Chip shortage Expected to Start Subsiding in 2H22

The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.

 

Sluggish 1Q22 results; for 2H22, improvement in supply-demand dynamics to be positive but ASP hikes more urgent

— Hanon Systems reported 1Q22 earnings, missing the market consensus. We attribute the miss to declining component demand amid the chip shortage and failure to sufficiently pass inflation-led cost increases through to component prices. We forecast semiconductor supply-demand dynamics to improve in 2H22, leading to an operating leverage effect. For 2Q22 earnings to improve, however, the company needs better pass-through.   

1Q22 review: OP of KRW30.5bn (39.3% below consensus); larger-than-expected increase in costs but only partial pass-through

— Hanon Systems reported OP of KRW30.5bn (-67.6% YoY), missing the consensus/our estimate by 39.3%/63.9%. The OP shortfall was attributable to an increase in raw material costs.

— Revenue came in at KRW1.9tn (+5.9% YoY). Despite waning demand from major clients (e.g., Hyundai Motor Group/Ford down 7.0% YoY/11.2% YoY), revenue climbed on an increase in proportion of EV parts (20.3% in 1Q21→24.0% in 1Q22) and partial cost pass-through. We believe a drop in demand pushed OP down KRW16.1bn while ASP markups contributed KRW27.8bn to OP.

— Despite ASP hikes, 1Q22 COGS ratio rose 2.9pp YoY to 91.0% and EBITDA margin fell 4pp YoY to 8.4%. Cost increases (YoY) lowered OP by KRW65.3bn, far more than our estimate of KRW21.6bn. We estimate cost pass-through ratio of 40.8% (KRW27.8bn of total cost increase of KRW65.3bn was passed through). According to the company, 1Q22 cost pressure mainly came from raw materials (KRW32.0bn), transportation (KRW20.0bn), electricity/gas in Europe (KRW8.0bn) and labor & other fees (KRW20.0bn). 

Positioned to benefit most from changing chip supply-demand dynamics in 2H22; 2Q22 earnings improvement depends on ASP hikes

— We expect the chip shortage to start subsiding in 2H22, resulting in earnings improvement. We see better cost pass-through going forward but the extent of ASP hikes needs to be monitored.

— Having yet to boost its utilization rates for green car components, Hanon Systems is in the best position to benefit from a positive operating leverage effect once the chip shortage subsides (market expectations on timing of normalization vary between 2H22 and 2024). The Chinese government’s measures to stabilize chip supply/demand (e.g., sharing demand info, cracking down on unfair practices) early this year were effective in normalizing its automobile market; similar action taken by other governments may accelerate global memory market normalization.

— We believe ASP hikes are essential for 2Q22 earnings improvement. Costs will increase QoQ given rising raw material prices, so successful price negotiations will be critical. 

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