The authors are analysts of Shinhan Securities. They can be reached at email@example.com and firstname.lastname@example.org, respectively. — Ed.
4Q22 OP falls short of consensus at KRW49.8bn (-25% QoQ)
Hyosung Advanced Materials posted operating profit of KRW49.8bn (-25% QoQ) for 4Q22, missing the consensus estimate of KRW55.7bn. Sales and operating profit from tire reinforcement materials came in at KRW498.7bn (-16% QoQ) and KRW38.5bn (-40% QoQ), respectively, with top-line and profit both hit by sluggish downstream demand plus declining sales volume and ASP levels from seasonal weakness. Other businesses were able to narrow losses thanks to the improvement in spandex spreads.
Operating profit from super fibers (carbon fiber & aramid) remained solid at KRW12.8bn (-5% QoQ). Earnings from carbon fibers continued on a growth track, propelled by brisk demand from downstream industries (high pressure vessels, photovoltaics) and ASP hikes. With aramid fibers also delivering robust earnings, operating margin from super fibers improved by 0.3%p QoQ to 19.2% in 4Q22, proving the company’s competitiveness in high value-added materials even in unfavorable external conditions.
1Q23 OP forecast at KRW74bn (+49% QoQ) with mainstay earnings to recover and growth potential added from new businesses
Operating profit is expected to reach KRW74bn (+49% QoQ) in 1Q23. Earnings from tire reinforcement materials should expand by 39% QoQ to KRW53.7bn. ASP levels and sales volume are set to climb on an upturn in seasonal demand, and spreads will likely improve with costs stabilizing at lower levels. Downstream demand remains weak but should gradually recover on the reopening of China and increase in global traffic from the endemic shift. Other businesses should return to profit, with earnings to recover along with improving spandex market conditions.
We forecast operating profit from super fibers at KRW13.4bn (+5% QoQ). Carbon fiber margins are expected to remain high on strong ASP, and aramid fibers are also likely to report robust earnings on the back of brisk demand from downstream industries. Carbon fiber earnings should continue on an uptrend, with new capacity of 2,500 tons (total capacity: 9,000 tons) to ramp up operations in April.
Retain BUY and target price of KRW500,000
We retain BUY on Hyosung Advanced Materials for a target price of KRW500,000. Adding to limited capacity expansion in the industry, recovery of demand and market share gains are expected to drive solid earnings from tire reinforcement materials this year. Carbon fibers should see a boost in earnings from capacity additions each year, driving company-wide growth. We believe increasing earnings contribution from carbon fibers (8% in 2022 to 16% in 2024) will lead to further re-rating of share valuations.