Expanding Investments in Europe

The authors are analysts of Shinhan Investment Corp. They can be reached at yjjung86@shinhan.com and dongho2852.shin@shinhan.com, respectively. -- Ed.

 

2Q22 OP falls short of expectations at KRW45.7bn (-40.4% YoY)

Mando's 2Q22 sales were in line with market expectations at KRW1.7tr (+12.9% YoY, -0.5% QoQ), but operating profit fell short of the KRW62.4bn consensus by 27% at KRW45.7bn (-40.4% YoY, -33.7% QoQ). China sales dropped to KRW326.7bn (-6.6% YoY, -22.9% QoQ), with production at major clients disrupted by COVID-19 lockdowns in Shanghai. Sluggish sales in China, which accounts for the largest portion of overseas earnings, weighed heavily on company-wide profit in 2Q22.

In addition, earnings were pulled further down by rising cost with raw material prices continuing on an uptrend since end-2021. The increase in USD/KRW rate also drove up the won-denominated prices of chips and other components purchased in USD by subsidiary HL Klemove.

China and EV parts sales to drive sharp improvement in 2H22 & increased investments in Europe to fuel growth in the long run

In 3Q22, we expect China sales to rebound to KRW436.9bn (+22.3% YoY, +33.7% QoQ) with government subsidies driving up auto demand and newly added production capacity at major EV clients coming online. As a result, consolidated sales should reach up to KRW1.9tr (+30.8% YoY, +14.6% QoQ) and operating profit to KRW71.2bn (+33.9% YoY, +55.8% QoQ) in 3Q22.

Meanwhile, Mando has been expanding investments in Europe after securing a KRW1.4tr order from Volkswagen in 2021. The company recently acquired an additional 10% stake in Maysan Mando for USD11.5mn to raise its ownership to 60% and include the Turkish auto parts JV as a consolidated subsidiary from 3Q22. We see ample room for further growth in Europe, which accounts for less than 5% of company-wide sales at present. Going forward, Mando is expected to build on the supply of parts to Volkswagen and EV-making clients to expand its regional presence in Europe.

Retain BUY and raise target price to KRW72,000

We retain BUY on Mando and raise our target price by 11% to KRW72,000. The visibility of earnings improvement is high for auto parts companies in 2H22, with capacity utilization rates rising at automakers and raw material prices stabilizing at lower levels. Mando will likely report a faster recovery in earnings than peers backed by its competitiveness in EV parts.

Copyright © BusinessKorea. Prohibited from unauthorized reproduction and redistribution