Automotive Software Sales Growth to Drive Share Recovery
The authors are analysts of Shinhan Securities. They can be reached at snowKH@shinhan.com and jhwon@shinhan.com, respectively. -- Ed.
4Q22 preview: OP to come in at KRW36.5bn (+39% YoY)
We now expect Hyundai Autoever to post sales of KRW755.2bn (+17% YoY) and operating profit of KRW36.5bn (+39% YoY) for 4Q22, with earnings continuing on a steep uptrend through the year. By division, system integration (SI) likely generated sales of KRW254.6bn (+19% YoY), IT outsourcing (ITO) KRW365.9bn (+14% YoY), and automotive software KRW134.7bn (+23% YoY). Operating margin should have improved by 0.7%p YoY to 4.8% on technological competitiveness in SI and ITO as well as operating leverage effect from brisk growth in sales of automotive software.
Further growth in automotive software sales to drive share recovery
Despite strong earnings, Hyundai Autoever shares continued on a downtrend in 2022 on concerns over the slowing economy and demand. We find the shares attractive at current valuations (2023F PER of 24x) and expect to see a sharp re-rating this year upon confirmation of solid growth fundamentals.
The automotive software division is enjoying steady growth in earnings from increasing adoption on more and higher-end cars. The industry-wide paradigm shift on growing demand for self-driving cars and automotive electronics, plus further expansion of the over-the-air (OTA) update business, should continue to drive growth going forward. In 2023, we expect automotive software sales to jump to KRW601.3bn (+24% YoY).
SI and ITO divisions both have solid business structures, with demand for data center management and adoption of smart platforms by group affiliates to continue on efforts to improve operational stability and efficiency within the value chain. For 2023, we forecast SI sales at KRW1.05tr (+14% YoY) and ITO sales at KRW1.36tr (+8% YoY).
Retain BUY for a revised-down target of KRW130,000
Our target price for Hyundai Autoever is lowered to KRW130,000, based on 2023F EPS of KRW3,989 and a target PER of 33.4x (30% premium to the peer PER average). The downward revision reflects the recent decline in peer valuations caused by growing economic slowdown concerns.
In our view, Hyundai Autoever stands to enjoy ample growth momentum in the mid-to long-term as the domestic market leader in embedded software for self-driving cars. We retain our BUY rating on the company, with demand for automotive electronics and self-driving systems projected to rise amid the paradigm shift to the fourth industrial revolution.