Yuanta Securities Korea said on the 23rd that for Hanon Systems(018880), the direction of profitability improvement has been confirmed and there is upside potential based on valuation. It raised its investment opinion to Buy from Neutral. It also slightly raised its target price to 4,300 won from 4,200 won. The previous trading day's closing price was 3,535 won.
Hanon Systems' second-quarter sales this year are estimated at 3.0046 trillion won, up 6.6% from a year earlier, with operating profit surging 115.8% to 139 billion won. The operating profit estimate is 24.4% above the market consensus of 112 billion won.
Kim Yong-min of Yuanta Securities Korea said, "A reduction in fixed-cost burden driven by quarter-over-quarter sales growth, recognition of high-margin sales alongside strong electric-vehicle sales by key customers, and foreign-exchange gains from a weaker won led to an improvement in earnings," and added, "The company has entered a phase where the direction of organic earnings improvement can be verified."
In particular, the key driver of profitability (OPM) improvement was cited as a higher sales mix to Mercedes. That is because sales remain strong for core models based on Mercedes' second-generation EV platform—CLA, GLB and GLC—equipped with Hanon Systems' thermal management system. Combined sales of the three models in April–May have already exceeded total first-quarter sales, and GLB and GLC are expected to see additional new-model effects in the second half.
However, financial risk and the overhang (potential sell volume) burden remain challenges. Risk factors for the share price were identified as the put option and remaining stake overhang of second-largest shareholder Hahn & Company (14.3% ownership) and the possibility of increased interest expense due to refinancing issuance.
Kim said, "If interest rates rise by 2 percentage points due to refinancing totaling 370 billion won maturing in June and September this year, annual interest expense could increase by about 7.4 billion won," but noted, "Net profit growth itself should be possible through continued repayment based on operating profit."
He added, "As the share price continued to fall after presenting a Neutral view, it has reached a buy-the-dip range," and said, "Rather than uncovering groundbreaking re-rating factors, visibility on profitability improvement has increased and there is upside potential for valuation."