JCI, Yanfeng interiors venture hailed by analysts
Investors and analysts largely applauded Johnson Controls Inc.'s deal to spin off its auto interiors business into a joint venture with China's Yanfeng Automotive Trim Systems Co. And JCI's CEO said the company expects to reap significant dividends from the deal over time and has no plans to sell the unit.
JCI, which is trying to reduce its reliance on the cyclical auto industry, is refocusing efforts on its building efficiency business.
Wells Fargo analyst Richard Kwas said the transaction will free up more cash for JCI to enhance its portfolio or return capital to shareholders. "Longer term, we believe the company is likely to separate from the automotive seating business," Kwas said in a report this week.
The U.S. company, which agreed to sell its auto electronics division to Visteon Corp. in January, had been exploring options for the interiors unit, which makes door and instrument panels, since March 2013. The unit's annual revenue had halved since 2011 and the pact lets JCI benefit from increased demand for interiors in China.
"This is a good option for JCI," Joseph Spak, an analyst with RBC Capital Markets, wrote in a note to investors. "It allows JCI to jettison the business so that it can continue to de-emphasize auto and become a more diversified company."
Yanfeng will own 70 percent of the new Shanghai venture and JCI will own the rest, the companies said in a statement on May 18. The venture will have revenue of about 46.73 billion yuan ($7.5 billion), according to the companies.
JCI will retain its seating and battery operations, spokesman Fraser Engerman said.
JCI isn't entering into the agreement planning to sell its stake in the business, CEO Alex Molinaroli said on Monday during a conference call with analysts and investors.
"We expect to get dividends and not put cash into this," Molinaroli said. "We think we're going to benefit from the growth that's going to come in that marketplace."
The joint venture, expected to be operational next year, will have pretax margins of 5 to 6 percent and revenue may grow as much as 8 percent annually for the next five years, Bruce McDonald, JCI's CFO, said during the call.
The companies' customer bases overlap little, McDonald said, because Yanfeng's customers are at the lower end of the market and JCI is concentrated at the premium end. Yanfeng is a unit of Huayu Automotive Systems Co., which is owned by Shanghai Automotive Industry Corp.
With the deal, JCI is better positioned to benefit from growth in China, the world's largest and fastest growing auto market, said David Leiker, an analyst with Robert W. Baird & Co.
He said the joint venture will have an optimized footprint from the start because JCI and Yanfeng will withhold certain unfavorable plants.
"JCI's exposure to China increases from $6 billion to $10 billion," Leiker said in a report published after the deal was unveiled. "Combining with Yanfeng gives JCI better exposure to low and middle portions of the China market while strengthening Yanfeng's exposure to Western automakers."
The venture will have engineering and customer centers in the United States, Europe, China, Japan and India. Products offered include instrument panels and cockpit systems, door panels and floor consoles. The noncash transaction is expected to close in the first half of 2015.
JCI's automotive-interiors business had annual sales of about $3 billion, Engerman said. It is a small slice of $42.7 billion in revenue JCI reported in the fiscal year ended Sept. 30.
Engerman didn't say how many employees would be affected by the move and said the terms are still being decided.
Wells Fargo analyst Richard Kwas said the transaction will free up more cash for JCI to enhance its portfolio or return capital to shareholders. "Longer term, we believe the company is likely to separate from the automotive seating business," Kwas said in a report this week.
The U.S. company, which agreed to sell its auto electronics division to Visteon Corp. in January, had been exploring options for the interiors unit, which makes door and instrument panels, since March 2013. The unit's annual revenue had halved since 2011 and the pact lets JCI benefit from increased demand for interiors in China.
"This is a good option for JCI," Joseph Spak, an analyst with RBC Capital Markets, wrote in a note to investors. "It allows JCI to jettison the business so that it can continue to de-emphasize auto and become a more diversified company."
Yanfeng will own 70 percent of the new Shanghai venture and JCI will own the rest, the companies said in a statement on May 18. The venture will have revenue of about 46.73 billion yuan ($7.5 billion), according to the companies.
JCI will retain its seating and battery operations, spokesman Fraser Engerman said.
JCI isn't entering into the agreement planning to sell its stake in the business, CEO Alex Molinaroli said on Monday during a conference call with analysts and investors.
"We expect to get dividends and not put cash into this," Molinaroli said. "We think we're going to benefit from the growth that's going to come in that marketplace."
The joint venture, expected to be operational next year, will have pretax margins of 5 to 6 percent and revenue may grow as much as 8 percent annually for the next five years, Bruce McDonald, JCI's CFO, said during the call.
The companies' customer bases overlap little, McDonald said, because Yanfeng's customers are at the lower end of the market and JCI is concentrated at the premium end. Yanfeng is a unit of Huayu Automotive Systems Co., which is owned by Shanghai Automotive Industry Corp.
With the deal, JCI is better positioned to benefit from growth in China, the world's largest and fastest growing auto market, said David Leiker, an analyst with Robert W. Baird & Co.
He said the joint venture will have an optimized footprint from the start because JCI and Yanfeng will withhold certain unfavorable plants.
"JCI's exposure to China increases from $6 billion to $10 billion," Leiker said in a report published after the deal was unveiled. "Combining with Yanfeng gives JCI better exposure to low and middle portions of the China market while strengthening Yanfeng's exposure to Western automakers."
The venture will have engineering and customer centers in the United States, Europe, China, Japan and India. Products offered include instrument panels and cockpit systems, door panels and floor consoles. The noncash transaction is expected to close in the first half of 2015.
JCI's automotive-interiors business had annual sales of about $3 billion, Engerman said. It is a small slice of $42.7 billion in revenue JCI reported in the fiscal year ended Sept. 30.
Engerman didn't say how many employees would be affected by the move and said the terms are still being decided.
