Korea Autoparts:Operational leverage remains high vs.OEMs

Hyundai Mobis (012330KS, KRW255,500, Buy, TP: KRW280,000): Mobis posted3Q17sales of KRW8.7trn (-0.1% y-o-y), 3.7% above consensus. Core parts saleswere up 5.1% y-o-y but module assembly division sales dropped 6.3% y-o-y, mainly dueto a volume decline in China. The after-sales division continued to post solid top-linegrowth, at 9.0% y-o-y driven by increased UIS (units in service) in the US and EU. ItsOPM also remained strong, at 25.2% (+2.3%pt y-o-y) thanks to improved logisticsefficiency and inventory management starting from 2Q17. Mobis’ overall OP fell 24.6%y-o-y with OPM at 6.2% (-2.0%pt y-o-y) due to a lower module margin from weaker Chinasales. Despite unsatisfactory earnings in 3Q17, we continue to believe Mobis ispositioned to benefit from rising content per vehicle movement at HMC/Kia as well aspotential customer diversification on its core parts in the EU and US. Recently, Mobissecured new contracts worth USD4.8bn to supply external amplifiers to Geely andchassis modules to Chrysler, starting from 2H18(source: Yonhap, 25September). Inaddition, rising demand for components for EV and autonomous driving should be longtermcatalysts for the stock as the company mentioned that 1) Mobis has massproduction facilities for mild hybrid with 48V battery system and EVs; and 2) it plans todevelop Level 3technology in-house by 2020and commercialise it by 2022. We maintainour Buy rating; Mobis remains our preferred name in the sector as it is more defensivewith potential customer diversification.

    Hyundai Wia (011210KS, KRW69,000, Buy, TP: KRW76,000): Wia reported 3Q17sales of KRW1.9trn (+10.4% y-o-y), 5.0% above market expectations. This wasmainly attributable to stronger sales at the Autoparts division (+12.3% y-o-y).Autoparts division: The plants in China, Mexico and the new Seosan diesel plantsaw quarterly sales growth on the back of a capacity utilisation rate improvement.However, the division’s OP declined 53.3% y-o-y. The Seosan diesel plant posted anoperating loss after adjusting cost-plus pricing on new products. We also believethere was increased pricing pressure from Korea OEMs. Machinery division: OPturned negative due to falling backlog orders and limited high margin factory automation(FA) sales. However, the company remains optimistic as it is likely to benefit fromHyundai Motor Group’s (005380KS, KRW1158,500, Hold) FA investment for nextgeneration engine and transmission in 2018e. We remain Buy on the stock.