20161107-三星证券-Auto_Parts__OVERWEIGHT_Overlooked_and_underloved_in_the_EV_era_50页_2mb

Sector Update Summary

Core Content

This document provides an analysis of the auto parts sector, focusing on the performance and potential of several Korean companies in the context of the EV (electric vehicle) era. The analyst, Hyunryul Cho, upgrades the auto parts sector to OVERWEIGHT, highlighting that companies traditionally seen as non-EV plays are actually well-positioned to benefit from the EV transition. The report includes detailed insights into four companies: Dae-II Corporation (DIC), Seoyon E-Hwa, Kopla, and A-Jin Industrial.

Main Points

• Valuation Shifts Post-Dieselgate: Following the Volkswagen emissions scandal in 2015, the auto parts sector experienced a divergence in valuations. EV-related companies were more highly valued, while conventional auto parts firms were derated. However, the valuation gap has started to narrow.

• EV Transition Impact: The report emphasizes that thermal management is critical for EVs, leading to a re-evaluation of companies like Hanon Systems and Woory Industrial. Additionally, companies like DIC, Seoyon E-Hwa, and Kopla, which are not solely focused on batteries or motors, have EV-related businesses and should benefit from the transition.

• Investment Recommendations: The analyst upgrades the auto parts sector to OVERWEIGHT and initiates coverage for DIC and Seoyon E-Hwa with a BUY rating. Kopla is also recommended with a BUY rating. A-Jin Industrial remains not rated.

• Target Prices and Upside Potential:

  • Dae-II Corporation: Target price KRW14,000, offering 38.6% upside.
  • Seoyon E-Hwa: Target price KRW17,000, offering 25.0% upside.
  • Kopla: Target price KRW22,000, offering 41.9% upside.
  • A-Jin Industrial: Not rated, target price not available.

• Company-Specific Highlights:

  • DIC: Strong growth in sales to Geely and Hyundai Motor Group due to increased adoption of 7-speed dual clutch transmissions (DCTs). It is also expanding into EV production.
  • Seoyon E-Hwa: Interior parts maker with rising average selling prices (ASPs) due to EV demand. Its door trims have seen a 6-year CAGR of 10.1%.
  • Kopla: Focuses on weight reduction for both EVs and ICE vehicles. Plans to expand and add overseas manufacturing bases through 2022.
  • A-Jin Industrial: Benefits from product-mix improvements and outsourcing from Hyundai Motor Group. Engaged in lightweight material development with non-ferrous metals and carbon fiber composites.

Key Information

• Valuation Data:

  • DIC: Current price KRW10,100, target price KRW14,000 (38.6% upside), 2017E P/E 9.5x, 2017E EPS 1,065 KRW.
  • Seoyon E-Hwa: Current price KRW13,600, target price KRW17,000 (25.0% upside), 2017E P/E 3.2x, 2017E EPS 14.3 KRW.
  • Kopla: Current price KRW15,500, target price KRW22,000 (41.9% upside), 2017E P/E 10.5x, 2017E EPS 26.7 KRW.
  • A-Jin Industrial: Not rated, current price KRW10,800, 2017E P/E 4.5x, 2017E EPS 25.5 KRW.

• Earnings and Growth Forecasts:

  • DIC: Expected 2017 sales to rise by 22.4% to KRW679.4b, operating profit to increase by 38.5% to KRW48.5b.
  • Seoyon E-Hwa: Expected to see continued growth in ASPs, with a focus on interior parts.
  • Kopla: Projected to benefit from long-term top-line growth due to its expansion plans.
  • A-Jin Industrial: Sales growth driven by product-mix improvement and outsourcing contracts.

• Market Position:

  • DIC's sales are heavily influenced by Geely, with a significant portion of its revenue coming from this client.
  • DIC's 2017 target P/E is 13.2x, based on regression analysis of its peers.
  • The company's ownership structure is affected by its convertible bonds, which could dilute the stake of major shareholders if fully converted.

• EV Transition Opportunities:

  • DIC is evolving into an EV player, with plans to produce electric trucks and supply gear components to a global EV maker.
  • Seoyon E-Hwa and Kopla are positioned to benefit from the increased demand for EV-related components and the need for lightweight materials in both EV and ICE vehicles.

Investment Points

• Geely Partnership: DIC's 2010 investment in a Geely-dedicated facility is now yielding results as Geely's sales have improved significantly.
• Hyundai Motor Group Orders: DIC has secured major orders for 7-speed DCTs from Hyundai Motor Group, indicating strong growth potential.
• EV Business Expansion: The firm is diversifying into EV production, moving beyond traditional powertrain components.

Conclusion

The auto parts sector is undergoing a transformation as the EV market grows. Companies that have been overlooked or undervalued due to their association with traditional ICE vehicles are now showing strong potential due to their expanding EV-related businesses. DIC, Seoyon E-Hwa, and Kopla are highlighted as key players with significant upside potential, while A-Jin Industrial remains under evaluation. The analyst believes that the EV transition is creating new opportunities for these firms, and their valuations are expected to improve as the sector evolves.