The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Affected by increased depreciation expenses from the start of operations at its Hungarian subsidiary’s 3rd line, Shinheung SEC’s OPM narrowed in 4Q19. In 2020, we expect to see the start of operations at the Hungarian subsidiary’s 4th and 5th lines, as well as the supply of products for new EV models. Accordingly, we believe the firm’s earnings growth will continue going forward.
4Q19 review: Records solid results
Shinheung SEC logged 4Q19 sales of W61.5bn (+4.6% y-y, -3.2% q-q), OP of W3.6bn (-11.7% y-y, -42.5% q-q), and OPM of 5.8%, with OPM falling short of expectations due to the earlier-than-anticipated start of operations at the Hungarian subsidiary’s 3rd line and the reflection of depreciation expenses of about W4.9bn. In addition, inventory valuation losses and incentive payments were reflected in the quarter.
Operations of the 3rd line at the Hungarian subsidiary (set up alongside the establishment of a major client’s Hungarian base in 2018) have begun, with utilization rate rising from 14.1% in 1Q19, to 38.7% in 2Q19, 56.0% in 3Q19, and 72.8% in 4Q19. We estimate the Hungarian subsidiary’s sales at W3.5bn (1st line) in 1Q19, W11.6bn (1st + 2nd line) in 2Q19, W12.7bn (1st + 2nd line) in 3Q19, and W17.0bn (1st + 2nd + 3rd line) in 4Q19.
Growth continuing in 2020
We expect Shinheung SEC to record 2020 sales of W329.5bn (+37.6% y-y) and OP of W28.6bn (+41.9% y-y), with production volume for the mid/large-size batteries of customers likely to increase 80.6% y-y alongside the kick off of operations at new lines of the Hungarian subsidiary. Of note, the Hungarian subsidiary’s 4th line is predicted to start operations in 1H20 and the 5th line in 2H20, with capacity rising from a current 3mn units/month to 5mn units/month by end-2020.
Although the outbreak of Covid-19 has caused some disruption at the firm’s Tianjin and Xi’an subsidiaries, earnings growth at the Hungarian subsidiary is continuing without pause. Overall solid earnings growth is anticipated in 2020 on the expected start of production for new EV rechargeable batteries from 2Q20.
The shares of rechargeable battery materials players are currently trading at a 2020E P/E of 30x or higher. Although rechargeable battery parts plays may not offer as much valuation appeal as materials industry firms, we believe that they will come to trade at a 2020E P/E of 20x or above. Against this backdrop, we view Shinheung SEC’s shares (currently trading at a 2020E P/E of 15.5x) as being undervalued.