High Yield : Transition to EV will be smooth in €HY

With this paper, we initiate coverage of two French issuers, Faurecia and Valeo, global leaders in the automotive supplier sector . As the auto parts business is linked to car makers , this research piece outlines recent trends in the auto industry across China, US, and Europe. The key underlying trend for the sector is electrification and transition from ICE technology to alternative vehicles . This change is supported and pushed forward by governments , especially in Europe and China. We expect that by 2030 AVs will account for 40% of new registrations in the world and 13% of global fleet. The main limitations of the EV adoption are charging time and infrastructure, still expensive batteries, large capex required from automakers to reach sufficient economies of scale. Hydrogen is another area of development that potentially might replace battery electric vehicles. In this context, the auto part industry is facing the same challenges as car makers . Those companies that are focused on technological solutions ( A Vs might have up to 9x more content per vehicle than an ICE car) , interiors (EVs have more space inside a car ) , chassis, thermal systems, and powertrain electrification are going to navigate well the transition to EV/AV. However, players with the main are a of expertise in ICE engines and transmissions are exposed to risks over midterm . Valeo and Faurecia are, in our view, well positioned to capitalize on the industry shift as they are focused on technological solutions and interiors respectively. Indeed, both companies were significantly hit during the pandemic as global passanger car sales collapsed by 16% from 85mn in 2019 to 71mn in 2020 . Faurecia reported €14.7bn in revenue vs. €17.8bn in 2019. Organically the business went down by -19.6% . Credit metrics deteriorated: Natixis adjusted (including pensions and using R&D adjusted EBITDA) net leverage ratio spiked to 3.4x vs. 1.5x at the end of 2019. Valeo , on the other hand, reported €16.4bn in revenue in FY2020 vs. €19.5bn in FY2019. Organically the business went down by -14%. Valeo’s margin and credit metrics also significantly deteriorated : Natixis adjusted net leverage ratio spiked to 4.7x vs. 2.5x at the end of 2019 . However, we expect a strong rebound in 2021 on the back of vaccination rollouts, lockdown liftings and normalization of supply chain . Considering the recovery in operating activity, credit metrics and attractive positioning for the EV transition, we anticipate credit rating agencies to upgrade credit rating of both companies to pre-covid levels (BBB- and BB+ respectively ) over the next 12-18 months . Thus, we see further spread tightening by ~50bps at the long end of the curve .