HD Hyundai Infracore
The author is an analyst of Shinhan Securities. He can be reached at ldh@sinhan.com -- Ed.
1Q23 review: All-time high OP driven mainly by engine earnings
HD Hyundai Infracore posted sales of KRW1.29tr (+11% YoY), operating profit of KRW152.6bn (+46% YoY), and operating margin of 11.8% (+2.7%p YoY) for 1Q23. Sales came in 2% short of the consensus estimate but operating profit topped market expectations by 28%, delivering an earnings surprise. Quarterly operating profit broke the previous record-high of KRW147.3bn set in 1Q18, backed by strong earnings from construction equipment and historic-high profit from the engine business.
By business, the company generated sales of KRW980.8bn (+6% YoY) from construction equipment and KRW369.9bn (+28% YoY) from engines in 1Q23. Sales of construction equipment rose 25% YoY in emerging markets and 14% YoY in North America/Europe, but dropped by 52% YoY in China. No decline was seen in the China plant's sales based on total output, with half of the output exported to other regions. At the engine business, sales of small-size engines and generators jumped by 19% and 44% YoY, respectively, in 1Q23. Continuing ASP hikes and improving sales mix in major export markets helped to drive visible growth in operating profit.
Multiple growth drivers in play
In 1Q23, the construction equipment business enjoyed brisk demand from Russia, Saudi Arabia, Brazil, and Indonesia. Since the outbreak of the Russia- Ukraine war, growing importance of securing natural resources has led to increased investment in resource-rich countries. In addition, oil majors have been re-investing profits made on the upturn in oil prices, and Saudi Arabia has been ramping up investment into its NEOM city project. Meanwhile, Turkey’s massive earthquake led to increased demand for emergency generators sold by the engine business, and a further boost is expected from recovery efforts in Ukraine going forward.
In the past when growth was driven mainly by China, overall sales widely fluctuated according to policy changes or replacement cycles in the country. Now, however, sales are flowing in from a wider range of countries in both emerging and developed markets. First mover advantages are expected from efforts made for expansion into new markets, including the addition of an authorized dealer in Brazil.
TP raised to KRW13,000 for rising star in construction equipment
We retain BUY on HD Hyundai Infracore and raise our target price by 18% from KRW11,000 to KRW13,000. Our EPS forecast for 2023 has been revised up by 15%, but our target valuation multiple remains conservative with a 20% discount applied in view of uncertainties over corporate governance. Despite steady growth reported over the past few years, HD Hyundai Infracore's sales have yet to reach even 10% of Caterpillar’s sales. We thus see ample room for further growth of the rising star in construction equipment from the expansion of overseas reach beyond China.