Sungwoo Hitech (015750 KQ) Compelling story and cheap valuation Auto 4Q13 review: Strong Chinese sales drive earnings beat Sungwoo Hitech’s 4Q13 earnings beat the market consensus, with revenue of Results Comment W802.6bn (+3.1% YoY) and operating profit of W72.6bn (+60.7% YoY). OP margin came March 17, 2014 in at 9.0% (the highest level in recent quarters), which beat our estimate of 7.8%. We primarily attribute the earnings beat to stronger-than-expected contributions from the firm’s Chinese operations, which we ascribe to solid sales by Hyundai Motor (HMC) and (Maintain) Buy Kia Motors in the country. We also believe Sungwoo Hitech’s European operations saw a solid earnings recovery due to pricing adjustments after a weak 1H13. Target Price (12M, W) 21,000 Pretax profit reached W83bn (+103.4% YoY), and net profit came in at W56bn (+117.7% YoY) thanks to a one-time gain of W30bn related to Sungwoo Hitech’s Share Price (03/14/14, W) 16,150 Hyundai Hysco securities holdings, which offset F/X-related losses. Expected Return 30% 2014 outlook Sungwoo Hitech is the largest supplier of automobile body parts to HMC’s and Kia OP (13P, Wbn) 213 Motors’ overseas operations (excluding the US and Brazil). Sungwoo Hitech’s main Consensus OP (13F, Wbn) 190 overseas businesses are in China, Eastern Europe (Czech Republic and Slovakia), Russia, and India. 67% of Sungwoo Hitech’s consolidated revenue comes from China (35%) and EPS Growth (13P, %) -2.4 Russia (32%), and only 29% is derived from Korean operations. Thus, future growth for Market EPS Growth (13F, %) 4.3 Sungwoo Hitech will be highly correlated with HMC’s and Kia Moto rs’ overseas P/E (13P, x) 5.9 expansion and growth. Market P/E (13F, x) 12.1 KOSDAQ 544.27 We believe Hyundai Motor Group (HMG) will continue to expand in Sungwoo Hitech’s key markets going forward. This year, HMC will complete the final ramp-up of its third Market Cap (Wbn) 808 plant in China (additional annual capacity of 150,000 units), and a fourth plant is Shares Outstanding (mn) 50 strongly anticipated. Meanwhile, Kia Motors has also started production at its third Free Float (%) 55.1 plant in China. For Eastern Europe, both HMC and Kia Motors have switched to a three- Foreign Ownership (%) 23.7 shift schedule, leading to additional capacity of 10% each. We also anticipate a third Beta (12M) 0.83 52-Week Low 13,050 expansion of HMC’s Russian plant. 52-Week High 18,100 Therefore, we are confident Sungwoo Hitech will continue to benefit from HMG’s (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M expansion efforts in China and Eastern Europe. Along with solid top-line growth, we also Absolute 8.4 8.8 9.9 anticipate Sungwoo Hitech’s operating profit and net profit to grow at 2013-15 CAGRs Relative 4.1 6.1 11.7 of 10.3% and 16.7%, respectively. 150 Sungwoo Hitech KOSDAQ Trading at a 2014F P/E of 5.7x 130 Sungwoo Hitech’s earnings levels (revenue over W3tr; net profit over W100bn) are the 110 highest among small- to mid-cap Korean auto parts makers. We also find the company’s OP margin (7%) and current 2014F trading multiples (P/E of 5.7x, EV /EBITDA of 3.9x, 90 and P/B of 0.8x) to be very compelling compared to peer levels. 70 3.13 7.13 11.13 3.14 Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13P 12/14F 12/15F Revenue (Wbn) 2,082 2,584 3,011 3,106 3,226 3,495 [Auto/Auto Parts/Tire] OP (Wbn) 162 174 200 213 230 259 Michael Yun OP margin (%) 7.8 6.7 6.6 6.9 7.1 7.4 +822-768-4169 NP (Wbn) 128 51 134 131 141 157 [email protected] EPS (W) 2,550 1,022 2,677 2,614 2,829 3,148 ROE (%) 27.9 8.4 19.0 16.5 15.9 15.4 Young-ho Park +822-768-3033 P/E (x) 4.3 13.6 4.4 5.9 5.7 5.1 [email protected] P/B (x) 1.0 1.1 0.8 0.9 0.8 0.7 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Sangmin Lee Source: Company data, KDB Daewoo Securities Research estimates +822-768-4170 [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURESDISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. March 17, 2014 Sungwoo Hitech TableTableTable 111.1. 