Deutsche Motors, Can We Expect a Turnaround in Performance This Year?

Operating Profit Last Year Below Hanwha Investment & Securities Estimates
Expected Reduction in Earnings Volatility Due to Deutsche Autoworld

[Asia Economy Reporter Gong Byung-sun] Although Deutsche Motors' performance was sluggish last year, there is an analysis that there is sufficient room for growth this year. With the full-scale opening of Deutsche Autoworld, performance volatility is expected to decrease, and synergy effects from additional construction could expand in the mid to long term. Accordingly, Hanwha Investment & Securities maintained a target price of 10,000 KRW and a 'Buy' rating for Deutsche Motors.

Deutsche Motors' performance last year fell short of expectations. In the fourth quarter of last year, sales reached 408.2 billion KRW, a 21% increase compared to the same period the previous year, but operating profit dropped 79% to 2.6 billion KRW, and net profit also decreased by 46% to 4.1 billion KRW. This figure was below Hanwha Investment & Securities' operating profit estimate of 11.9 billion KRW.

The decline in performance appears to be due to losses in Deutsche Motors' BMW division and Deutsche Autoworld. Profitability in the BMW division declined as year-end promotions were expanded. In the complex shopping mall Deutsche Autoworld, some facility leases were delayed, and lease liabilities and sublease negative margins occurred.

From this year, performance volatility is expected to decrease due to Deutsche Autoworld. Revenue recognition from sales ended in the first half of last year. Additionally, through the issuance of convertible bonds, issues related to lease liabilities and sublease negative margins, which caused losses in the second half, were resolved. Analyst Kim Dong-ha of Hanwha Investment & Securities said, "Starting this year, there will be stable operating profit of around 5 billion KRW annually from Deutsche Autoworld through the leasing business," adding, "High-profit new revenue generation such as performance inspections is also expected."

Mid to long-term synergy effects are also worth anticipating. There are plans to form a used car complex network through additional construction of Deutsche Autoworld. Analyst Kim explained, "Through synergy effects with the offline platform Deutsche Autoworld, growth in high-profit businesses and strengthening of the multi-brand dealer strategy will occur," and added, "Recurring profit increases are expected to continue."