Auto parts/tire
The author is an analyst for Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
After-sales parts division entering the home stretch to recovery
The key variable determining auto sector earnings has been shifting from ASP levels (inflation) in 2022 to the normalization of supply chains and costs in 2023. With pent-up demand continuing to drive brisk sales for a longer- than-expected period, the prolonged weakness of auto parts suppliers is finally coming to an end along with the easing of supply disruptions. Hyundai Mobis, remaining in charge of supplying after-sales parts to group affiliates while leading group-wide R&D efforts for electrification and electronics parts, has been more exposed to cost variables such as logistics costs and R&D spend than other parts suppliers. We thus find it positive that spot ocean freight rates have returned to normal levels, although the after- sales parts division will still need to exhaust costlier inventories that reflect higher logistics costs to make a full recovery. Depending on the pace of inventory depletion, the after-sales parts division is expected to see margins improve from 20% in 1Q and 21% in 2Q to 23% levels by 4Q, emerging once again as the steady cash-cow business for the company.
Outstanding performance expected from electrification & core parts
We believe the electrification and core parts businesses are the hidden gems of Hyundai Mobis that can drive up the valuations of the company. Growth in sales from the electrification business to KRW9.7tr (sales share of 18.6%) and core parts to KRW9.3tr (18.0%) in 2022 had limited impact on valuations due to low profit contribution and high portion of captive sales. Hence, we expect visible profitability improvement and non-captive client additions to lead to an upgrade in valuations going forward.
R&D and capex spend have already passed a peak, in our view. Most of the KRW1.6tr R&D spend (+20% YoY) planned for this year will be used for electrification and electronics parts businesses amid forecasts for 36% YoY growth in sales from electrification and core parts. Even after factoring out the impact of directed-sourcing of battery cells, we expect top-line growth to reach 18% YoY for 2023. Going forward, the cost burden should decline with sales growth likely to outpace the increase in costs from 2024 onwards. Full-year capex spend is projected to jump 152% YoY to KRW2.6tr (+152% YoY) in 2023 with plant construction underway in Georgia, but the internal rate of return (IRR) of the US investment is unlikely to be low considering the effect of the US Inflation Reduction Act (IRA).
Meanwhile, order intake from non-captive clients is on track to meet the company's target of USD5.3bn for 2023 after coming in at an average of USD2.5bn per year over the past five years (2018-2022). Orders secured to date are enough to drive an uptrend in the portion of sales from non-captive clients over the next five years. We believe captive client orders will account for less than 90% of total orders of the core parts business in 2023, marking a historical first for the company.
Retain BUY and target price of KRW300,000
We maintain our BUY rating and target price of KRW300,000 for Hyundai Mobis. At a 2024F PER of 6.5x, Hyundai Mobis shares are now trading at cheaper valuations than all of the sector peers under our coverage.