4Q134Q134Q13P4Q13 PPP results (Wbn, %) 4Q14Q14Q13P4Q1 3P3P3P 4Q124Q124Q12 3Q133Q133Q13 YoYYoYYoY QoQQoQQoQ Preliminary KDB Daewoo Revenue 779 739 803 850 3.1 8.6 Operating profit 45 50 73 66 60.7 46.6 Pretax profit 41 38 83 63 103.4 116.0 Net profit 26 21 56 35 117.7 162.9 OP margin 5.8 6.7 9.0 7.8 Net margin 3.3 2.9 7.0 4.1 Source: Company data, KDB Daewoo Securities Research TableTableTable 222.2. Quarterly and annual earnings (Wbn, %) 1Q131Q131Q13 2Q132Q132Q13 3Q133Q133Q13 4Q134Q134Q13P4Q13 PPP 1Q14F 2Q14F 3Q14F 4Q14F 201220122012 2013P2013P2013P 2014F2014F2014F 2015F2015F2015F Revenue 771 793 739 803 772 824 786 844 3,011 3,106 3,226 3,495 Operating profit 40 52 50 73 46 60 49 75 200 213 230 259 Pretax profit 30 53 38 83 51 64 54 72 208 205 239 266 Net profit 19 34 21 56 30 42 30 39 134 131 141 157 OP margin 5.1 6.5 6.7 9.0 6.0 7.3 6.2 8.8 6.6 6.9 7.1 7.4 Net margin 2.4 4.3 2.9 7.0 3.9 5.1 3.9 4.6 4.4 4.2 4.4 4.5 Source: Company data, KDB Daewoo Securities Research TableTableTable 333.3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg.chg.chg. NotesNotesNotes 2013F2013F2013F 2014F2014F2014F 2015F2015F2015F 2013P2013P2013P 2014F2014F2014F 2015F2015F2015F 2013P2013P2013P 2014F2014F2014F 2015F2015F2015F Revenue 3,154 3,486 3,810 3,106 3,226 3,495 -1.5 -7.5 -8.3 - Reflected 4Q13P earnings Operating profit 207 225 250 213 230 259 3.1 2.4 4.0 - Revised down Korean revenue forecasts Pretax profit 185 241 257 205 239 266 10.6 -0.6 3.5 - Revised up overseas earnings forecasts Net profit 109 144 152 131 141 157 19.5 -1.4 3.7 EPS 2,192 2,869 3,037 2,614 2,829 3,148 19.2 -1.4 3.6 OP margin 6.6 6.4 6.6 6.9 7.1 7.4 Net margin 3.5 4.1 4.0 4.2 4.4 4.5 Source: Company data, KDB Daewoo Securities Research Figure 111.1. Revenue breakdown by region Figure 222.2. Operating profit breakdown by region (Wbn) (Wbn) 4,500 Korea 250 Korea China China Eastern Europe 200 Eastern Europe 3,600 India 4% India 28% 4% 25% 150 2,700 32% 34% 100 59% 53% 1,800 35% 33% 50 900 21% 19% 0 29% 29% 0 -50 -4% 04 05 06 07 08 09 10 11 12 13 14F 15F 04 05 06 07 08 09 10 11 12 13 14F 15F Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 2 March 17, 2014 Sungwoo Hitech To play a key role in HMC’s “back to fundamentals” push HMC is emphasizing the solid fundamentals of its most recently launched new cars, the Genesis and the Sonata. (The automaker’s advertisements for the latter model feature the mantra “run, turn, stop, protect.”) In particular, we note that HMC has been transitioning to stronger automobile body parts in its vehicles. However, while this switch has resulted in improved crash test performances, it has led to increases in car weights. Thus, because Sungwoo Hitech focuses on both strength/safety and weight reduction in the development of its key products, we believe the parts maker will continue to play a major role for HMG. Figure 333.3. Product lineup Source: Company data, KDB Daewoo Securities Research Maintain Buy with TP of W21,000 We maintain our Buy rating on Sungwoo Hitech with a 12-month target price of W21,000. We believe that Sungwoo Hitech will continue to play a key role in HMC’s and Kia Motors’ overseas expansion efforts and maintain its core competitiveness in body press parts. Valuation comparisons with peers are also compelling considering the company’s profitability and outlooks for 2014 and 2015. TableTableTable 444.4. Valuation comparison of smallsmall----////midmidmidmid----capcap autautoo parts companies (as of 20132013)))) (Wbn, x, %) Market Company Main products Revenue OPOPOP OP margin NPNPNP P/EP/EP/E P/BP/BP/B ROEROEROE EV/EBITDA capcapcap Sungwoo Hitech Body press parts 3,106 214 6.9 131 808 5.9 0.9 16.5 4.2 Hanil E-Hwa Interior trim, bumpers 3,025 201 6.6 42 700 16.7 1.0 6.9 2.9 SL Lamps, chasses, mirrors, FEMs 1,242 35 2.8 73 547 7.5 0.8 11.6 7.4 Hwashin Chassis and body press parts 1,484 66 4.5 1 426 427.3 1.3 0.3 5.1 Pyeong Hwa Door systems 999 69 6.9 47 401 8.5 1.0 13.2 4.4 Automotive Daewon Kang Up Suspension springs, seats 1,011 64 6.3 32 383 12.2 0.8 6.7 7.3 Suspensions, air bags, power S&T Motiv 960 52 5.4 34 380 11.3 0.6 5.9 4.4 train parts , motor s Sejong Industrial Mufflers, body parts, convertors 1,094 57 5.3 46 319 7.0 0.9 13.7 4.2 Kyung Chang Transmission parts 527 30 5.7 26 181 7.0 1.8 27.4 5.1 Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 March 17, 2014 Sungwoo Hitech Sungwoo Hitech (015750 KQ/Buy/TP: W21,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 33,,0011113,011 33,,1100663,106 33,,2222663,226 33,,4499553,495 Current Assets 11,,0088111,081 11,,1144771,147 11,,2288331,283 11,,4466001,460 Cost of SSaalleessSales 22,,6600332,603 22,,6677552,675 22,,7766442,764 22,,9988002,980 Cash and Cash Equivalents 168 144 207 278 Gross Profit 440088408 443311431 446622462 551155515 AR & Other Receivables 499 531 557 610 SG&A Expenses 220077207 221177217 223322232 225555255 Inventories 258 265 288 314 Operating Profit (Adj) 220000200 221133213 223300230 225599259 Other Current Assets 156 207 231 258 Operating Profit 220000200 221133213 223300230 225599259 NNoonnNon-Non ---CurrentCurrent Assets 11,,1177881,178 11,,1111661,116 11,,1111441,114