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  5. LNR: The auto industry backdrop and Linamar. [Linamar Corporation]
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Q: The auto industry backdrop and Linamar. I can understand that the EV scene is mixed, perhaps at best; there are re-charging issues as well as some fire risk associated with Lithium, and that Chinese subsidized imports are a potential problem, but my reading was that our industries here, MG, LNR, and MRE, were largely agnostic to the potential EV problems. In addition my most recent related reading was that Linamar has diversified at least in part into agricultural machinery, which would be an addition to their initial skyjack venture, and that while the US Fed had postponed rate reductions the US economy continues to bubble along, albeit at a slightly lower rate than hoped, but is OK. So what have I missed? Is Lithium a bust? How serious are the range/ recharging/ fire issues? A PE of 5 or 6 is for the birds.
Asked by Mike on August 13, 2024
5i Research Answer:

It is true that how and the magnitude that the EV trend is going to affect the traditional automobile components manufacturers is quite uncertain, as most of the large EV players (Tesla, BYD, etc.) tend to manufacture the components in-house and the manufacturing facilities for EV components are also much different from traditional auto components. That being said, the transition to EV will not happen overnight, in fact, it may take decades for the full transition to happen, and in the meantime, these companies are transforming their business models by positioning themselves in the next evolution of EV. Although we think these players may not go anywhere anytime soon, and the P/E looks attractive, these are highly cyclical industries and are facing secular headwinds, we would allocate the portfolio conservatively to these sectors. Also, we tend to prefer pure players like MG rather than companies that are trying to diversify away from their main operations as it tends to lead to "diworsification"