[Click eStock] "Hyundai Mobis, Target Price Down 6% Due to Top-Line Growth Without Profitability Improvement"

Meritz Securities Report
Prolonged Decoupling of Sales and Profitability

[Asia Economy Reporter Minji Lee] Meritz Securities maintained a buy rating on Hyundai Mobis on the 27th and lowered the target price by 6% to 300,000 KRW. This reflects the expectation of reduced profitability due to the low profitability trend in the electrification sector and increased cost burdens.

In the fourth quarter of last year, sales reached 11.6 trillion KRW, a 9% increase compared to the same period last year, exceeding market expectations by 10%. Despite a 13% production decrease at Hyundai and Kia due to semiconductor shortages, core parts sales increased by 1% through a higher proportion of vehicles equipped with high-spec functions. Electrification sales also grew by 63%, in line with the 69% growth in BEV sales by Hyundai and Kia. Additionally, after-sales (AS) sales increased by 22% as accumulated replacement parts demand materialized.

However, operating profit recorded 528.6 billion KRW, a 25% decrease compared to the same period last year. This was 2% below the market expectation, which had already been lowered by 12% over the past month. The operating profit margin was 4.6%, down 2 percentage points from a year ago. Junseong Kim, a researcher at Meritz Securities, explained, “The continued reflection of increased logistics costs is also a burden,” adding, “It is regrettable that despite steep sales growth, the underperformance of the electrification sector is failing to contribute to improvements in consolidated earnings.”

The sales scale of the electrification sector has grown rapidly over the past five years. It steadily increased from 1.2 trillion KRW (3% of parts business sales) in 2017, 1.8 trillion KRW (5%) in 2018, 2.8 trillion KRW (7%) in 2019, 4.2 trillion KRW (12%) in 2020, to 5.7 trillion KRW (18%) in 2021, reaching 2 trillion KRW (22%) in the fourth quarter of last year. Researcher Kim stated, “To help improve Mobis’s corporate value through the expansion of BEV sales by Hyundai and Kia, it is necessary to secure profitability in the electrification sector and confirm its contribution to consolidated earnings.”

Hyundai Mobis continues to experience a decoupling between sales growth and profitability improvement. Since the adoption of IFRS accounting standards in 2010, Mobis’s sales have increased significantly, expanding from 17 trillion KRW in 2010 to 42 trillion KRW in 2021. However, operating profit has essentially stagnated, remaining around 2 trillion KRW last year compared to 2.5 trillion KRW in 2010.

Researcher Jinwoo Kim analyzed, “To improve corporate value, it is necessary to verify the basis for profit growth accompanying sales growth,” and added, “Reflecting ongoing cost burdens and the low profitability trend in the electrification sector, we adjusted the 2022 EPS estimate down by 5.3%, and accordingly lowered the target price by applying the parts industry average PER (price-to-earnings ratio) of 10.6 times.”