[Click eStock] Hanon Systems, Despite Earnings Improvement, Stock Attractiveness... 'Neutral' Maintained

[Asia Economy Reporter Lee Seon-ae] Hana Securities maintained a neutral investment opinion and a target price of 13,500 KRW for Hanon Systems.

Song Seon-jae, a researcher at Hana Securities, stated, "Although the second-quarter performance was sluggish, slightly missing market expectations due to increased production and sales costs, positive aspects were also found, such as growth in eco-friendly vehicle parts and the pass-through of cost increases to selling prices. In the second half, performance is expected to improve with customers' production recovery, increased supply of eco-friendly vehicle parts to Hyundai Motor, Kia, Volkswagen, and others, as well as cost ratio improvements." He added, "On the other hand, from a stock price perspective, the current high valuation with a price-to-earnings ratio (PER) of 22 times and a price-to-book ratio (PBR) of 2.5 times requires better growth and profitability to be justified, which is a regrettable point."

Hanon Systems' second-quarter results slightly missed market expectations (operating profit basis -3%) due to the continued impact of rising raw material, transportation, and energy costs following the first quarter. Sales and operating profit recorded 2.11 trillion KRW and 60.1 billion KRW (operating margin 2.9%, -2.6%p), representing a 14% increase and a 40% decrease year-on-year, respectively. Despite production disruptions at major customers (due to semiconductor shortages and city lockdowns in China), sales reached a quarterly record high thanks to ASP increases, exchange rate effects (+4%), pass-through of cost increases to selling prices, and growth in eco-friendly vehicle parts (26% increase, 8.3% share). The sales growth rate excluding exchange rate and price pass-through is estimated to be 5-10%.

Hanon Systems stated that annual sales are expected to reach the upper end of the guidance range of 8 trillion to 8.4 trillion KRW due to increased production by customers in the second half. Considering this, second-half sales are expected to be around 4.3 trillion KRW (vs. 4.1 trillion KRW in the first half). With cost stabilization, the operating margin in the second half is expected to improve to 4-5% (vs. 2.2% in the first half). The annual target for the electrification sales ratio of 26% is considered achievable given the main customers' electric vehicle production increase plans (approximately 2.1 trillion to 2.2 trillion KRW). Regarding key modules of the heat pump system (e-Comp, heat pump valve, battery chiller, etc.), orders were received in the second quarter from European premium brands for factories in Europe, North America, and China. From July, supply began with the production of the MEB-based ID.4 model at Volkswagen's U.S. plant. Supply is also planned for Hyundai Motor's Ioniq 6 model, which will start production soon, as well as Hyundai Motor's Seven and Kia EV9 models next year.