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| Seen is Hanon Systems' factory in Pyeongtaek, Gyeonggi Province. Courtesy of Hanon Systems |
Securities analysts say auto parts supplier faces challenges
By Park Jae-hyuk
The continued global semiconductor shortage is putting a downward pressure on the valuation of Hanon Systems, amid attempts by its largest and second-largest shareholders to sell their combined 70 percent stake estimated to be worth up to 8 trillion won ($6.8 billion), according to securities analysts, Monday.
A securities analyst said Hanon Systems' less-than-impressive third-quarter earnings results may lead its buyers and sellers to see its valuation differently.
"Good performance gives sellers bargaining power, while a bad one empowers the buyers," another local brokerage analyst said. "Although there are various reasons behind Hanon Systems' third-quarter performance, its latest quarterly reports showed the company could also be affected by external factors. The (potential) buyers are therefore expected not to offer higher prices."
Earlier this month, Hanon Systems said its third-quarter operating profit decreased 41 percent, year-on-year, to 70.6 billion won, citing a decline in global car production resulting from the automotive semiconductor shortage.
"Car production by our major customers ― Volkswagen, GM and Stellantis ― dropped between 15 percent and 33 percent, causing our sales decline," Hanon Systems said in its conference call upon announcing results for three months ended Sept. 30. "The continued decline in car production resulted in a 49 billion won decrease in our third-quarter operating profit."
Hana Financial Investment trimmed down its target on Hanon Systems shares to 16,000 won this month from 17,000 won in August, while eBest Investment & Securities lowered its target price to 18,000 won this month from 23,000 won in August.
Hanwha Investment & Securities maintained its 18,000 won target price, but it said Hanon Systems became less attractive to investors at least in the short-term, citing its relatively higher valuation compared to its foreign peers such as Denso.
Eugene Investment & Securities, which maintained its 20,000 won target price, mentioned the recent magnesium shortage caused by China's electricity crisis as another negative factor for Hanon Systems, saying European carmakers using lightweight materials may reduce their production, if the shortage lingers.
The government-funded Korea Automotive Technology Institute (KATECH) said the global automotive semiconductor shortage will continue until the first half of next year at the earliest and even after 2023.
"Infineon, STMicroelectronics, Ford, GM, Daimler, Volkswagen and Bosch expressed their forecasts about the lingering supply shortage through press interviews," KATECH said in a report earlier this month. "The size of production shortfall caused by supply shortage this year is expected to reach 10.1 million units."
Countermeasures
Most securities analysts, however, said a gradual economic recovery in major markets would be helpful in terms of awakening idling demand for vehicles, so such macro-economic factors would possibly benefit Hanon Systems in its earnings for the current quarter.
Actually, Hanon Systems is also increasing the production of electric compressors for eco-friendly vehicles. The company recently raised its forecast for its electric compressor production in 2025 to 6 million from 4.4 million a year earlier.
"Only a few auto parts makers can cope with the faster-than-expected changes in the market, so their dominance will be maximized," Hyundai Motor Securities analyst Chang Moon-su said in report. "Considering the main bid for Hanon Systems and the selection of a preferred bidder later this year, its enterprise value will go up."
Hanon Systems did not mention the specific timeline for its sale in its recent conference call. But it confirmed that its largest shareholder hired Morgan Stanley and Evercore as advisers to consider various strategies, including the sale of its stake.
According to industry sources, the preliminary bid for Hanon Systems in June attracted Carlyle, Bain Capital, Germany's Mahle, France's Valeo and Japan's Nidec. However, the timing of the main bid remains unclear.
In most M&A deals, a main bid takes place following a month of due diligence after a preliminary bid, but the COVID-19 pandemic has made it difficult for international bidders to conduct due diligence of Hanon Systems' assets worldwide.
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