Hyundai Heavy Industries Holdings (267250)

Hyundai Heavy Industries Holdings

(Valuation267250 and) Dividend Merits Intact

Dongjik Jeong Shipbuilding / Holding Companies April 8, 2021 +82-2-6114-2965 [email protected]

Maintain BUY; Raise target price to We raise our 12m fwd TP for HHIH by 11.7% from KRW60,000 (post-stock split basis) to KRW67,000 KRW67,000 (12m fwd BVPS x 0.73x target P/B). Our TP was bumped up to reflect upward revisions to earnings estimates (2021E/2022E NP attributable to controlling interests up 4.1%/4.3%), a change in market risk premium (5.93% for 2020→7.37% for 2021) and necessary adjustments to assumptions (e.g., risk-free rate, terminal growth rate) due to market rate changes. We maintain BUY as our new TP offers 17.8% upside (24.5% if dividends included) against the Apr 6 closing price.

Trading suspended until Apr 12 due to HHIH will split its stock, lowering par value from KRW5,000 to KRW1,000. Trading will be stock split suspended from Apr 8 to Apr 12 and then resume on Apr 13 with the listing of post-split shares. The purpose of the split seems to be to boost trading via an increase in the number of outstanding shares. We note that the daily average trading value for HHIH stock has hovered at KRW18.4bn (0.4% of market cap) over the past three months.

Earnings surprise expected in 1Q21 We forecast 1Q21 revenue at KRW6.18tn (+8.1% YoY) and OP at KRW382.1bn (turn to black YoY; 6.2% OPM). Both estimates are above the market consensus by large margins. Hyundai Oilbank operating income is expected to turn around from a KRW563.2bn loss in 1Q20 to a KRW283.7bn profit thanks to gains on inventory valuation (oil price jumps) and improving refining margins. Hyundai Global Service and Hyundai Construction Equipment are likely to post solid results on the back of improving shipbuilding market conditions and brisk excavator sales in China and other emerging countries.

Buy Maintain Trading Data Risk & Total Return (annualized over three years) Free float 55.1% Target Price (Raised) KRW67,000

Avg. T/O val. (3m, KRWbn) 18.4 Return 1 2 3 4 High5 Risk Dividend yield* 6.5% Foreign ownership 17.3% 1 FALSE TRUE FALSE FALSE FALSE Major shareholders Mong-Jun Jung and 6 others 34.3% Total return 24.9% 2 FALSE FALSE FALSE FALSE FALSE Current price (Apr 7) KRW56,600 National Pension Service 10.7% 3 FALSE FALSE FALSE FALSE FALSE Consensus target price KRW71,600 Stock Price Performance

4High FALSE FALSE FALSE FALSE FALSE Market capitalization USD4.0 (%) 1M 3M 6M 12M 5 FALSE FALSE FALSE FALSE FALSE * 12-month forward Absolute 5.8 -1.1 29.9 23.1

Relative 2.4 -6.1 -1.7 -29.5

Earnings Forecast & Valuation Stock Price & Relative Performance Fiscal year-end 2020A 2021E 2022E 2023E Revenue (KRWbn) 18,911 22,476 26,035 27,041 Relative performance (LHS) OP (KRWbn) -597 833 942 1,003 Stock price (RHS) % KRW NP to control. int. (KRWbn) -609 357 401 439 10 100,000 EPS (KRW) -7,631 4,515 5,071 5,555 0 80,000 EPS growth (%) TTR TTB 12.3 9.5 -10 60,000 P/E (x) N/A 12.5 11.2 10.2 EV/EBITDA (x) 93.2 10.5 9.3 8.8 -20 40,000 P/B (x) 0.6 0.6 0.6 0.6 -30 20,000 ROE (%) -8.1 5.0 5.6 6.0 -40 0 Div. yield (%) 6.5 6.5 6.5 6.5 Apr '20Jul '20 Oct '20Jan '21Apr '21

Source(s): Company data, KB Securities

Valuation and dividend merits intact HHIH stock is currently trading at a compelling 0.6x 2021E P/B. Our 2021 DPS estimate is KRW3,700 (6.5% yield), one of the highest among major holding companies. The company may raise its DPS if improvements in Hyundai Oilbank earnings boost HHIH dividend income.

