Efforts Underway to Overhaul Business Structure
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
Mid/long-term efforts by management are underway to overhaul Hyundai Wia’s business structure, which is focused on the production of internal combustion engines. While the acquisition of shares in Hyundai Wia Automotive Engine (Shandong) was all but inevitable, some negatives are being felt in terms of valuations and room for investment in new businesses.
Situation to worsen in 2Q20, as global production and sales further deteriorate
While adhering to a Hold rating on Hyundai Wia, we lower our TP from W52,000 to W37,000 in light of changes in earnings estimates and a 20% discount stemming from Covid-19-related uncertainties.
Affected by a global production and sales slump due to Covid-19, Hyundai Wia’s 2Q20 sales decline is likely to be on par with that at other firms, with operating income likely turning to loss. In the long term, the company’s ongoing efforts to shift business structure and secure new orders from HMG and others should prove favorable. However, in order for such anticipated positives to result in full-fledged valuation recovery, results from new businesses will likely need to be sighted. In the short term, the prolonged sluggish performance of the machinery division threatens to serve as an additional burden on earnings.
1Q20 review: Reversal of ordinary wage provision
Hyundai Wia logged 1Q20 sales of W1.65tn (-10.9% y-y) and OP of W84.5bn (+478.8 y-y; OPM of 5.1%). According to the labor-management agreement, about W139.5bn out of W183bn in ordinary wage provisions was reversed (W79.7bn in OP and W59.8bn in non-OP). Adjusted OPM (excluding bad debt allowance) is estimated at 0.3% (automobile: 1.2%, machinery: -7.4%).
Hyundai Wia has acquired an additional stake in Hyundai Wia Automotive Engine (Shandong), for which equity structure previously broke down as: HMG 70% (Hyundai Wia 30%, Hyundai Motor Company (HMC) 22%, and Kia Motors (Kia) 18%) and Rizhao Port Group (national enterprise located in Rizhao, China) 30%. HMG took over Rizhao Port Group’s 30% stake for W249.2bn. At end-2019, when considering the net assets of Shandong Hyundai Wia (approximately W700bn), this acquisition amount equated to a P/B of 1.2x. Hyundai Wia’s portion of the acquisition total came to W106.8bn, and after the acquisition, its stake increased to 42.9%.
Hyundai Wia has acquired an additional stake in Hyundai Wia Automotive Engine (Shandong), for which equity structure previously broke down as: HMG 70% (Hyundai Wia 30%, Hyundai Motor Company (HMC) 22%, and Kia Motors (Kia) 18%) and Rizhao Port Group (national enterprise located in Rizhao, China) 30%. HMG took over Rizhao Port Group’s 30% stake for W249.2bn. At end-2019, when considering the net assets of Shandong Hyundai Wia (approximately W700bn), this acquisition amount equated to a P/B of 1.2x. Hyundai Wia’s portion of the acquisition total came to W106.8bn, and after the acquisition, its stake increased to 42.9%.