Auto parts/tire
The author is an analyst of Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
1Q23 OP meets expectations at KRW70.2bn (+2% YoY, +23% QoQ) HL Mando posted operating profit of KRW70.2bn (+2% YoY, +23% QoQ) on sales of KRW2tr (+18% YoY, -8% QoQ) in 1Q23, coming in line with the market consensus of KRW68bn. Sales from North America and other regions expanded sharply to KRW462.2bn (+27% YoY, -4% QoQ) and KRW362.2bn (+47% YoY, +3% QoQ), respectively. Increasing shipments to Hyundai Motor and Kia (+32% YoY) as well as key EV-making clients (+63% YoY) added a boost to North American sales. Sales gains from other regions were mainly driven by growth in European sales, with the Turkish subsidiary included in consolidated statements and a significant amount of sales flowing in from major EV-making clients.
Two major concerns debunked
We need to note that 1Q23 earnings results helped debunk two major concerns that had weighed on HL Mando. First, delays in the release of new advance driver assistance system (ADAS) solutions that will support Level 3 autonomous driving sparked concerns over a possible dip in sales of the company’s main growth driver. However, ADAS sales remained on a steep growth track and reached KRW222bn (+30% YoY) in 1Q23. Strong sales of high-end cars and upper trim models at clients provide room for further growth. We expect new product release effects to kick in from 2H23. Second, EV-making clients’ shift to price-cutting strategy led by Chinese EV makers was another cause for concern. Although it seemed evident that the company would enjoy growing orders for electric power steering (EPS) systems, investors worried that falling EV prices might increase pricing pressure on auto parts suppliers. Despite concerns, sales from key EV-making clients are estimated to have come in at KRW342bn (+51% YoY) in 1Q23, based on which we can assume ASP levels were either flat or higher. We believe fears over price-cut pressure should dissipate going forward.
Retain BUY for a target price of KRW65,000
We maintain our BUY rating on HL Mando and target price of KRW65,000, based on 2023F EPS and a target PER of 13.9x (average PER of global top- tier auto parts suppliers). Our target price is undemanding in view of the renewed growth of the ADAS business and expanding shipments to major EV-making clients.