The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
Hansae Co.’s 1Q20 results are likely to fall significantly below consensus due to: 1) the spread of Covid-19 in the US; and 2) deteriorated conditions at the domestic and Chinese fashion businesses. As order decline is expected to intensify over 2Q20~3Q20, we recommend approaching the stock from a long-term investment horizon.
Orders slowdown to become more visible
Considering the global consumption decline resulting from Covid-19, slowing orders, and the possibility of deteriorating profitability at the domestic and Chinese fashion businesses, we revise down 2020E/2021F EPS by 43% and 13%, respectively, and lower our TP by 40% from W30,000 to W18,000.
As 92% of Hansae’s OEM sales are generated in the US, the firm will likely be strongly affected by the drop in US consumption activity due to Covid-19. Shipments are being delayed as of 1Q20, and orders are expected to fall in earnest over the peak season of 2Q20~3Q20. The company’s current share price (Mar 27 closing price of W9,040) corresponds to a 2020E P/E of 10.7x. While this is not an absolute low, we view the company’s shares as being in oversold territory as the current woes will likely ultimately fade and consumption trends should normalize.
1Q20: 1) OEM’s shipping delay; and 2) brand business struggle
We expect Hansae to report 1Q20 sales of W437.2bn (+3% y-y) and OP of W2bn (-60% y-y), with OP falling significantly below consensus of W6.7bn.
The OEM division should post sales of W382.4bn (+11% y-y) and OP of W9.6bn (+3% y-y), with order growth at the division expected to clock 2% y-y (on a dollar basis). At the beginning of 2020, 5% y-y growth seemed possible, but shipment delays are likely due to the recent spread of Covid-19 in the US.
Meanwhile, we expect Hanse MK to book sales of W54.8bn (-29% y-y) and an operating loss of W7.5bn (RR y-y). Due to the impact of Covid-19, domestic apparel sales are likely to fall more than 25% y-y and China NBA sales are predicted to slide 33% y-y.