Chosen as Preferred Bidder for Doosan Infracore Sale
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
Valuations are improving in all of HHI Holdings’ business areas. The firm’s earnings have been better than feared in 2020, and earnings visibility has improved for 2021. We also advise paying attention for possible business expansion as the company has been designated as the preferred bidder for the Doosan Infracore sale.
Raise TP on earnings recovery at subsidiaries and attractive NAV
We raise our TP on HHI Holdings from W315,000 to W370,000 as subsidiaries in most business areas (mainly oil refining) are seeing share prices rallies and their earnings are showing signs of improvement.
The company is trading at a 44.2% discount to NAV, an attractive level. We also point out possible top-line growth through the planned acquisition of Doosan Infracore. Of note, HHI Holdings boasts sufficient funding capability for the M&A, and additional funding is also possible through KDBI.
Earnings forecasts: Refinery business begins to turnaround; other businesses showing signs of recovery
Subsidiary Hyundai Oilbank remained in the black in 2Q20 and 3Q20, demonstrating its superior cost structure compared to peers. Its OP should further improve as a global economic recovery has begun, and chemical facility expansion was completed in 3Q20.
Positive changes have also been confirmed for other businesses. The construction machinery and electric businesses are expected to turn around, and large-scale orders (including for a Mozambique LNG project at yearend and Qatar LNG project in 2021) are expected at the shipbuilding business.
Doosan Infracore M&A: Expected to become sixth largest global construction equipment player
Having been designated as the preferred bidder for the Doosan Infracore sale, the HHI Group is expected to become the sixth largest construction equipment group in the world. The acquisition would strengthen the firm’s brand power and ease competition in the domestic market.
However, there are still challenges to overcome. The risk of litigation related to Doosan Infracore’s Chinese subsidiary (DICC) has yet to be resolved, and it is also necessary to gain M&A approval due to monopoly issues.