Upside Potential Looks Limited
The author is an analyst of NH Investment & Securities. He can be reached at jinmyung.choi@nhqv.com. -- Ed.
Hyundai CE’s share price has rebounded strongly thanks to greater-than-expected strength in the Chinese construction equipment market. However, as a result, its P/E has reached the upper end of the machinery sector’s 10yr band. It is necessary to check whether momentum will continue in 2H21 and 2022.
Lower rating to Hold: Construction sector P/E hits 23x
We raise our TP on Hyundai CE from W41,000 to W53,000 but lower our rating from Buy to Hold, as the firm’s upside potential looks limited. We raise our TP to reflect: 1) an 11.3% increase in 2021E EPS on a faster-than-expected recovery of the Chinese construction market; and 2) a jump in the average machinery sector P/E from 13.8x to 23.0x.
While the business environment remains favorable, the company’s valuations have reached a 10-year high. For the firm’s share price to continue rising, it will need to secure new growth drivers or show faster-than-expected growth in ex-China markets.
Will Chinese construction market’s strong growth continue?
The Chinese construction market is recovering faster than expected. Over January~February, demand in China grew 177%, and it should continue to rise in 1H21.
But, we believe that China momentum is already reflected in Hyundai CE’s share price. Also, the firm has a relatively low effective stake (36%) in its China subsidiary. It is also possible that the Chinese government will shift its policy focus from construction to domestic consumption expansion.
US to be key to 2H21 earnings
While the firm’s performance in ex-China regions is yet unknown, we believe that Hyundai CE’s share price upside potential will mainly hinge upon the pace of demand recovery in such regions. Of note, considering the company’s sales mix and governance structure, changes in demand in DMs (eg, North America and Europe) and EMs (eg, India) tend to have a big impact on its EPS. In line with ongoing improvement in a variety of economic indicators, we anticipate that investor interest in Hyundai CE’s shares will strengthen going forward.