[Click eStock] "Hyundai Wia, Challenging External Environment... Investment Rating Downgraded to 'Neutral'"

[Asia Economy Reporter Myunghwan Lee] Korea Investment & Securities announced on the 14th that it has downgraded its investment opinion on Hyundai Wia from Buy to Neutral. The reason cited is the expectation of continued sluggish performance in the second half of this year due to unfavorable external factors such as the Ukraine war.

Korea Investment & Securities projected Hyundai Wia's operating profit for the second quarter of this year to be 28.6 billion KRW, which is about 34% lower than market expectations. The operating profit margin is expected to decrease by 0.8 percentage points from the previous quarter to 1.5%.

The reason for the anticipated poor performance is explained as the increase in variable costs combined with Hyundai Motor and Kia's second-quarter vehicle sales falling short of expectations by 7% and 9.5%, respectively, which prevented the dispersion of fixed cost burdens. The impact of the Russia-Ukraine war, which has led to growing losses at the Russian subsidiary, is also cited as a concern. The Russian subsidiary recorded a loss of 24 billion KRW in the first quarter alone. The machinery division, which achieved a surprising operating profit margin of 1.1% in the first quarter, is expected to return to a loss with an operating profit margin of -3% in the second quarter.

Korea Investment & Securities forecasts that the challenging external environment faced by Hyundai Wia will continue into the second half of the year. While the combined production volume of Hyundai Motor and Kia is expected to increase in the second half, losses at the Russian subsidiary are expected to persist. Before the outbreak of the war, the Russian subsidiary generated an operating profit of about 3 billion KRW per month, but it is now estimated to have shifted to a monthly loss of the same amount. The continued sluggishness of Hyundai Motor and Kia in the Chinese market is also expected to have an impact.

The machinery division is also expected to continue its losses in the second quarter. For stable earnings in the machinery division, orders worth about 300 billion KRW per quarter are necessary, but new orders are expected to be weak due to concerns over an economic downturn.

Korea Investment & Securities cited geopolitical risks and the negative environment faced by new businesses as reasons for downgrading Hyundai Wia's investment opinion to Neutral. Although Hyundai Wia established a new engine plant in Russia as an alternative to the sluggish Chinese market, the timing of recovery is uncertain due to the outbreak of the war. Among new businesses, the hydrogen tank business is expected to slow down due to Hyundai Motor Group's prioritization of electric vehicles. The air conditioning parts business is also evaluated as less attractive considering the poor performance of Hanon Systems, the industry leader.

Researcher Jinwoo Kim of Korea Investment & Securities analyzed, "The increase in machinery division sales due to Hyundai and Kia's investment in electric vehicle plants could be the only investment point, but even considering this, the valuation appeal is limited."