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Mando (060980 KS) Auto Parts December 20, 2011 Company Report Mando (060980 KS) Auto parts Daewoo Securities Co., Ltd. New orders are winning over investors Michael Yun +822-768-4169 Maintain Buy rating with TP of W250,000 [email protected] We maintain our Buy rating on Mando with a 12-month target price of W250,000. Young-ho Park We forecast MandoÊs net profit to grow at a CAGR of 19% between 2011 and +822-768-3033 2016, outpacing the average growth (9.5%) of KOSPI manufacturers as well as the [email protected] growth of Hyundai Motor (HMC) and Kia Motors. In deriving our target price, we applied a target P/E of 15.3x to MandoÊs 2012F EPS of W16,382. We arrived at our target multiple of 15.3x using a PEG of 0.8x, which is the average PEG of manufacturers listed on the KOSPI. Key investment points 1) Next-generation electronic parts. We believe that MandoÊs next-generation Buy (Maintain) electronic parts for use in braking and steering systems will be the core drivers of Target Price (12M, W) 250,000 medium- to long-term growth of quality earnings at the company. Indeed, with Share Price (12/19/11, W) 194,000 regard to braking and steering systems, the company has competitive edges in Expected Return (%) 28.9 know-how, technology, and customer diversification. EPS Growth (11F, %) 22.0 2) Backlog of new orders will serve as the backbone for MandoÊs long-term Market EPS Growth (11F, %) -2.0 P/E (11F, x) 14.5 growth. MandoÊs new orders for 2011 are expected to reach W6.1tr, which is Market P/E (11F, x) 10.1 equivalent to 132% of the companyÊs 2011F consolidated revenues (W4.6tr). We KOSPI 1,776.93 believe that the pace of new order-taking will continue to be solid, allowing the Market Cap (Wbn) 3,534 company to enjoy stellar sales CAGR of 12.9% during 2011~2016. Shares Outstanding (mn) 18 3) Customer diversification is likely to strengthen MandoÊs pricing power. We Avg Trading Volume (60D, '000) 120 Avg Trading Value (60D, Wbn) 23 believe that Mando will continue to diversify its customer base. We forecast the Dividend Yield (11F, %) 0.6 companyÊs non-Hyundai-Kia Automotive Group (HKAG) sales to increase to 60%, Free Float (%) 68.8 from the current 45%. This development should strengthen MandoÊs pricing power, 52-Week Low (W) 128,000 as it will make the company less dependent on one major customer. 52-Week High (W) 226,500 Beta (12M, Daily Rate of Return) 1.1 2012 Net profit expected to increase by 22.5% (2011~2016 CAGR of 19.0%) Price Return Volatility (12M Daily, %, SD) 3.0 Foreign Ownership (%) 30.7 We forecast MandoÊs 2011 net profit to increase by 27.3% to W243.6bn (CAGR of Major Shareholder (s) 51% from 2009). This robust figure should be largely attributable to the strong Jung Mong Won et al. (30.01%) growth of HKAG and the adoption of the companyÊs new system parts. Going PNS (8.62%) forward, we believe that new customers such as GM and Chinese auto makers, Mirae Asset Investments et al. (6.45%) along with next-generation system parts, will be the core drivers of MandoÊs Price Performance growth. In 2012, we expect net profit to increase by 22.5%. Furthermore, we (%) 1M 6M 12M forecast that net profit will show a CAGR of 19% between 2011 and 2016. Absolute 3.5 -11.2 43.7 Relative 6.9 1.3 56.0 Share price § Earnings & Valuation Metrics 180 KOSPI FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 160 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 140 12/09 2,727 177 6.5 107 6,653 322 132 13.1 - - - 120 12/10 3,624 262 7.2 191 10,961 391 70 18.2 11.8 2.0 6.5 100 12/11F 4,591 327 7.1 244 13,376 464 43 18.5 14.5 2.7 8.4 80 12/12F 5,232 399 7.6 298 16,386 583 126 19.2 11.8 2.2 6.5 60 12/13F 5,823 470 8.1 350 19,214 674 134 18.8 10.1 1.8 5.5 40 12/10 4/11 8/11 12/11 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. I. Investment summary ...................................................................................................................3 II. Valuation and investment strategy ...........................................................................................4 1. Valuation premium to be justified for Korea system parts makers ...........................................4 2. Is Mando’s premium justified?...................................................................................................7 3. Maintain Buy rating with TP of W250,000.................................................................................9 III. Why Mando now?.....................................................................................................................10 1. Mando’s profile ........................................................................................................................10 