Investment Opinion & Risks

Base-case scenario: Catalysts

Bull-case scenario KRW86,000 (0.94x target P/B) 1) Shareholder return (dividend + share buybacks) at 6.0~8.0%

2) 2021E consolidated OPM at 3.0~4.0% Base-case scenario (target price) KRW67,000 (0.73x target P/B) Bull-case scenario: Upside risks 1) Shareholder return (dividend + share

Current price KRW56,600 (Apr 7, post-stock split) buybacks) above 8.0% 2) 2021E consolidated OPM above 4.0%

Bear-case scenario: Downside risks Bear-case scenario KRW48,000 (0.52x target P/B) 1) Shareholder return (dividend + share buybacks) below 6.0% 2) 2021E consolidated OPM below 3.0%

Revised Earnings Estimates Valuation & Target Price Calculation (KRWbn, %) Previous Revised Change 2021E 2022E 2021E 2022E 2021E 2022E 1) Valuation method: Revenue 21,594 24,612 22,476 26,035 4.1 5.8 PBR Valuation OP 822 936 833 942 1.4 0.6 NP (to control. int.) 342 384 357 401 4.1 4.3 2) Target price calculation: Source(s): KB Securities estimates KRW90,998 12m fwd BVPS x 0.73x multiple

KB Estimates vs. Consensus 3) Target price range: (KRWbn, %) KB Estimates Consensus Difference KRW48,000 ~ KRW86,000 2021E 2022E 2021E 2022E 2021E 2022E Revenue 22,476 26,035 22,063 23,438 1.9 11.1 4) Valuation at target price: OP 833 942 726 854 14.8 10.2 14.8x 2021E P.E, 0.74x 2021 P/B NP (to control. int.) 357 401 282 371 26.5 7.9 Source(s): FnGuide consensus (3m), KB Securities estimates

Revenue Composition (2021E) Earnings Sensitivity Analysis (%) EPS change 3.1% 2021E 2022E 8.4% +1% in FX rate -2.6 -2.3 Oil Refining +1pp in interest rate -23.6 -20.9

13.1% Construction Equipment

Electronics

Other & cons. adj.

75.4%

Source(s): KB Securities estimates

Peer Group Comparison (KRWbn, X, %) Market P/E P/B EV/EBITDA ROE Dividend Yield Cap 2021E 2022E 2021E 2022E 2021E 2022E 2021E 2022E 2021E 2022E HHI Holdings 4,463 13.0 11.6 0.6 0.6 9.6 8.9 4.4 4.9 6.5 6.5 Samsung C&T 23,650 16.9 13.8 0.9 0.8 14.6 12.3 5.3 6.2 2.4 2.8 SK Holdings 19,812 20.0 16.7 1.1 1.0 7.8 7.2 5.5 6.3 2.4 2.4 LG Corporation 15,859 8.9 8.0 0.7 0.7 5.4 4.5 8.4 8.7 3.0 3.3

Source(s): FnGuide consensus (3M), KB Securities

Table 1. Target Price Calculation Value Previous Notes Revised (Nov 12, 2020) Cost of equity (A= a+(b x c)) 7.16 7.81

Risk-free rate (a) 0.68 0.68 Avg. 1y monetary stabilization bond yield (last three months)

Market risk premium (b) 5.93 7.37 Required rate of return - risk-free rate

Beta (c) 1.09 0.97 52w adj. beta Sustainable ROE (B) 4.91 6.23 Terminal growth rate (C) 1.47 1.87 Min. (50% long-term retention rate x ROE, avg. 30y KTB yield for last three months)

Target P/B (D= (B-C) / (A-C)) 0.60 0.73

Fair equity value (E=D X d) 4,729 5,267

12m fwd total equity (d) 7,824 7,188

No. of shares (e) 7,899 7,899

Fair price per share (F=E/e) 59,866 66,679

12m target price (G≒F) 60,000 67,000

Current price (H) 51,400 56,600 Apr 7, 2021

Upside (I= G/H) 16.7 18.4

Rating Buy Buy

Source(s): Company data, KB Securities estimates Note 1: MRP of 7.37% = WMI500 total return of 10.97% – 1y MSB total return of 3.61% Note 2: Share price and no. of shares based on post-stock split figures (par value: KRW5,000  KRW1,000)

Table 2. Quarterly Earnings (K-IFRS consolidated) 1Q21E Change Diff. (KRWbn, %) 1Q20 2Q20 3Q20 4Q20 KB Estimate Consensus YoY QoQ Consensus

Revenue 5,716.3 4,005.8 4,577.9 4,611.0 6,181.0 5,668.6 8.1 34.1 9.0 OP -487.2 104.3 101.1 -315.3 382.1 189.8 TTB TTB 101.3

EBT -603.7 -18.2 69.0 -500.3 316.6 110.5 TTB TTB 186.5

NP (to control. int.) -230.8 -11.3 2.5 -369.6 213.9 53.3 TTB TTB 301.3

OPM -8.5 2.6 2.2 -6.8 6.2 3.3 EBT margin -10.6 -0.5 1.5 -10.8 5.1 1.9

NPM (to control. int.) -4.0 -0.3 0.1 -8.0 3.5 0.9

Source(s): Company data, FnGuide consensus (3m), KB Securities estimates Note: TTB=turn to black

