High Earnings Visibility
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Despite Covid-19 effects, Hanwha Corp is showing sound earnings visibility, led by: 1) its in-house defense business and Hanwha Aerospace; and 2) rising renewable energy business opportunities, including for hydrogen-powered vehicles and solar power projects. Its shares are trading at a 61% discount to NAV.
Offering high earnings visibility and expectations for renewable energy business
Despite Covid-19 effects, Hanwha Corp is displaying sound earnings visibility, spearheaded by its in-house defense business and Hanwha Aerospace. We expect OP at Hanwha Corp’s in-house defense business to surge 67% y-y in 2020 on both the reflection of deferred sales (from 2019) and y-y low-base effect. With the election of US President Biden, who has emphasized environment-friendly investment, the expansion of renewable energy business in the US should accelerate on: 1) Hanwha Solutions’ PV business; and 2) equity investment in hydrogen fuel cell vehicle player Nikola by Hanwha Energy and Hanhwa General Chemical (affiliates of H Solution, a company wholly-owned by the Hanwha Group founding family) and an accompanying increase in business opportunities in the hydrogen market.
Adhering to a Buy rating, we raise our TP from W32,000 to W37,000, reflecting changes in the share prices of listed subsidiaries. Hanwha Corp’s shares are trading at a 61% discount to NAV.
3Q20 review: Earnings surprise thanks to strong earnings at Hanwha Solutions
Hanwha Corp posted 3Q20 sales of W11.7tn (-10% y-y) and OP of W636.2bn (+64% y-y), with both figures arriving well above consensus.
Hanwha Corp’s rosy results were helped the most by an earnings surprise at Hanwha Solutions stemming from robust chemical business. But, with strong non-consolidated OP (W71.2bn, +82% y-y) continuing at the in-house defense business thanks to y-y low-base effect, subsidiaries’ earnings generally topped consensus overall. Hanwha Life Insurance (OP of W68.9bn, +227% y-y) booked a reversal of variable insurance-related guarantee reserves, and Hanwha Aerospace logged favorable earnings on defense business improvement. However, Hanwha E&C (OP of W43.5bn, -8% y-y) suffered a q-q decline in profitability due to the suspension of housing business in Iraq amid Covid-19.
Looking at 4Q20, despite restructuring costs at the in-house trading business and weak earnings for Hanwha E&C’s Iraq housing business, Hanwha Corp should record OP of W351.2bn (+206% y-y), aided by growth of the in-house defense business and earnings expansion for listed subsidiaries.