[Click eStock] "Hyundai Rotem, Burdensome Valuation"

[Asia Economy Reporter Song Hwajeong] Shinhan Financial Investment maintained a 'Neutral' investment rating on Hyundai Rotem on the 22nd, diagnosing that while the gradual operating profit growth trend is positive, the valuation is burdensome. No target price was presented.

Hyundai Rotem announced that its consolidated sales for the second quarter reached 710.7 billion KRW, with an operating profit of 15.8 billion KRW. Compared to the same period last year, sales increased by 8.2%, but operating profit decreased by 38.4%. Hwang Eoyeon, Senior Researcher at Shinhan Financial Investment, analyzed, "This performance is 34.6% below the consensus operating profit of 24.1 billion KRW," adding, "A delay in the development of the distributed power high-speed train 'KTX-Eum' led to the recognition of a penalty of 16.5 billion KRW in the Rail Solution division." The Rail Solution division's operating profit recorded 1.4 billion KRW, down 87.1% from the previous quarter due to the penalty recognition. The Defense Solution division's operating profit decreased by 6.6% to 13.6 billion KRW, while the Eco Plant division's operating profit improved to 800 million KRW, a 287.8% increase, influenced by the completion of the Qatar sewage treatment facility.

Since last year, stable operating profits have continued, and gradual growth is expected to persist. Senior Researcher Hwang said, "Future gradual operating profit growth is anticipated due to the resolution of low-priced orders in the railway sector, expansion of orders for the relatively high-margin KTX-Eum, and the hydrogen business expansion in the plant division." The profit growth in the Rail Solution division is expected to be driven by the KTX-Eum high-speed train. Unlike electric trains that undergo competitive bidding, high-speed trains proceed through negotiated contracts. Hwang explained, "Although subject to government price regulations, margins are favorable among domestic projects," adding, "The 4th Railway Network Plan (2021?2030) has a project budget of 119.8 trillion KRW, a 32.1% increase compared to the 3rd plan. Benefits from the government's high-speed rail expansion policy are also expected."

While the gradual operating profit growth trend is positive, the valuation is considered burdensome. Senior Researcher Hwang stated, "The expected compound annual growth rate (CAGR) of operating profit from 2021 to 2024 is 7.5%, and the price-to-earnings ratio (PER) based on 2021 is 44.8 times, which is 77.3% higher than global peers, so we maintain a neutral investment rating."