Profitability Expected to Improve in 2020
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
Last week, we attended Hyundai Glovis’s US NDR. In light of cost competitiveness, we expect the PCC division to see 3PL sales growth, M/S expansion, and profitability improvement in 2020. CKD sales should also rise this year on increasing car production at affiliates’ overseas plants. We view Hyundai Glovis’s recent share price dip as a bargain buying opportunity.
Growth momentum of PCC business remains intact
Last week, we attended Hyundai Glovis’s US NDR, at which US investors appeared upbeat towards the firm’s robust 2019 earnings improvement, as well as showed interest in the drivers of cost competitiveness at the pure car carrier (PCC) business and whether M/S expansion can be achieved over the mid/long term.
Hyundai Glovis has grown to become the world’s second-largest car shipping company, operating a fleet of 90 vessels at end-2019. We note that Hyundai Glovis’s fleet boasts: 1) superior fuel efficiency versus those of competitors, thanks to its relatively low average age; and 2) higher load factor (L/F) versus European shipping peers, owing to Hyundai Glovis’s comparatively stable backhaul volume. Backed by these strengths, the firm is able to secure sufficient profitability even at a lower ASP than competitors. Moreover, having signed a contract with a non-affiliated European automaker, Hyundai Glovis’s L/F and profitability are improving. We expect the firm to become the global number-one PCC player in the future.
Covid-19 negatives present short-term concern; valuation merit in play
Disruptions in car production at Hyundai Glovis’s affiliates (due to the spreading of Covid-19) and China-related transportation issues are to negatively impact the company’s 1Q20 earnings. However, we believe that cost competitiveness at the PCC business remains intact. Despite concerns towards a potential decline in sales at the complete knock down (CKD) business stemming from utilization rate reduction at European plants (due to European emissions regulations), we believe that any unfavorable effects can be offset by increasing production at Kia Motors’ India plants in 2020 and Hyundai Motor Company (HMC)’s planned entry into Indonesia in 2021.
We also see potential for inorganic growth driven by increasing capex for fleet expansion and the active pursuit of possible M&As with logistics players. Although the issue of corporate governance restructuring presents uncertainty, we believe that Hyundai Glovis’s share price is currently undervalued, trading at a 2020E P/E of 9.1x, a historical low. With the firm’s increase in dividends strengthening its shareholder return policy, we view Hyundai Glovis’s recent share price decline (due to short-term negatives) as presenting a bargain buying opportunity.