2. The time has come for Mando ................................................................................................13 IV. Investment points ....................................................................................................................16 1. Mando’s competitive edge ......................................................................................................16 2. Next generation electronic parts .............................................................................................17 3. Solid new order backlog..........................................................................................................18 4. Customer diversification..........................................................................................................18 5. FTAs with U.S. and EU to open more opportunities...............................................................19 V. Earnings preview and outlook ................................................................................................20 1. 4Q Earnings preview...............................................................................................................20 2. 2012 Earnings outlook ............................................................................................................20 2 December 20, 2011 Mando I. Investment summary A good reason for a We maintain our Buy rating on Mando with a 12-month target price of W250,000. We premium forecast MandoÊs net profit to grow at a CAGR of 19% between 2011 and 2016, outpacing the average growth (9.5%) of KOSPI manufacturers as well as the growth of Hyundai Motor (HMC) and Kia Motors. In deriving our target price, we applied a target P/E of 15.3x to MandoÊs 2012F EPS of W16,382. We arrived at our target multiple of 15.3x using a PEG of 0.8x, which is the average PEG of manufacturers listed on the KOSPI. In the mid-to-long term outlook, we believe that the global auto industry will face over supply issues as global auto supply normalizes with additional capacity increase. Thus, we believe that large system auto parts makers, such as Mando, will be a better play, with more growth potential on back of customer diversification, compared to auto makers which face intensifying competition. In 2011, MandoÊs valuation was unattractive as its earnings growth and profitability was non-differentiated from HMC or Kia Motors. However, we believe that MandoÊs differentiated growth in 2012 will justify its valuation premium over its peers as well as auto makers. Three investment points 1) Next-generation electronic parts. 1) Next-generation electronic parts. We believe that of Mando MandoÊs next-generation electronic parts for use in braking and steering systems will be the core drivers of medium- to long-term growth of quality earnings at the company. Indeed, with regard to braking and steering systems, the company has competitive edges in know- how, technology, and customer diversification. 2) Backlog of new orders will serve as the backbone for MandoÊs long-term growth. MandoÊs new orders for 2011 are expected to reach W6.1tr, which is equivalent to 132% of the companyÊs 2011F consolidated revenues (W4.6tr). We believe that the pace of new order-taking will continue to be solid, allowing the company to enjoy stellar sales CAGR of 12.9% during 2011~2016. 3) Customer diversification is likely to strengthen MandoÊs pricing power. We believe that Mando will continue to diversify its customer base. We forecast the companyÊs non- Hyundia-Kia Automotive Group (HKAG) sales to increase to 60%, from the current 45%. This development should strengthen MandoÊs pricing power, as it will make the company less dependent on one major customer. Strong 4QF earnings MandoÊs 4Q consolidated revenue and operating profit is forecast to be strong at W1.3tr and W91.7bn, respectively. This is mainly due to the solid output from HKAGÊs domestic and overseas operations, and rising sales to their overseas customers. Operating profit and margins should also achieve historic highs. 2012 NP to increase by We forecast MandoÊs 2011 net profit to increase by 27.3% to W243.6bn, for a CAGR of 22.5% 51% since 2009. This was mainly attributable to the strong growth of HKAG and the adoption of next generation system parts. NP to show CAGR of Going forward, we believe the core driver of growth will be new customers such as GM and 19% over next five Chinese auto makers and next generation system parts. In 2012, we forecast net profit to years increase by 22.5% and show a CAGR of 19% over five years. KDB Daewoo Securities Research 3 December
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