[Click e Stocks] Hanon Systems 'Neutral', The Unyielding Surge of the Dollar

[Asia Economy Reporter Hwang Junho] Korea Investment & Securities downgraded its investment opinion on Hanon Systems to 'neutral' on the 29th, forecasting that the company's Q3 performance this year will fall short by about 20%.

Korea Investment & Securities projected that Hanon Systems' operating profit in Q3 would be sluggish due to rising raw material costs. Operating profit is expected to record 68.6 billion KRW, which is 20.2% lower than the forecasted figure.

They anticipated that sales would increase due to a rebound in China's operating rate and strong sales in the North American region. However, the strong dollar is expected to be a factor in the decline in performance. Hanon Systems hedges most of its foreign exchange exposure through forward contracts, so the profit and loss improvement from the rise in the KRW-USD exchange rate is limited. Additionally, due to the strong dollar, the cost of raw materials procured in dollars is declining more slowly than expected. In fact, aluminum prices, which account for about 20% of raw materials, have steadily fallen in dollar terms since March, but the price decline in KRW terms is not significant. Moreover, the depreciation of the Turkish lira is expected to continue to increase financial costs following Q2.

Concerns over Europe's power shortage, leading to conservative production activities among client companies, were also cited as a factor in the performance decline. Europe accounts for more than 30% of Hanon Systems' sales. Although the supply of automotive semiconductors is easing, it is understood that major European automakers' parts orders for the second half of the year are not large. This is because, amid power shortages and economic concerns increasing uncertainty, automakers are taking a conservative approach to their factory operation plans for the second half.

Jinwoo Kim, a researcher at Korea Investment & Securities, said, "The key point to watch in the second half is the speed of normalization of production activities in Europe and profitability recovery," adding, "For Hanon Systems' valuation to recover, it is essential to restore profitability befitting a core electric vehicle parts supplier."

He continued, "Even Hanon Systems, a leading large parts company performing well in an inflationary environment, is struggling to pass on costs," and added, "It is expected to be difficult to fully pass on the increased cost burden to customers in the second half of this year as well."