1. The company mentioned 30.7% revenue coming from US, how does that number roughly translate into profit? Most likely US customers provide the highest margin, so Xinpoint's profit gets hit harder than revenue.
2. Based on the "industry competitor analysis" section of this article, it seems there's almost no viable Non-Chinese alternative vendor for these plastic parts -- is that really the case? If true then logically Xinpoint has a strong leverage over its US customers and the tariff burden can be potentially transferred, especially considering the total cost of these parts is a small fraction of the overall BOM.
1. For the first one, I talked with their marketing team as well as their executive team. So Mr. Ma has always been very cautious with guidance -- this company has a tradition of "under-promise, over-deliver". Their true estimate of the impact of revenue is probably around 15%, not even close to 30%, although obviously there are many moving pieces right now. The ASPs for the US ones are indeed more lucrative, but the negative impact will likely be smaller. If Trump applies a tiered tariff (35% on non-strategic), then that means the headwind for 1571 will be around 70mm HKD -- obviously not ideal, but they have lived through it. The two foreign factories ramping up will offset more of the negative impact although the yield in Mexico is indeed lower (so cost structure higher).
Lastly let's not forget this thing is really dirt cheap... It's not like the other auto suppliers are not gonna be affected...
2. We did a lot of digging into the competitive landscape and there are very few alternatives that we are able to identify. They're really the last man standing. It is literally impossible to bring these production facilities back into the US because 1). it's pollution heavy and neighbors are gonna scream; 2). few if any, even the republications, want to work in the factory (https://www.yahoo.com/news/americans-want-more-u-factory-080000279.html). And you're right the cost per part for even the US OEMs are 11-12 RMB ASP so, yes, very small but quite important functionally and aesthetically.
FWIW, their marketing team got back and said 30% revenue chop-off is the absolutely worst scenario and the likely outcome will be much lighter than that. Take it with a grain of salt, but I also thought 30% was a bit on the higher end.
It's hard for me to sell the shares at this point. In my analysis, as you can see above, I assumed a 20% chop-off of their revenue. That gives me a 6.6x PE. Today's announcement tells me that I was optimistic by about 10%, so let's chop off 30% of its revenue... and assume a similar margin for the rest of the revenue that remains... you still get a very inexpensive stock after today's collapse.
Plus we have a large overall position (compared to daily volume) and today's obviously not the time to sell...
Two tail risks -- if they can't absorb their fixed costs, and operating leverage works in the other direction, and they keep supplying these components to the US OEMs at 125% tariff, then they'll suffer sizeable losses exceeding my estimates; another risk is privatization since Ma owns close to 75% of its shares now.
Great article! Two questions:
1. The company mentioned 30.7% revenue coming from US, how does that number roughly translate into profit? Most likely US customers provide the highest margin, so Xinpoint's profit gets hit harder than revenue.
2. Based on the "industry competitor analysis" section of this article, it seems there's almost no viable Non-Chinese alternative vendor for these plastic parts -- is that really the case? If true then logically Xinpoint has a strong leverage over its US customers and the tariff burden can be potentially transferred, especially considering the total cost of these parts is a small fraction of the overall BOM.
Those are both valid concerns.
1. For the first one, I talked with their marketing team as well as their executive team. So Mr. Ma has always been very cautious with guidance -- this company has a tradition of "under-promise, over-deliver". Their true estimate of the impact of revenue is probably around 15%, not even close to 30%, although obviously there are many moving pieces right now. The ASPs for the US ones are indeed more lucrative, but the negative impact will likely be smaller. If Trump applies a tiered tariff (35% on non-strategic), then that means the headwind for 1571 will be around 70mm HKD -- obviously not ideal, but they have lived through it. The two foreign factories ramping up will offset more of the negative impact although the yield in Mexico is indeed lower (so cost structure higher).
Lastly let's not forget this thing is really dirt cheap... It's not like the other auto suppliers are not gonna be affected...
2. We did a lot of digging into the competitive landscape and there are very few alternatives that we are able to identify. They're really the last man standing. It is literally impossible to bring these production facilities back into the US because 1). it's pollution heavy and neighbors are gonna scream; 2). few if any, even the republications, want to work in the factory (https://www.yahoo.com/news/americans-want-more-u-factory-080000279.html). And you're right the cost per part for even the US OEMs are 11-12 RMB ASP so, yes, very small but quite important functionally and aesthetically.
Thanks for the sharing.
Has your opinion changed after Xinpoint announced that selling is by DDP?
FWIW, their marketing team got back and said 30% revenue chop-off is the absolutely worst scenario and the likely outcome will be much lighter than that. Take it with a grain of salt, but I also thought 30% was a bit on the higher end.
It's hard for me to sell the shares at this point. In my analysis, as you can see above, I assumed a 20% chop-off of their revenue. That gives me a 6.6x PE. Today's announcement tells me that I was optimistic by about 10%, so let's chop off 30% of its revenue... and assume a similar margin for the rest of the revenue that remains... you still get a very inexpensive stock after today's collapse.
Plus we have a large overall position (compared to daily volume) and today's obviously not the time to sell...
Two tail risks -- if they can't absorb their fixed costs, and operating leverage works in the other direction, and they keep supplying these components to the US OEMs at 125% tariff, then they'll suffer sizeable losses exceeding my estimates; another risk is privatization since Ma owns close to 75% of its shares now.