Hanon Systems Sees Earnings Rebound, but Long-Term Growth Drivers Remain Unclear [Click e-Stock]

Hyundai Motor Group, Which Accounts for Half of Revenue, Moves to Internalize Business
Short-Term Earnings to Grow, But Long-Term Growth Remains Uncertain

Hanon Systems returned to profitability in the fourth quarter of last year, with its annual revenue rebounding and surpassing 10 trillion won. Nevertheless, some analysts say its long-term growth drivers remain unclear, as its key customer, Hyundai Motor Group, is seeking to internalize thermal management.

On February 4, KB Securities maintained its target price for Hanon Systems at 3,700 won and its investment rating at "Neutral (HOLD)" based on this outlook. The previous day's closing price was 3,390 won. Despite having closed up 5.94% from the day before, KB Securities judged that the upside potential from here is only about 9%.

In the fourth quarter of last year, Hanon Systems posted revenue of 2.7025 trillion won and operating profit of 91.2 billion won. Compared with the same period a year earlier, revenue increased by 6.6%, and the company swung to an operating profit from an operating loss. Operating profit exceeded the market consensus by 23.2%.

KB Securities interpreted the earnings rebound as being driven by the absence of restructuring against provisions already recognized, along with continued cost savings in raw materials, labor, and logistics. Net income came in at a loss of 196.1 billion won, falling short of expectations by 233.4 billion won. This was due to the amortization of development costs that had previously been recognized as assets, after some customers changed their eco-friendly vehicle programs. This is expected to go through a settlement process and be reflected this year as non-recurring operating profit.

Even so, the brokerage was not optimistic about the industry outlook. The reason is the uncertainty in long-term profit forecasts. A particular concern is that Hyundai Wia, an affiliate of Hyundai Motor Group that accounted for 48% of Hanon Systems' revenue last year, has declared its entry into the thermal management business. As electric-vehicle adoption progresses, thermal management has grown in importance, making Hyundai Motor Group's attempt to internalize this business a natural move.

Kang Sungjin, an analyst at KB Securities, said, "As a latecomer, Hyundai Wia is unlikely to pose a meaningful threat to Hanon Systems' earnings in the short term, and with cost-efficiency efforts delivering better-than-expected results, Hanon Systems' operating profit is projected to grow by an average of 38.4% annually over the next three years. However, the long-term growth drivers for operating profit still need to be verified going forward."

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