[Click eStock] Hyundai Rotem, Variable in Rail Solution Division Recovery Speed

[Asia Economy Reporter Lee Seon-ae] Meritz Securities on the 24th gave Hyundai Rotem a 'Neutral' investment rating and a target price of 20,500 KRW.

Since the week of the 17th, uncertainties regarding Hyundai Motor Group's U.S. investment issues (including hydrogen) and North Korea issues during the Korea-U.S. summit appear to be coming to an end. Among Hyundai Rotem's three major business divisions, Rail Solutions has already priced in expectations for inter-Korean economic cooperation, and Eco Plant has been influenced by the group's investment issues. The Defense Solutions division has maintained an operating profit margin of over 5% for five consecutive quarters due to stable sales from the second mass production and normal delivery of the K2 tank, the third mass production, and the third batch of wheeled armored vehicles. As volatility outside the core business decreases, it is time to confirm sales growth and profit improvement in the main division, Rail Solutions. The consolidated operating profit margin for Q1 was 3.9%, in line with consensus, achieving five consecutive quarters of profit since the second half of 2019.

Of the 240 billion KRW convertible bonds (CB) issued in 2020, 98.1% have already been converted, leaving only 473,091 shares (4.6 billion KRW) remaining, resolving the overhang issue. Compared to net borrowings of 1.08 trillion KRW at the end of 2019, the expected net borrowings at the end of 2021 are 0.48 trillion KRW, showing rapid reduction and confirming improvement in the financial structure. Led by the special purpose company Kohygen, launched in February, the commercial vehicle hydrogen refueling infrastructure business has been fully initiated. In the first half of the year, hydrogen electric tram development will be completed and operations will begin. Once Hyundai Glovis starts building the hydrogen supply chain platform, benefits from the group's full-scale hydrogen infrastructure business can also be expected.

The issue is valuation. Researcher Kim Hyun of Meritz Securities explained, "Based on the expected 2021 return on equity (ROE) of 2.4%, the current stock price is at a price-to-book ratio (PBR) of 1.6 times. Compared to the global peers' expected average 2021 ROE of 10.5% and PBR of 2.3 times, it is difficult to argue valuation attractiveness. We maintain a 30% discount rate compared to peers and keep the investment rating at Neutral, with a target price of 20,500 KRW."

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