By Lee Gyu-sun
Founded in 1994, MDS Technology is an embedded software and solution provider serving various industries including auto, mobile devices, and defense and aerospace.
Embedded software is built into mobile devices, automobiles and other products to control the hardware and enable advanced functionality. MDS Technology has the most extensive list of client industries and solutions in the domestic embedded software industry, with a dominant position in automotive electronics.
By client industry, digital devices accounted for 27 percent of total revenues in 2011, automotive electronics 23 percent, industrial automation 17 percent, mobile devices 17 percent and defense and aerospace 16 percent.
Mobile revenues are projected to steadily decline given smartphone technologies have already fully matured. On the other hand, the automotive business is still in its early stages of growth ― only recently have domestic automakers begun to make full-fledged investments in automotive systems.
We thus expect the automotive business to become the company’s primary growth driver and estimate automotive revenues to jump 48 percent year-on-year to 20.5 billion won in 2012, contributing around 30 percent of the total revenues.
Hyundai Motor Group has recently stepped up efforts to make its automotive system subsidiaries more technologically independent, and thus assert its control over them ― for instance, by providing large-scale funding.
For example, in 2011, the group acquired full ownership of Carnes, a joint venture formed in 2005 with Siemens, putting an end to the technological alliance between the two firms. After raising 100 billion won from a rights issue in the first quarter of 2012, Carnes was renamed Hyundai Autron.
Another subsidiary KEFICO, a power-train control system supplier, also recently ended its 24-year alliance with Bosch, indicating that Hyundai Motor Group’s stake is likely to increase.
We believe the group’s automotive electronics business will largely be led by three key players: Hyundai Autron, KEFICO, and Hyundai Mobis.
Autron will take care of design and software, KEFICO of power-train systems, and Hyundai Mobis of X-by-Wire (break, suspension, steering, and more), advanced safety vehicle (ASV) and electric vehicle (EV) components.
Looking ahead, we expect the domestic automotive electronics industry to expand with Hyundai Motor Group leading the way. This should benefit MDS Technology in the mid- to long-run, as the company is best positioned to meet automakers’ needs, with an extensive lineup of solutions across the value chain.
MDS Technology’s automotive business can be broken down into development solutions ― AUTOSAR and infotainment systems. Development solutions involve supplying the tools necessary for debugging, designing and testing electric control units (ECU) to part makers like Hyundai Mobis, KEFICO, and Mando. We estimate that 80 percent of MDS’s automotive revenues this year will come from development solutions.
AUTOSAR (AUTomotive Open System ARchitecture) is a standard automotive software architecture developed by the German company Elektrobit that integrates and standardizes multiple ECUs. Since it is widely adopted by global automakers like BMW, Mercedes Benz, Bosch and Continental, domestic part makers such as Hyundai Mobis and Mando also need to apply the standard if they wish to diversify their client base.
In partnership with Elektrobit, MDS Technology currently provides solutions and training for the development of AUTOSAR compliant ECUs.
Furthermore, the company’s infotainment lineup includes the MirrorLink solution and virtual integrated ECU solution. MirrorLink is a global standard platform that connects smartphones to in-vehicle infotainment systems, one of the most recent examples being Samsung Electronics’ Galaxy S III.
MDS Technology has developed its own MirrorLink-enabled head unit solution called NeoLink, which we believe will likely be built into head units, as in-vehicle infotainment systems become more widespread.
We forecast record-high earnings in 2012, with non-consolidated IFRS revenues estimated at 68.4 billion won ― up 12 percent from a year ago, operating profit at 10.4 billion won ― up 30 percent, and net profit at 10.6 billion won ― up 20 percent.
In particular, we expect the automotive business to deliver meaningful top-line growth and replace mobile devices as the company’s primary growth driver.
Although MDS Technology is currently trading at the price eleven times as high as the earnings per share forecasted for 2012, we believe the stock will likely undergo a re-rating on the back of earnings improvement.
First of all, the company’s domestic automotive electronics business is still in its early stages, suggesting significant room for growth.
Second, the firm has attained a dominant position in the automotive electronics market by building an extensive presence across the value chain.
Furthermore, the company enjoys strong profitability _ the operating profit margin for 2012 expected at 15.2 percent _ and a solid balance sheet with net cash flow of 38.8 billion won as of the end of the first quarter.