The author is an analyst of Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. -- Ed.
1Q20 OP forecast at KRW81.8bn (+459.9% YoY) on one-off reversals
Hyundai Wia is expected to have posted sales of KRW1.6tr (-13.6% YoY) and operating profit of KRW81.8bn (+459.9% YoY) for 1Q20. The labor and management have reached an agreement on ordinary wage payments in March. A considerable portion of provisions (KRW183bn) will likely be reversed. Of the KRW150bn estimated in total reversals, around KRW70bn is assumed to be booked as operating profit and KRW30bn as non-operating profit in the first quarter.
China sales to continue on the recovery path in 2Q20
We had previously expected the auto parts division to swing negative in 1Q due to the plunging demand in China. We now revise up our earnings forecasts in light of the faster-than-anticipated improvement in Chinese market conditions for Hyundai Motor and Kia Motors (shipments up from 3,000 units in February to 48,000 in March). Operating profit from auto parts will likely come in at KRW17.9bn (-37.3% YoY) excluding one-offs.
The automakers’ capacity utilization rates in China are estimated to have recovered from near zero in February to 50% levels in March. The rates should rise further to 70% levels from April. The pace of recovery going forward will hinge on the extent of stimulus measures taken by the Chinese government.
Retain BUY for a revised-up target price of KRW36,000
We retain our BUY rating on Hyundai Wia and raise our target price by 9.1% to KRW36,000. The company suffered the steepest decline (-53.3%) among 10 auto/parts stocks under our coverage during the sharp market correction since Feb. 19. With concerns over China demand quickly dissipating, it is paring much of its losses. Uncertainty remains over global demand in 2Q, but the uptrend in shares should continue for the time being, driven by the recovery in China operations.