Improvement in Global Demand to Be Slow-paced
The author is an analyst of NH Investment & Securities. He can be reached atjinmyung.choi@nhqv.com. -- Ed.
India plant shut down; Covid-19 crisis causing direct earnings damage
While Hyundai Construction Equipment (Hyundai CE) is striving to navigate unfavorable market conditions, its earnings are inevitably to be harmed by the Covid-19 crisis. While operations at the firm’s production facilities in China are now normalizing, any improvement in global demand is to be slow paced for now. Also of concern, Hyundai CE’s production facilities in India have been temporarily shut down.
Sluggish earnings inevitable amid Covid-19 crisis
Given the effects of the ongoing Covid-19 crisis, it is difficult to expect Hyundai CE to reach its 2020 target sales of W3tn. Having already had to temporarily shut down operations in 1Q20 at its production facilities in China, the firm has recently been forced to temporarily shutter its plants India due to movement bans. Accordingly, sluggish 1H20 earnings appear inevitable.
The Covid-19 pandemic has been spreading worldwide since March. Influenced by the Covid-19 outbreak, a large numbers of construction projects are being terminated worldwide. Cancellations and delays of construction projects are gradually to translate into decreased demand for construction excavators.
Until notable market changes appear, take conservative approach
In line with the recent plunge in demand, there is a high possibility that dealers’ purchasing power has weakened in light of financial deterioration across the construction equipment industry. In our view, it will take at least six months before recoveries begin to be seen in terms of both market demand and dealers’ purchasing power.
Given the immensity of the impact of the Covid-19 crisis across the construction equipment industry, the chances of individual equipment makers breaking out to lead early earnings growth appears limited. Looking ahead, a sparking of earnings growth is to hinge upon: 1) early-as-possible defeat of Covid-19, backed by worldwide efforts; and 2) an introduction of special measures (such as direct stimulus) to prop up the construction industry.
Meanwhile, given the downsizing of its share of the Chinese construction equipment market, Hyundai CE might be limited from benefiting even after Chinese demand starts to recover. In order to achieve an earnings turnaround, we believe that Hyundai CE needs to focus its efforts going forward upon securing significant market shares in India and other regions.