Growing Demand for Automotive Software and DT Services
The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and wonyong.sim@shinhan.com, respectively. -- Ed.
2Q22 sales to come in at KRW569.9bn (+11% YoY)
We now expect Hyundai Autoever to report operating profit of KRW25.3bn (-25% YoY, +13% QoQ) on sales of KRW569.9bn (+11% YoY) for 2Q22 with solid earnings continuing from the previous quarter. By division, system integration (SI) will likely post sales of KRW191.6bn (+9% YoY), IT outsourcing (ITO) KRW264.1bn (+6% YoY), and automotive software KRW114.2bn (+27% YoY, +11% QoQ).
The three major drivers of steady earnings growth in 2Q22 are seen as: 1) orders booked on growing demand for SI infrastructure services and favorable forex rates; 2) steady order intake from Hyundai affiliates; and 3) rise in demand for connected car services using the company's automotive software along with the shift to advanced technology cars. Company-wide operating margin is estimated at 4.4% (-2.1%p YoY) for 2Q22.
Growing demand for automotive software and DT services
We focus on the growth potential of Hyundai Autoever's automotive software platform. Triggered by advancements in self-driving cars and connected technology, the rapid paradigm shift in the mobility industry is driving visible growth in demand for new automotive software architectures. We expect Hyundai Autoever's Mobilgene to strengthen its foothold as an essential automotive software platform, providing advantages in over-the-air (OTA) updates for process integration and control. For full-year 2022, automotive software sales are forecast at KRW475.8bn (+75% YoY).
Hyundai Autoever also stands out as the leading provider of digital transformation services, offering improvement in service stability and efficiency for smart factories and logistics systems using robots, AI, IoT and other innovative technologies. In addition, expectations are growing for operational synergy between Hyundai affiliates and Hyundai Autoever's mobility operations. Introduction of a wider variety of mobility services sparked by the shift to the fourth industrial revolution is expected to further accelerate growth of the market for cloud platforms going forward. With Hyundai Autoever likely to benefit from the paradigm shift in the industry, we believe sales from SI will reach up to KRW825.5bn (+11% YoY) and ITO to KRW1.08tr (+9% YoY) in 2022.
Retain BUY for a revised-down target of KRW160,000
We retain our BUY rating on Hyundai Autoever while lowering our target price to KRW160,000 in view of: 1) change in valuation base from 2022 to 2023 forecasts; and 2) decline in peer valuations. Our revised target price is based on 2023F EPS of KRW4,516 and a target PER of 34.9x, reflecting a 35% premium to the peer PER average with Hyundai Autoever expected to emerge as a key beneficiary of the paradigm shift to the fourth industrial revolution.