Long-term Share Price Revaluation Expected
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
We expect Hyundai Mobis’s stable cash flow and business expansion efforts to look increasingly favorable over the mid/long term. In the process of securing economies of scale, profitability at the electrification division should improve. Viewing it as capable of achieving sustainable growth, we expect Hyundai Mobis to enjoy valuation re-rating over the long term.
Expect long-term share price revaluation as sustainable growth play
We maintain a Buy rating and TP of W230,000 on Hyundai Mobis.
In 2Q20, earnings at the A/S division are unlikely to escape the impact of Covid-19. We estimate the division’s 2Q20 sales and OP at W7.44tn (-21.4% y-y) and W209bn (-66.7% y-y; OPM of 2.8%), respectively.
Although sluggish near-term results look inevitable, client diversification and a rising portion of electrification sales should boost the firm’s long-term earnings visibility amidst global auto industry deterioration. In 2021, with the introduction of Hyundai Motor Group (HMG)’s exclusive EV platform, profitability at the electrification division should rise. With OPM at the module division to climb as a result, mid/long-term valuation rerating is anticipated.
1Q20 review: Module division turns to red
Hyundai Mobis logged 1Q20 sales of W8.42tn (-3.6% y-y) and OP of W360.9bn (-26.9% y-y; OPM of 4.3%), with OP falling short of our estimate. Although stable growth sustained at the A/S division, the module division turned to loss due to a decline in HMG’s global utilization rate (focusing on China).
In 1Q20, sales and OP at the A/S division totaled W1.89tn (+4.3% y-y) and W450.8bn (-0.8% y-y; OPM of 23.9%), respectively, showing ongoing steady growth. Module sales and related operating loss reached W6.54tn (-5.7% y-y) and -W89.9bn (TTL; OPM of -1.4%), respectively.
We note that electrification business-related sales growth is ongoing. In 1Q20, electrification-related sales came to W702.4bn (+22.2% y-y)—the module division’s lone beacon of growth. The percentage of electrification sales out of overall sales rose to 8.3% (vs 4Q19: 8.2% and 1Q19: 6.6%).