[This Week's Industry Insight] CS Wind's 'Painful Finger' Subsidiary Transforms... Securities Firms' Love Call

10 Securities Firms Raise Target Prices
Stock Price Surges 30% in One Month
Buying Momentum Led by Pension Funds and Investment Trusts

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'Entering the Phase of Earnings Turnaround'

CS Wind, which faced headwinds last year due to the high-interest-rate environment and the possibility of former U.S. President Donald Trump's victory in the U.S. presidential election, received love calls from securities firms after posting an earnings surprise in the second quarter. This was thanks to strong performance in its core business of tower and component sales, as well as a surprising performance from its offshore structure subsidiary, which had been a "pain point" in the first quarter. The stock price also surged nearly 30% in a month, surpassing 65,000 KRW as of the closing price on the 12th.

Ten Securities Firms Raised Target Prices in One Month

According to financial information provider FnGuide on the 13th, ten domestic securities firms raised their target prices for CS Wind within the past month. Samsung Securities raised its target price twice, from 69,000 KRW to 77,000 KRW, and then from 77,000 KRW to 85,000 KRW. Among all securities firms, DS Investment & Securities set the highest target price at 97,000 KRW, while Meritz Securities was the most conservative with a target price of 74,000 KRW.

CS Wind, established in 2006, is a company that manufactures wind towers and related components. It was listed on the Korea Exchange in November 2014. Currently, it operates tower production subsidiaries in Vietnam, the United States, Portugal, China, Turkey, Taiwan, and Malaysia. To strengthen its market competitiveness, especially in offshore wind power, it acquired Bladt Industries, a European offshore wind foundation manufacturer. Bladt has since been renamed "CS Wind Offshore (CSWO)."

The securities industry expects annual earnings to rise significantly after the consolidated second-quarter results greatly exceeded market consensus. CS Wind posted consolidated sales of 857.8 billion KRW and operating profit of 130.3 billion KRW in the second quarter, up 106% and 212% year-on-year, respectively. The operating profit exceeded the market consensus of 40.1 billion KRW by 224.9%.

Expectations had been rising in the market even before the second-quarter earnings season. Samsung Securities raised its target price twice, once before the earnings announcement (July 26) and once after (August 9). Researcher Heo Jae-jun of Samsung Securities explained, "CSWO recorded an operating loss of 52.7 billion KRW in the first quarter but conducted negotiations regarding price increases with clients and the offshore substation (OSS) and the reversal of construction loss provisions. Thanks to positive negotiation results, it turned profitable."

The offshore structure segment, which was a potential risk factor in the first quarter, became a "cash cow" in the second quarter. Researcher Moon Kyung-won of Meritz Securities analyzed, "The OSS project, which caused large one-time costs in the first quarter, succeeded in price increases and turned profitable. Past losses were reversed into second-quarter profits. The profit from the OSS project is estimated to be larger than the total profit of the offshore structure business division."

The core business of tower and component sales is also evaluated as solid. Researcher Park Geon-young of Kyobo Securities said, "Considering the increasing trend of AMPC amounts, it is judged that the U.S. production subsidiary is normalizing. Despite the macro environment (interest rates) and the business status of upstream companies, the wind power industry is improving profitability even though it has not fully recovered." He especially noted that CS Wind's existing orders are expected to be quickly recognized as earnings when the industry recovers. Researcher Moon Kyung-won also said, "AMPC recorded 32.7 billion KRW (operating profit), about 7 billion KRW more than Meritz Securities' forecast."

Supported by the unexpected strong second-quarter performance, the stock price is also on the rise. CS Wind's stock closed at 65,400 KRW on the 12th, up 28.5% from 50,900 KRW on August 1. During the same period, the KOSPI 200 index fell 7.8%, from 383.68 to 353.61. Notably, the recent stock price rise was driven by institutions and foreigners. This month, institutions bought stocks worth 65.8 billion KRW, foreigners bought 13.6 billion KRW, while individuals sold stocks worth 82.3 billion KRW. Among institutional investors, pension funds purchased 23.6 billion KRW, and investment trusts bought 24.7 billion KRW.

CSWO Earnings Improvement and External Environment 'Positive'

The fact that the subsidiary CSWO, a result of bold mergers and acquisitions (M&A), has turned into a profit-contributing business despite market skepticism is symbolic. The risk related to the offshore structure segment has been partially resolved. Researcher Lee Jin-ho of Mirae Asset Securities said, "CS Wind has shaken off the concerns about price negotiations that persisted since the initial acquisition of CSWO," adding, "The 2024 sales guidance is raised from 2.7 trillion KRW to 3 trillion KRW, and the operating profit margin from 7% to 9%." Researcher Jeon Hye-young of Daol Investment & Securities also said, "It is estimated that about 60% of the annual guidance (3 trillion KRW) has been secured through new orders," and "Offshore wind projects in Europe in the second half are expected to continue orders for towers and offshore structures." Researcher Kim Kwang-sik of Sangsangin Securities interpreted, "The biggest gain from successful renegotiations related to offshore structures is that it proved the European offshore structure market is in a shortage state," adding, "Although there is still a possibility of problems in future projects, loss compensation through renegotiations can be expected."

Expectations and concerns coexist regarding external variables surrounding the company. Earlier, the market feared that the victory of former U.S. President Donald Trump in the November U.S. election would lead to the decline of eco-friendly renewable energy, due to the potential reduction of benefits from the U.S. Inflation Reduction Act (IRA). Concerns were raised that IRA subsidies would decrease if the right-wing, including the Republican Party, gained power. Regarding this, researcher Lee Jin-ho said, "The stock price decline caused by the increased possibility of Trump's election is likely to be partially reversed by the 'Harris Trade.'"

The fact that the U.S. is at the early stage of an interest rate cut cycle is also considered a favorable environment for the company. The market widely expects the U.S. Federal Reserve (Fed) to cut the base interest rate in September. Major Wall Street financial firms predict a 'big cut' of 0.5 percentage points not only at the upcoming meeting next month but also in November. Researcher Han Byung-hwa of Eugene Investment & Securities explained, "The timing of earnings normalization at the beginning of the interest rate cut cycle is a positive factor," adding, "For wind power companies, resolving the high-interest-rate issue is more important than the U.S. election results."

On the other hand, cautious views urging investor attention focus more on uncertainties. Researcher Myung Ji-woon of Shinhan Investment Corp. said, "The tower segment shows smooth growth, and the offshore structure segment has normalized through price negotiations and productivity improvements after acquiring Bladt," but added, "However, it is difficult to predict price negotiations and new order visibility, and cautious approaches are needed due to U.S. election uncertainties." Researcher Yoo Jae-sun of Hana Securities also said, "The U.S. subsidiary, the main base, is adjusting the speed of production facility expansion considering power infrastructure shortages, and solid performance may continue due to the increased proportion of production volume from key clients," but warned, "Attention is needed as multiples may change significantly depending on the U.S. election results."

Meanwhile, on a quarterly basis, it is expected that the third quarter of this year will see relatively reduced operating performance compared to the previous quarter due to the base effect. Researcher Lee Jin-ho of Mirae Asset Securities said, "Operating profit in the third quarter is expected to be 92.4 billion KRW, down 29% from the previous quarter," adding, "Additional price negotiations for monopiles within CSWO are expected in the third quarter, but the improvement in earnings will likely be smaller than that from offshore substations." Specifically, offshore substations are expected to record earnings of 60 to 70 billion KRW, and monopiles 30 to 40 billion KRW.