Hanon Systems' stock recovered the 4,000-won level for the first time in three months on expectations of improved earnings and the easing of overhang (potential sell orders). In addition, short covering in short selling, which had weighed on the share price after the rights offering, emerged and further strengthened the upward momentum.
According to the Korea Exchange (KRX) on the 6th, Hanon Systems' stock closed at 4,030 won the previous day, up 305 won (8.19%) from the prior session. After trading at 3,275 won on the 30th of last month, Hanon Systems' stock has surged 23% this month to 4,030 won.
Improved earnings and news of new orders are behind the stock's rise. Hanon Systems said on the 3rd that annual revenue rose 8.9% on-year to 10.8837 trillion won, and operating profit jumped 184.6% to 271.8 billion won. Investor sentiment was further stirred by media reports that the company will supply a dedicated thermal management system for robotaxis to an Autonomous Driving subsidiary of Amazon.
Analysts said it is also positive that concerns about overhang, which had been holding back the share price, have been largely resolved. Shin Yoon-cheol, an analyst at Kiwoom Securities, said in a report on the 3rd, "The sell orders for 64 million forfeited shares underwritten by NH Investment & Securities, the lead manager of the rights offering, had limited upside pressure on the stock," adding, "Most of the overhang appears to have been absorbed."
Earlier, Hanon Systems carried out a rights offering of about 950 billion won to improve its financial structure, issuing 374.5 million new shares (55.17% of total shares outstanding). In the process, about 63.85 million forfeited shares occurred, and as NH Investment & Securities, the lead manager, underwrote them, caution spread in the market that the shares could be released at any time.
In fact, after the rights offering was announced in September last year, the net short balance also surged, increasing downward pressure on the share price. Generally, a rise in the short balance is interpreted as more investors betting on a decline. The balance rose from an average of about 7.4 billion won in the month before the announcement (Aug. 22–Sept. 22) to about 17 billion won after the announcement (Sept. 23–Dec. 22), and then jumped to around 28.4 billion won after news of the forfeited shares (Dec. 23–Feb. 2).
Recently, however, as much of the overhang has been absorbed and earnings improved, the stock turned sharply higher. In particular, analysts said upward momentum strengthened further as short covering by investors who had sold short expecting a decline flowed in to stem losses. According to the Korea Financial Investment Association, from the 2nd to the 4th, the number of shares repaid from Hanon Systems' stock lending balance was 9,427,075, far exceeding the number of shares borrowed (3,824,162).
Separate from the short-term supply-demand improvement, brokerages advise focusing on medium- to long-term growth drivers. Hanon Systems flagged a push into the aftermarket (A/S) parts business during its fourth-quarter earnings conference call last year. Shin said, "Hyundai Mobis posts an operating margin in the 20% range in its A/S parts business," adding, "Even if it is difficult for Hanon Systems to secure Hyundai Mobis-level margins, it is expected to serve as a key pipeline to accelerate an exit from the loss structure."
The potential recovery of the European electric vehicle market is also cited as a positive. Kim Jin-seok, an analyst at Mirae Asset Securities, said, "Germany resumed electric vehicle subsidies in January, and support policies in countries such as France and Spain are continuing," adding, "It is worth noting the high share of sales in Europe and the heavy exposure to Volkswagen (VW)."
However, the possibility that part of a client's electrification (xEV) project volume will transfer to Hyundai WIA is cited as a risk factor. Lee Jae-il, an analyst at Eugene Investment & Securities, said, "If part of the electrification project volume within Hyundai Motor Group moves to Hyundai WIA, Hanon Systems' new orders focused on xEVs could slow," adding, "This raises concerns about long-term growth."