The author is an analyst of Shinhan Investment Corp. He can be reached at email@example.com. -- Ed.
Defense: 1Q20OP likely 23% above consensus at KRW74.8bn (+62% YoY)
The four defense companies under our coverage are expected to have secured combined operating profit of KRW74.8bn (+62% YoY) on sales of KRW2.5tr (+14.7% YoY) for 1Q20, beating the market consensus of KRW61bn by 22.7%. Robust earnings are attributable to: 1) limited impact of the COVID-19 pandemic on non-government shipments; and 2) improvement in profitability from the 7.5% YoY increase in USD/KRW exchange rate. By company, we believe 1Q20 operating profit exceeded market consensus at Korea Aerospace Industries, met market expectations at Hanwha Aerospace, and missed consensus estimates at LIG Nex1 and Hanwha Systems.
Traditional machinery: 1Q20OP likely 24% above consensus at KRW338bn (-25% YoY)
The five traditional machinery companies under our coverage should have recorded combined sales of KRW4.7tr (-6.3% YoY) and operating profit of KRW338bn (-24.7% YoY) for 1Q20. Despite the impact of the pandemic, combined operating profit likely exceeded market consensus of KRW272bn by 24.3% on: 1) the 7.5% YoY increase in USD/KRW rate; 2) smaller-than-expected, 5-10% YoY sales decline in developed markets; and 3) an estimated 11.2% YoY increase in construction equipment sales in China during the month of March. We believe 1Q20 earnings results will come in above market forecasts at Doosan Bobcat, Doosan Infracore and Hyundai Elevator, and in line with market expectations at Hyundai Construction Equipment and Hyundai Rotem.
Favor construction equipment in April, Hanwha Systems in 2Q, Hanwha Aerospace in 3Q
Construction equipment stocks should continue to rally on China momentum through April. Expecting further downward adjustment of earnings forecasts for the sector from 2Q20, we recommend shifting focus to Hanwha Systems as the pandemic is unlikely to affect the company. From 3Q20, investors should focus on Hanwha Aerospace with the company expected to enjoy 62.6% YoY growth in 2H20 operating profit. Defense companies have seen no disruption to civil aircraft/engine parts shipments and future risks are also low. Investor sentiment towards defense stocks should visibly recover once Airbus and Boeing restart plant operations.