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● Upgraded to BUY; 6M TP of W58,000 raised 16.0% to W58,000
The target price of W58,000 is derived by applying a target P/E of 24.0x to the 12-month forward EPS. The RIM-based fair value is W71,387.
We upgrade our rating for Hanwha Techwin to BUY from NEUTRAL on confirming the first-quarter earnings have hit a yearly low.
OP will keep falling in 2Q17, but turn around in 3Q17 and rise sharply in 4Q17.
On a positive note, profit-taking in traditional cyclical sectors are underway and foreign buying is rising in anticipation of a defense budget increase by the next administration.
1Q17 earnings missed the significantly reduced market consensus, which could cause the share price to fall further. Investors should take advantage of the buying opportunity.
● 1Q17 sales and OP miss Daishin estimates by 18.0% and 49.4%, respectively
Sales slumped for all business units other than the chip mounter unit.
Hanwha Defense and Hanwha System, whose full-year earnings will be consolidated into Hanwha Techwin's earnings starting this year, also fared badly in 1Q17 as major projects were completed and sales recognition of new projects did not rise yet.
The engine and defense units showed a sales reduction of 17.0% and 19.2% yoy, respectively, as the second mass production of FA50s and Surion helicopters came to an end and no exports were booked as sales.
In contrast, the chip mounter unit turned to the black as a workforce relocation reduced its payroll costs.
The security unit fell to a temporary loss after sustaining mid-single-digit profitability due to delayed bulk orders from European governments, but will rebound in 2Q17.
● Self-propelled guns to book sales starting in 3Q17 on export orders from 1H17
Export of self-propelled guns to Poland, Finland, and India will begin in 3Q17, taking the lead in Hanwha Techwin's OP growth.
The export amount is forecast at mid-W100bn in 2017 and over W200bn in 2018.
The defense unit is also forecast to see a rise in OP margin, from 1.3% in 1Q17 to 15.0% in 4Q17.
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