20170905-三星证券-Hyundai_Heavy_Industries_Group_Capital_increases_unsurprising_but_unsatisfactory_12页_390kb

Sector Update Summary: Hyundai Heavy Industries Group

Core Content

This document provides an analysis of the capital increase plans by Hyundai Construction Equipment (HCE) and Hyundai Electric (HE), both subsidiaries of the Hyundai Heavy Industries Group. The companies are issuing new shares via rights offerings, which will lead to share dilution but are expected to provide long-term growth opportunities through acquisitions and new investments.

Main Points

1. Rights Offering Details

• Hyundai Construction Equipment plans to issue new shares equivalent to 38.5% of its outstanding shares, raising an estimated KRW341.6b.
• Hyundai Electric will issue new shares equivalent to 38.3% of its outstanding shares, raising an estimated KRW277.6b.
• The issue prices will be finalized in November (Nov 1 for HCE, Nov 6 for HE).
• Both firms will conduct a 1:1 bonus issue for existing shareholders following the rights offering.

2. Use of Proceeds

• Hyundai Construction Equipment:
  • 81% of proceeds (KRW280.2b) will be used to acquire a 60% stake in HHI's Chinese subsidiary and total ownership of HHI's Indian subsidiary.
  • The remaining 19% will be allocated to capital expenditures (Capex) and other purposes.
• Hyundai Electric:
  • 70% of proceeds (KRW200b) will be used for new investments, including:
    • Rationalizing production processes
    • Expanding mass production
    • Integrating global IT systems
    • Establishing an R&D center in Europe
  • 13% of proceeds (KRW36.3b) will be used to acquire HHI's subsidiary in Bulgaria.
  • The remaining 17% will be used for other purposes.

3. Impact on Financials

• The rights offering will dilute shares by 27.8% for HCE and 27.7% for HE.
• The acquisition of overseas subsidiaries is expected to increase sales and profits.
• Hyundai Construction Equipment:
  • Revised 2018 EPS forecast down by 17% due to dilution, but sales and net profit are forecasted to rise by 18% and 15%, respectively.
  • Target price cut from KRW470,000 to KRW400,000.
• Hyundai Electric:
  • EPS forecasts for 2017 and 2018 revised down by 27% and 24%, respectively, due to dilution and interest expense reduction.
  • Target price cut to KRW307,000, based on a 15.6x 2017 P/E multiple, similar to domestic peers.

4. Acquisition Details

• Hyundai Construction Equipment:
  • Acquiring a 60% stake in HHI's Chinese subsidiary for KRW213.4b and total ownership of HHI's Indian subsidiary for KRW66.8b.
  • The acquisition prices are estimated at 1.2x P/B, which is considered reasonable given the growth in construction equipment demand in China and India.
  • Brazilian subsidiary is excluded due to financial losses and ongoing restructuring.
• Hyundai Electric:
  • Acquiring HHI's subsidiary in Bulgaria (a transformer manufacturer).
  • The Chinese subsidiary (HHI China Electric) is not a target for acquisition this time, as it is expected to be acquired by HCE in the future.

Key Information

• Hyundai Construction Equipment:
  • Shares outstanding: 3,584,046
  • New shares issued: 1,380,000
  • Book value: KRW286.4b (end-1H)
  • Acquisition capital: KRW280.2b
  • Target price: KRW400,000
• Hyundai Electric:
  • Shares outstanding: 3,710,107
  • New shares issued: 1,420,000
  • Acquisition capital: KRW36.3b
  • New investment capital: KRW200b
  • Target price: KRW307,000

Market Reaction and Investment Outlook

• The market was surprised by the speed of the capital increase plans, as the companies lacked sufficient cash reserves and had limited borrowing capabilities.
• The rights offering may disappoint investors due to:
  • Share dilution
  • Uncertain offering prices
  • Lack of detailed financials for the target subsidiaries
• Despite the dilution, the analysts maintain a BUY rating for both companies, citing:
  • Significant upside potential due to recent share price declines
  • Reasonable acquisition prices relative to current market conditions
  • Strategic investments aimed at long-term growth

Peer Valuations

• Both companies are valued lower than their overseas peers but similar to domestic peers.
• The target price for Hyundai Electric is KRW307,000, which is lower than the overseas average but comparable to domestic peers.

Conclusion

The rights offering by Hyundai Construction Equipment and Hyundai Electric is a strategic move to acquire overseas assets and expand production capacity, despite the dilution and uncertainty surrounding the offering price and financial details of the subsidiaries. While the short-term impact may be negative, the long-term growth potential is seen as positive, especially given the current market conditions and historical performance. The target prices have been adjusted to reflect these changes, but analysts remain optimistic about the future earnings and value creation.