The author is an analyst for Shinhan Securities. He can be reached at ldh@sinhan.com -- Ed.
HD Hyundai Electric is expected to have earned sales of KRW844bn (+24% YoY) and operating profit of KRW100.9bn (+97% YoY) in 4Q23, beating consensus estimates by 6% and 14%, respectively. Operating margin likely improved by 7.6%p YoY to 12%. Its brisk performance looks attributable to increased sales recognition on orders with higher ASP from 3Q23.
The company saw orders, which have been on the rise since 1H22, making a larger contribution to sales, as well as a seasonal demand surge. Although it is difficult to tell, increasing orders and higher ASP both seem to be evenly contributing to sales gains. Steady top-line growth can be expected with the order backlog continuing on an uptrend. Profits were bound to increase as the stabilization of raw material prices adds a boost to operating leverage driven by sales gains and price increases. Without one-offs, quarterly operating profit should exceed the KRW100bn mark for the first time. Operating margin is highly likely to remain in double digits as in 3Q23.
Strong confidence in 2024 earnings
The company’s 2024 earnings guidance, disclosed on January 2, calls for annual sales of KRW3.3tr and order intake of USD3.7bn. This is a sharp increase from its 2023 guidance which targeted annual sales of KRW2.54tr and order intake of USD1.95bn (a figure that had been revised up twice to USD2.6bn and USD3.2bn later in the year).
Despite limited capacity expansion, sales are expected to increase 20% YoY in 2024 on order growth and ASP hikes. Order backlog of KRW5.1tr is twice as large as the annual sales, but the company is poised to secure more orders down the road. With market conditions still remaining solid in North America and the Middle East, demand is also recovering in domestic and European markets. All in all, the company shows stronger confidence in 2024 earnings.
Target price raised to KRW105,000, shares still undervalued
We raise our target price for HD Hyundai Electric by 15.4% from KRW91,000 to KRW105,000, reflecting the upward revision of 2024 EPS forecast and the change in valuation base. Given the recent surge in earnings, the current market consensus for 2024 earnings looks conservative but will likely be revised upward. The shares are still undervalued at 2024F PER of 11x and 2025F PER of 8x.
Despite robust earnings growth, the steep rise in the share price in absolute terms leads to increased volatility. The share price peak will be reached upon confirmation of the peak-out of market conditions. While the current market boom is projected to last through 1H24 at the least, earnings growth may continue for the long term if capex expansion coincides with the growth of the power infrastructure market. We continue to recommend accumulating shares in HD Hyundai Electric, although some adjustment in weighting will be necessary depending on share price volatility.