Fig 1. Complex Margin Fig 2. DPS & Dividend Yield

(KRW'000) (%) Complex refining margin Spot margin (non-lagging) DPS (L) Dividend yield (R) (USD/bbl) 4.0 7.0 20 6.5 6.5 6.5 6.5 16 12 3.0 6.0 8 5.5 4 5.3 2.0 0 -4 5.0 -8 1.0 -12 -16 0.0 4.0 01 '18 07 '18 01 '19 07 '19 01 '20 07 '20 01 '21 18 19 20 21E 22E 23E

Source(s): Bloomberg, KB Securities Source(s): Company data, KB Securities estimates

Income Statement Statement of Financial Position (KRWbn) 2019A 2020A 2021E 2022E 2023E (KRWbn) 2019A 2020A 2021E 2022E 2023E (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C)

Revenue 26,630 18,911 22,476 26,035 27,041 Total assets 25,716 26,559 27,270 27,866 28,027

Cost of revenue 24,801 18,341 20,407 23,662 24,551 Current assets 9,935 8,049 8,652 9,245 9,440 Gross profit 1,830 570 2,069 2,374 2,490 Cash and cash equivalents 2,028 2,039 2,081 2,133 2,092 SG&A expenses 1,163 1,167 1,236 1,432 1,487 Current financial assets 886 493 500 500 500

Operating profit 667 -597 833 942 1,003 Trade receivables 2,140 1,694 1,798 1,929 2,003 EBITDA 1,347 181 1,621 1,839 1,938 Inventory 3,877 3,022 3,458 3,857 4,006 Non-operating accounts -464 -456 -262 -292 -291 Other current assets 1,005 802 814 827 839

Interest income 41 35 35 36 37 Non-current assets 15,780 18,510 18,618 18,621 18,588 Interest expenses 292 236 248 253 254 Investment assets 4,181 3,812 3,907 4,005 4,105 Profit on equity method 40 0 0 0 0 Property, plant and equipment 8,409 10,680 10,673 10,557 10,402

Net other non-operating income -252 -256 -49 -74 -74 Intangible assets 2,152 2,009 2,002 1,996 1,991 Profit before tax 203 -1,053 571 650 712 Other non-current assets 1,039 2,010 2,036 2,063 2,090 Income tax expense 87 -263 151 179 196 Total liabilities 13,831 15,461 15,947 16,290 16,221

Net profit 115 -790 420 471 516 Current liabilities 8,022 6,336 6,742 7,075 7,194 NP attributable to controlling interests 173 -609 357 401 439 Trade payables 2,070 1,614 1,873 2,170 2,253 Adj. net profit 356 -424 392 455 493 Short-term financial liabilities 3,537 2,458 2,500 2,500 2,500

Other current liabilities 2,415 2,264 2,369 2,405 2,441 Operating Statistics & Ratios Non-current liabilities 5,809 9,125 9,204 9,215 9,027 (%) 2019A 2020A 2021E 2022E 2023E Non-current financial liabilities 5,113 8,417 8,500 8,500 8,300

Revenue growth -2.3 -29.0 18.9 15.8 3.9 Other non-current liabilities 696 708 704 715 727 OP growth -22.6 TTR TTB 13.1 6.5 Total equity 11,885 11,098 11,323 11,576 11,806

EBITDA growth -1.2 -86.5 794.2 13.4 5.4 Issued capital 81 81 81 81 81 NP growth of parent -35.5 TTR TTB 12.3 9.5 Share premium 5,172 5,193 5,193 5,193 5,193 GP margin 6.9 3.0 9.2 9.1 9.2 Other equity interest -547 -722 -722 -722 -722

OP margin 2.5 -3.2 3.7 3.6 3.7 Accumulated other comprehensive income 102 250 280 310 310 EBITDA margin 5.1 1.0 7.2 7.1 7.2 Retained earnings 3,183 2,213 2,308 2,423 2,575 EBT margin 0.8 -5.6 2.5 2.5 2.6 Controlling interests 7,992 7,015 7,140 7,285 7,437

NP margin of parent 0.7 -3.2 1.6 1.5 1.6 Non-controlling interests 3,893 4,083 4,183 4,292 4,369

Statement of Cash Flows Key Ratios (KRWbn) 2019A 2020A 2021E 2022E 2023E (x, %, KRW) 2019A 2020A 2021E 2022E 2023E

Cash flow from operating activities 1,206 887 1,023 1,163 1,340 Multiples Net profit 115 -790 420 471 516 P/E 30.8 N/A 12.5 11.2 10.2

