[Click eStock] "Hanon Systems, Profitability Weak... Investment Opinion 'Neutral'"

Korea Investment & Securities Report

[Asia Economy Reporter Minji Lee] On the 19th, Korea Investment & Securities downgraded its investment opinion on Hanon Systems to neutral. This decision was based on the judgment that the current valuation is at a burdensome level considering its profit-generating ability.

Operating profit for the second quarter is expected to be 53 billion KRW, falling 20% short of market expectations. This is due to increased cost burdens such as raw materials and logistics, coupled with sluggish sales caused by disruptions in finished car production. China, accounting for about 15% of sales, was affected by lockdowns, and Europe, responsible for 31% of sales, experienced reduced operating rates due to parts shortages caused by the Russia-Ukraine war.

Profitability is expected to remain weak for an extended period. Jinwoo Kim, a researcher at Korea Investment & Securities, said, “Over the past 10 years, Hanon Systems has traded at a PER exceeding 20 times based on its global competitiveness in HVAC parts, one of the core components of electric vehicles. Despite the advent of the electric vehicle era, Hanon Systems is underperforming expectations.”

The main reasons cited include a structural increase in depreciation expenses due to the rise in tangible and intangible assets, and changes in the status of parts suppliers. Since 2014, Hanon Systems has steadily increased its tangible assets, and in 2019, intangible assets also grew significantly through the acquisition of Magna’s thermal management division. As a result, cash flow improved due to EBITDA growth, but operating profit declined due to increased depreciation expenses, and the return on assets (ROA) also decreased due to asset growth.

Researcher Kim added, “The market expects a return to profitability, but considering the changed cost structure, it is not an easy situation. It also shows that the status and bargaining power of traditional large parts suppliers have changed significantly compared to the early 2010s.”

This content was produced with the assistance of AI translation services.