Positive earnings surprise in 2Q16, led by the defense division

Hanwha Techwin delivered a positive earnings surprise for 2Q16. Consolidated sales came to W820.6bn (+27.7% QoQ, +35.1% YoY) and operating profit to W44.4bn (+40.2% QoQ, swing to profits YoY). Operating profit exceeded the consensus of W36.7bn (SHIC estimate: W35.3bn) by a wide margin as one-off costs disappeared. The biggest driver was the defense division. 

Defense sales went up 40% QoQ to W191.1bn. More remarkable is that the margin more than doubled thanks to increased exports. The division normally posts a margin of 3-5% given its heavy sales portion to the Ministry of National Defense.

Most other divisions excluding security (CCTV) also posted strong 2Q16 results. The security division posted just 0.3% YoY sales growth. The industrial equipment division swung to a modest profit with sales rising 56% QoQ to W67.5bn. The aviation division (mostly related to engines) saw a 14% QoQ increase in sales. Concerns over the earnings shock that continued last year have been lifted.



Solid earning expected in 3Q

Earnings should remain strong in 3Q. We expect sales of W1.3tr (+5.6% QoQ, +24.2% YoY) and operating profit of W51.4bn (+16.0% QoQ, 114.2% YoY). The main driver for earnings will be the recently acquired subsidiary Hanhwa Defense (Doosan DST), whose earnings will be reflected in the consolidated financial statements starting from 3Q.

Upgrade target price to W80,000

There is no domestic company that is comparable to Hanwha Techwin. The P/B was in the range of 1.8-4.3x in 2010-2012, when the company received strong momentum from new business launches and overseas order intake. Our target price is set at W80,000. We applied a target P/B of 1.8x (lower end of P/B band) to 2016F BPS as growth momentum has returned.


Source: Shinhan Investment