[Into the Stocks] 'Revenge Spending' Sparks Jeju Travel Boom... SK Rent-a-Car's Value Soars

SK Rent-a-Car, 57% Increase Since Early Year Due to Jeju Travel Boom
Double-Digit Growth in Performance... Q1 Financial Costs Surge by 10 Billion KRW
"Car Sharing to Drive Higher Rental Car Demand"

[Asia Economy Reporter Ji Yeon-jin] The valuation of SK Rent-a-Car is soaring. After more than a year of suppressed spending due to COVID-19, the pent-up "money flow" has burst out through trips to Jeju Island, creating a special demand for rental car companies. Additionally, expectations that used car demand will increase due to delays in new car releases caused by semiconductor supply shortages have pushed SK Rent-a-Car's stock price up more than 50% since the beginning of the year, with target prices being raised continuously.

◆ Jeju 'Travel Boom' Triggered by Revenge Spending, Rental Cars in Short Supply = According to the financial investment industry on the 9th, DS Investment & Securities set a target price of 21,000 won for SK Rent-a-Car on the 7th. This is due to the sharp increase in short-term rental car utilization rates driven by rising domestic travel demand and expectations of improved cost ratios from rising used car prices. Earlier on the 7th, Samsung Securities set a target price of 18,000 won, and last month, KTB Investment & Securities (17,000 won) and Hyundai Motor Securities (16,000 won) also raised their target prices consecutively. SK Rent-a-Car's stock price was below 10,000 won at the beginning of the year but started to surge from April, reaching 15,350 won on the 2nd. On the morning of the same day, it rose nearly 5% again, approaching 15,000 won.

In reality, with overseas travel blocked by COVID-19, tourists flocked to Jeju Island, making rental car reservations as difficult as "picking stars from the sky." According to the Jeju Tourism Association, 1,069,888 tourists visited Jeju in April, nearly double the 542,258 visitors during the same period last year. Last month, 1.1 million people visited Jeju, and as of yesterday this month, 280,000 people have arrived. The number of Jeju travelers is expected to increase further during the summer peak season.

SK Networks acquired a 42.24% stake in AJ Rent-a-Car in September 2018 to strengthen future mobility business competitiveness through restructuring the rental car industry. Subsequently, on December 31, 2019, SK Networks transferred its rental car business division (excluding one long-term rental car and used car sales location) to AJ Rent-a-Car and acquired a 21.99% stake in AJ Rent-a-Car. In September last year, through a 100 billion won paid-in capital increase, the integrated corporation launched SK Rent-a-Car. Last year, sales amounted to 863 billion won, and operating profit was 70.7 billion won, with the rental car business (68%) exceeding used car sales revenue (28%).

◆ SK Rent-a-Car Grows Larger, but Financial Costs Are a 'Burden' = Since the launch of the integrated corporation, SK Rent-a-Car's valuation has increased significantly. Sales rose 34% compared to 2019 (640.8 billion won), and operating profit surged more than 70% from 41.5 billion won during the same period. Net profit increased from 16.3 billion won to 18.1 billion won. In the first quarter of this year, sales reached 248.5 billion won, nearly 20% higher than the same period last year, and operating profit was 19.6 billion won (+2%). Given that sales are higher in the travel peak seasons of the second and third quarters, there is a forecast that this year's sales could reach 1 trillion won.

However, deteriorating profitability is a concern. Net profit in the first quarter of this year was 6 billion won, down from 7.2 billion won in the first quarter of last year. During this period, financial costs (interest) increased significantly from 8 billion won to 10 billion won. SK Rent-a-Car has recently seen a rapid increase in debt, issuing 300 billion won in corporate bonds earlier this year to purchase rental assets including electric vehicles. Debt size increased from 1.04 trillion won in 2019 to 1.764 trillion won last year, and approached 2 trillion won (1.9399 trillion won) in the first quarter of this year. This is interpreted positively as investment costs for growth. Lee Kyung-rok, a researcher at Samsung Securities, said, "There is an expectation of increased demand for personal long-term rental cars due to changing perceptions of vehicle ownership. As car-sharing and ride-hailing businesses expand, the need for vehicle ownership decreases, shifting new car demand among people in their 20s and 30s to long-term rentals. Additionally, short-term rental demand is expected to increase due to long-term rental demand from corporations and individuals alongside the transition to eco-friendly vehicles."

SK Rent-a-Car's consolidated sales in the second quarter of this year are estimated at 251.2 billion won, a 16.5% increase year-on-year, and operating profit is expected to rise 49% to 20.7 billion won. Kim Seung-hoe, a researcher at DS Investment & Securities, said, "Considering that last year was a period of performance deterioration due to COVID-19, performance momentum is expected to be highlighted. This year’s performance is projected to be sales of 1.0875 trillion won and operating profit of 101.9 billion won, marking the first year operating profit surpasses 100 billion won."

◆ Impact of Industry Leader Lotte Rental's IPO? = The financial investment industry expects a revaluation of SK Rent-a-Car as Lotte Rental pursues an initial public offering (IPO).

As of the first quarter of this year, the domestic rental car market consists of Lotte Rental (21.8%), SK Rent-a-Car (19.2%), Hyundai Capital (12%), Hana Capital (3.2%), and other small and medium-sized companies. Industry leader Lotte Rental submitted an application for preliminary review for listing on the Korea Exchange's KOSPI market on the 31st of last month.

With Lotte Rental easing competition to improve profitability ahead of its listing, rental car companies are expected to focus on maintaining their current market shares rather than engaging in price-cutting competition as in the past. Lotte Rental's rental car market share decreased from 25.3% in 2015 to 21.8% in the first quarter of this year, but its operating profit margin on a separate basis rose from 6.0% to 7.7% during the same period. Also, since Lotte Rental expects a corporate value of 1.5 trillion won after listing, there are expectations that SK Rent-a-Car's market capitalization (730 billion won) will also be revalued.