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The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. — Ed.

4Q22 earnings miss expectations on non-recurring factors; China market recovery to be key

ㅡ HL Mando saw OP miss the market consensus but come roughly in line when excluding non-recurring factors. The effects of having secured a leading North American EV maker as its customer from early on as well as the accumulation of good references and the easing of chip shortages should drive earnings growth in 2023. In the near term, however, a recovery in China’s auto market, which has been sluggish lately, should be key. 

4Q22 OP at KRW56.6bn (+84.9% YoY), 36.5% below consensus; Revenue growth lackluster for China alone

ㅡ HL Mando posted 4Q22 OP of KRW56.6bn (+84.9% YoY, -26.1% QoQ), missing the market consensus by 36.5% and our estimate by 34.7%. Excluding non-recurring expenses, however, OP amounted to KRW88.6bn, in line with the market consensus (KRW89.2bn) and our estimate (KRW86.8bn).

ㅡ Non-recurring expenses recognized in 4Q22 (KRW31.9bn) include: (1) inventory valuation loss; (2) losses related to partners with high financial risks that were booked in advance; and (3) various others (i.e., additional R&D, participation in Consumer Electronics Show, company name change, new building). 

ㅡ 4Q22 revenue jumped 26.5% YoY (KRW457.0bn) to KRW2.2tn. By region, Others (India, Europe, etc.) saw YoY revenue growth of 77.8%, North America 59.9%, and Korea 13.7%. China posted relatively lackluster growth of 5.0%.

ㅡ Normalization following the resolution of chip shortages and rising sales to leading EV makers were the main contributors to revenue growth in all regions. In China, on the other hand, the sluggish revenue growth came as a result of slower demand and the effects of lockdown measures, despite rising EV shipments. Sales to North American EV makers and local EV maker NIO surged in China as well, however, registering growth of 36% and 151% YoY, respectively.

ㅡ Meanwhile, NP came in at -KRW97.1bn (TTR YoY/QoQ), missing market consensus and our estimate by KRW160.7bn and KRW162.0bn, respectively. This was attributable to lower-than-expected OP and non-operating expenses of KRW103.9bn—i.e., valuation loss on short-term financial assets (KRW29.0bn), impairment loss on tangible assets (KRW30.0bn), impairment loss on a subsidiary in Poland (KRW30.0bn), and loss due to changes in accounting method for a subsidiary in Turkey (KRW14.9bn). 

Various expenses incurred, but earnings growth factors remain valid; Timing of China market recovery to be important

ㅡ The fact that various non-recurring expenses were booked in 4Q22 serves as a negative, but factors for earnings growth—i.e., the resolution of chip shortages at OEM companies, the effects of securing leading EV makers as customers from early on, and the accumulation of good references—remain intact. 

ㅡ HL Mando announced 2023 guidance for revenue of KRW8.5tn (+12.9% YoY), revenue proportion of eco-friendly cars of 33% (vs 26% in 2022), and revenue proportion of sales to non-HMG companies of 54% (vs. 49% in 2022). According to these figures, revenue related to eco-friendly cars is expected to see YoY growth of 43.3% this year—which indicates that thanks to its early lead, the company is confident in its ability to rapidly expand sales to other EV makers as well. The guidance figures also indicate sales to non-HMG companies may increase by 24.4% YoY—likely as major OEM companies recover from chip shortages and sales to non-HMG companies receive a boost from rising sales of EV parts. Growth in sales to non-HMG companies should accelerate once China’s auto market starts to recover in 2023, however.  



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