Confidence Increasing in Sustainability
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
Although some short-term uncertainties are in play (including automotive semiconductor supply issues and a re-proliferation of Covid-19), our favorable long-term growth outlook for Hyundai Mobis remains intact. With HMG’s E-GMP production to begin in earnest from 2Q21, the mid/long-term growth potential of Hyundai Mobis’s electrification business is to start being realized. With confidence increasing in its sustainability, we view Hyundai Mobis as warranting a long-term valuation premium.
Electrification business growth to hit full force from 2Q21
We maintain a Buy rating and a TP of W530,000 on Hyundai Mobis. Rather than focusing upon short-term earnings, we advise investors to concentrate on expectations that the module division will enjoy long-term top-line growth and margins improvement, supported by both the expansion of the Hyundai Mobis’s electrification business and a recovering global utilization rate at HMG. Accordingly, share price re-rating is in the cards. As a core component supplier, Hyundai Mobis is to start realizing its mid/long-term growth potential from 2Q21, at which time the introduction of HMG’s exclusive xEV platform (E-GMP) is to be in full swing.
Of note, Hyundai Mobis’s share price is trading at a 2021E P/B of just 0.8x—an excessively undervalued level given the strong mid/long-term growth potential of its electrification business, and further given a potentially significant role for the firm in anticipated governance restructuring at HMG. Of note, we expect the sales portion accounted for by Hyundai Mobis’s electrification business to rise from 11.5% in 2020 to 34.2% by 2025, with related margins likely to improve upon the securing of greater economies of scale.
1Q21 preview: Anticipate solid top-line growth
Hyundai Mobis should see consolidated 1Q21 sales of W9.55tn (+13.4% y-y) and OP of W567.9bn (+57.4% y-y; OPM of 5.9%). Although HMG’s Chinese market sales remain sluggish, Hyundai Mobis is to experience top-line growth once HMG’s global utilization rate (excluding China) starts improving in earnest. In terms of profitability, OPM at the A/S division will likely show a narrowing (y-y), but the module division should record a turn (y-y) to positive operating income territory.
By business arm, we expect the A/S division to register 1Q21 sales of W1,81tn (-3.7% y-y) and OP of W397.8bn (-11.8% y-y; OPM of 21.9%). For the module division, we forecast 1Q21 sales of W7.74tn (+18.4% y-y) and OP of W170.2bn (TTP; OPM of 2.2%). Margins at the A/S division have likely been narrowing in 1Q21 on a less favorable won/dollar rate, higher transportation costs, and issues related to the application of a new integrated parts management system. However, we advise investors to focus more upon expectations that Hyundai Mobis’s portion of electrification sales will increase significantly from 2Q21 once HMG’s E-GMP production begins in earnest.