[Click eStock] "Hyundai Wia, Machinery Division Deficit... Target Price Down"

[Asia Economy Reporter Son Sunhee] Meritz Securities maintained a 'Buy' rating on Hyundai Wia on the 19th but lowered the target price from 85,000 KRW to 70,000 KRW. This is due to the poor operating profit in the machinery division caused by a sharp downturn in the fourth quarter.

Hyundai Wia recorded sales of 2.16 trillion KRW in the fourth quarter of last year, a 12% increase compared to the same period the previous year. While sales grew, operating profit and net income attributable to controlling shareholders were only 55.3 billion KRW and 41.1 billion KRW, respectively. Although it turned profitable, it fell short of market expectations.

The main reason is the significant deterioration in profitability in the machinery division. The machinery division had recorded losses for five years since 2017 but achieved three consecutive quarters of profit last year following intensive workforce restructuring in 2021. However, due to a sharp decline in demand from upstream industries and intensified competition in the fourth quarter of last year, it is estimated to have returned to a loss.

The difficult operating environment for the machinery division is expected to continue this year. Junseong Kim, a researcher at Meritz Securities, stated, "Due to the contraction of investment in upstream industries, the growth of demand for general-purpose machinery is slowing, and intensified order competition will continue to cause poor profitability in the machinery business." He added, "With the introduction of the U.S. Inflation Reduction Act (IRA) and sluggish consumption leading to intensified competition in the battery electric vehicle (BEV) market, Hyundai Kia's BEV sales growth rate is expected to shrink compared to the previous year, reducing the external growth of the automotive parts division."

Researcher Kim further commented, "The much-anticipated thermal management business is also expected to generate sales of about 60 billion KRW in 2023, which is insufficient to make a meaningful contribution to sales and profits." He added, "To improve corporate value, it is necessary to secure stable profit-generating capabilities in the machinery division based on order expansion and to eliminate concerns about losses in the Russian business."