A New Rolling Stock Plant Completed in March
The author is an analyst of NH Investment & Securities. He can be reached at hyundong.lee@nhqv.com. -- Ed.
Spurred by increased sales at the electric train division, Dawonsys’s earnings continued to grow in 1Q20. Having completed a new rolling stock production facility in March, sales should climb further from 2H20. In addition, the performance of other businesses (plasma, nuclear waste, medical equipment, etc) is likely to improve from 2H20.
1Q20 review: Sales of electric trains to rise further in 2H20
Dawonsys’s 1Q20 earnings exceeded our estimates, with sales of W51.4bn (+52% y-y) and OP of W4.1bn (+117% y-y; OPM of 8.0%). The sound growth was led by sales of W45bn (+75% y-y) at the rolling stock (electric train) business. Given that the majority of train orders stem from the government, we expect the business to be relatively unaffected by the Covid-19 crisis.
Sales for new electric trains are booked after trains complete 1,000km on test lines. We note that the company completed new production/testing facilities in Jeongeup in March. Adding to its existing 1.2km curved test line in Gimcheon, the company now has the longest straight test line (1.2km) in Korea. Driven by its new facilities and order backlog of W842.3bn, we expect to see a rapid jump in sales at the electric train business in 2H20.
In 2020, orders for new/replacement trains should reach W1tn in the domestic market owing to strengthened safety regulations. We predict that rising new orders for electric trains from 2Q20 will drive the company’s earnings growth going forward. Also, the start of GTX construction and increasing exports should act as additional growth drivers.
Corporate value to climb on increasing new business sales
Due to the growth of the electric train business, Dawonsys’s cash cow and growth engine, 2Q20 sales and OP are projected to reach W70.3bn (+67% y-y) and W5.3bn (+90% y-y), respectively.
The performance of the company’s other divisions, which recorded sluggish 1Q20 results, should also improve from 2H20. We expect Dawonsys’s enterprise value to be bolstered by: 1) the supply of semicon plasma equipment worth W10bn; 2) orders for nuclear waste disposal in line with the decommissioning of Gori nuclear power plant #1 from 2021; and 3) the IPO of subsidiary Dawonmedax (develops boron neutron capture treatment medical devices for cancer treatment) in 2021.