Korea Autoparts:2Q17review,China remains a concern for recovery

Hyundai Mobis (012330 KS, Buy, TP: KRW280,000 [from KRW300,000]): Mobisposted 2Q17 sales of KRW8.3trn (-16.0% y-o-y), falling short of consensus by 9%.

    Core parts sales were down 8.7%, while module assembly division sales dropped 12.9%y-o-y mainly due to volume decrease in China. The after-sales division was hurt byunfavourable FX (weak USD) with its sales down 7.4% y-o-y. However, its OPMremained solid at 25.1% (+1.3%pt y-o-y) thanks to efficient management of logisticsand inventory. The overall OP fell 26.4% y-o-y with OPM at 5.9% (-1.3%pt y-o-y) due tolower module margin from weaker China sales. Reflecting this, we lower our 2017e OPby 8.7% with new 2017e OPM assumptions (module at 3.3% and A/S at 24.9%).

    Despite weaker earnings in 2Q17, we continue to believe Mobis is positioned to benefitfrom rising content per vehicle at HMC/Kia as well as potential customer diversificationon its core parts in the EU and US. We maintain a Buy rating but lower our TP toKRW280,000 from KRW300,000.

    Hyundai Wia (011210 KS, Buy, TP: KRW76,000 [from KRW79,000]): Wia reported2Q17 sales of KRW1.8trn (-6.9% y-o-y), 7% below market expectations. Weakersales were mainly due to weaker China engine sales (Wia’s key supplies are 1.8L/2.0LNu engines) while lower portion engine sales from existing plants and fixed-cost burdenfrom new plants drove OPM down to 1.7% (-3.0 ppt y-o-y). For auto division,management expects profit improvement for auto parts in 2H17e on the back of capacityutilisation rate improvement at its Mexico plants and Seosan diesel plant. Sales growth ofGamma engine (mainly exported to Russia) will likely offset weaker sales of Nu-engine inChina. For machinery division, Wia remains optimistic as it secured a new order worthabout KRW600bn in 1H17, translating into higher top-line in 2H17e. In addition, thecompany is likely to benefit from Hyundai’s new factory automation (FA) investment fornext-generation engine and transmission in 2018e. We lower our 2017/18e OP estimatesby 8.6% and 2.8%, respectively, reflecting weaker module and machinery margins inChina. Accordingly, we lower our TP to KRW76,000 from previous KRW79,000.