Depreciation & amortization 680 778 788 897 935 P/B 0.7 0.6 0.6 0.6 0.6

Other non-cash adjustments 463 366 151 179 196 P/S 0.2 0.2 0.2 0.2 0.2 Investments in working capital 230 1,060 -189 -210 -116 EV/EBITDA 11.2 93.2 10.5 9.3 8.8

Decrease(Increase) in receivables -52 362 -105 -130 -74 EV/EBIT 22.7 N/A 20.5 18.2 17.0 Decrease(Increase) in inventory 442 872 -436 -399 -149 Dividend yield, ordinary (%) 5.5 6.5 6.5 6.5 6.5 Increase(Decrease) in payables -270 -451 259 297 84 EPS 2,127 -7,631 4,515 5,071 5,555

Investments in other working capital 110 276 93 23 24 BVPS 101,173 88,804 90,388 92,217 94,150 Other operating cash flow -283 -528 -147 -174 -191 SPS 337,122 239,400 284,536 329,590 342,318 Cash flow from investing activities -1,640 -1,818 -904 -899 -902 DPS (annual, ordinary) 3,700 3,700 3,700 3,700 3,700

Capital expenditure -1,072 -2,197 -700 -700 -700 Cash dividends payout ratio (%) 156.2 N/A 80.2 71.4 65.2 Investments in intangibles -101 -35 -75 -75 -75 Operating performance Changes in investment assets 17 -51 -95 -98 -100 ROE 2.2 -8.1 5.0 5.6 6.0

Other investment cash flow -485 465 -34 -27 -27 ROA 0.5 -3.0 1.6 1.7 1.9 Cash flow from financing activities 1,364 950 -77 -212 -479 ROIC 3.5 -3.0 3.9 4.3 4.6 Proceeds from (repayment of) debt -143 -198 126 0 -200 Financial structure (%)

Changes in equity 0 -124 0 0 0 Total liab./equity 116.4 139.3 140.8 140.7 137.4 Dividends paid -270 -270 -261 -286 -286 Net debt/equity 48.3 75.2 74.4 72.3 69.5 Other financing cash flow 1,777 1,542 59 74 7 Current ratio 1.2 1.3 1.3 1.3 1.3

Other cash flow -1 -9 0 0 0 Interest coverage (x) 2.3 -2.5 3.4 3.7 4.0 Increase/decrease in cash 929 10 43 52 -42 Activity ratios Cash and cash equivalents at FYE 2,028 2,039 2,081 2,133 2,092 Asset turnover (x) 1.1 0.7 0.8 0.9 1.0

Free cash flow 134 -1,310 323 463 640 Receivables turnover (x) 12.1 9.9 12.9 14.0 13.8 Net cash flow 724 -2,608 -75 52 158 Payables turnover (x) 12.1 10.3 12.9 12.9 12.2 Net cash (net debt) -5,735 -8,343 -8,419 -8,367 -8,208 Inventory turnover (x) 6.5 5.5 6.9 7.1 6.9

Source(s): Company data, KB Securities estimates

Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)

Hyundai Heavy Industries Holdings (267259)

(KRW) Date Rati ng Target Price Differential (%) Hyundai Heavy Industries Holdings 100,000 (KRW) A v g. Max /Mi n Mar-28-2019 88,000 -26.10

80,000 Jun-25-2019 82,000 -20.22 Sep-24-2019 84,000 -25.05

60,000 Mar-25-2020 53,000 -7.88 Jul-15-2020 55,000 -16.46

40,000 Nov-12-2020 60,000 -8.20 Apr-07-2021 67,000

20,000 19/4 19/8 19/12 20/4 20/8 20/12 21/4

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Note: KB Securities’ classification of investment ratings has shifted from four stages sources that KB Securities considers reliable. KB Securities makes no representation that (Strong BUY, BUY, Marketperform, Underperform) to three stages (Buy, Hold, Sell) the information and data are accurate or complete and the views presented in this report based on Korean reports since February 23, 2017. are subject to change without prior notification. Clients should independently consider KB Securities’ standards for stock rating shifted starting on Feb 10, 2020 from an their own particular circumstances and objectives and are solely responsible for their estimation of six-month absolute returns to an estimation of 12-month absolute returns. investment decisions and we shall not have liability for investments or results thereof. These materials are the copyright of KB Securities and may not be reproduced, Investment Rating for Industry redistributed or modified without the prior consent of KB Securities. Comments and (based on estimation of 12-month absolute returns) views in this report are of a general nature and intended for reference only and not Positive: Neutral: Negative: authorized for use for any other purpose. To outperform market To match market performance To underperform market

Notes: The industry rating system of KB Securities has shifted from (Overweight, Neutral, Underweight) to (Positive, Neutral, Negative) as of Jun 28, 2017. KB Securities’ standards for industry rating shifted starting on Feb 10, 2020 from an estimation of six-month absolute returns to an estimation of 12-month absolute returns.