Dependence on Group Affiliates Continues to Fall
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
4Q21 results beat expectations, with logistics market having larger impact than auto sector; reduction in dependence on domestic market and group affiliates continues
— 4Q21 OP beat both the market consensus and our estimate, confirming that benefits from global supply chain disruptions are outweighing negatives from semiconductor supply shortages. In addition, the steady decline in contribution from domestic revenue and reduced dependence on group affiliates should dispel criticism over unfair trading practices going forward.
4Q21 review: OP of KRW325.1bn (+85.6% YoY) well above market consensus thanks to strong Shipping earnings
— Hyundai Glovis reported 4Q21 OP of KRW325.1bn (+85.6% YoY), exceeding the consensus and our estimate by 8.4% and 7.9%, respectively. While Shipping OP exceeded our estimate by KRW27.9bn, Logistics OP missed by KRW4.2bn and Distribution OP was in line.
— For Shipping, strong bulk shipping demand, new PCTC client additions and PCTC demand growth amid the global recovery contributed to the earnings beat, in our view. Other (bulker) and PCTC revenue were KRW154.5bn and KRW99.4bn higher than our estimates, respectively. For the PCTC business, revenue from non-affiliate clients was about KRW110.0 above our estimate and KRW140.0bn higher than 4Q20 revenue. Combined Shipping revenue exceeded our estimate by KRW253.9bn, with favorable operating leverage pushing OP significantly above our expectation.
— We believe the lower-than-expected Logistics OP is attributable to an uneven allocation of quarterly costs. In 4Q21, supply chain disruptions intensified, and air cargo/container shipping rates rose faster than expected. As a result, Hyundai Glovis revenue improved 10.7% QoQ in 4Q21, beating our estimate by 9.9%. However, Logistics OPM came in at just 6.1%, 1.8pp below that of 3Q21 and 0.8pp short of our estimate. In 2Q21 and 3Q21, OPM was abnormally high because some revenue items were booked without recognizing related expenses due to reasons that include revenue settlement. Thus, Hyundai Glovis appears to have retroactively recognized expenses in the last quarter of its financial year, as has been done before.
— Distribution OP of KRW138.9bn was in line with our estimate of KRW138.7bn. While Distribution revenue came in at KRW2.9tn (+9.9% YoY), or 2.5% below our estimate, OPM reached 4.8% (+2.4pp YoY), exceeding our estimate by 0.1pp. The YoY improvement in revenue and OPM appears to be on the back of positive FX effects on CKD revenue (KRW2.2tn; +4.2% YoY).
Robust OP amid supply chain disruptions; reduced dependence on domestic market, group affiliates
— 4Q21 results indicate the following:
(1) OP has recently been tracking the logistics market more closely than the auto sector. While semiconductor shortages are depressing logistics demand for auto parts and finished cars, the protracted instability in the global supply chain has shot logistics rates up, fueling revenue growth at logistics firms. Hyundai Glovis maintained robust revenue and OP in 4Q21, though major group affiliates announced disappointing results.
(2) Hyundai Glovis continues to reduce its dependence on the domestic market and group affiliates. In 4Q21, PCTC revenue from domestic business and affiliates are estimated to have grown 3.2% YoY and 15.0% YoY, respectively, significantly slower than company-wide growth and PCTC revenue growth of 19.8% YoY and 45.0% YoY, respectively. The company’s transition should mitigate criticism over unfair trading practices.