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Are capital goods margins holding up?
Summary
In this report, Daiwa analysts covering capital-goods companies and automakers in China, India
and Korea analyse the impact of raw-material cost inflation on the stocks they cover, focusing on
the companies’ ability to raise selling prices enough to sustain profit margins. Given that the share
prices of many stocks in these sectors have fallen by 15-30% so far this year, the cost-escalation
burden has been discounted to a large degree. Our aim here is to identify those companies whose
pass-through ability may be greater than many investors believe.
In the Auto Sector, only the Korea companies have the potential to protect margins, in our view,
despite rising steel prices and the strengthening Won, due to new model launches, higher ASPs,
and a likely further increase in the proportion of new models built under integrated platforms. By
contrast, raising prices in China is extremely difficult due to intense competition and slower market
growth this year, with a similar situation likely to prevail in India. In both cases, a sustained rise in
raw-material costs should depress margins. Given this, we regard Hyundai Motor (HMC) as an
attractive investment, especially in light of its 13% YTD underperformance versus Kia Motors (Kia).
In the broad Capital Goods Sector in Asia, several stocks stand out as potential winners.
Companies such as Larsen & Toubro (L&T), with cost-plus contract clauses, fare relatively well in
an inflationary environment, in contrast to KEC International (KECI), which has mostly fixed-price
contracts. The Korea machinery suppliers have benefited from a strong pricing environment in
China, with Doosan Infracore being our preferred play. We also expect the Korea shipyards to
pass on their rising cost burden, as this has been the case in previous cyclical upturns. The China
power-equipment suppliers, meanwhile, are burdened by government-controlled pricing, except in
new industries with strong demand, such as nuclear power. In this context, Shanghai Electric
Group (SHE) fares well.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Are capital goods margins holding up?
Summary
In this report, Daiwa analysts covering capital-goods companies and automakers in China, India
and Korea analyse the impact of raw-material cost inflation on the stocks they cover, focusing on
the companies’ ability to raise selling prices enough to sustain profit margins. Given that the share
prices of many stocks in these sectors have fallen by 15-30% so far this year, the cost-escalation
burden has been discounted to a large degree. Our aim here is to identify those companies whose
pass-through ability may be greater than many investors believe.
In the Auto Sector, only the Korea companies have the potential to protect margins, in our view,
despite rising steel prices and the strengthening Won, due to new model launches, higher ASPs,
and a likely further increase in the proportion of new models built under integrated platforms. By
contrast, raising prices in China is extremely difficult due to intense competition and slower market
growth this year, with a similar situation likely to prevail in India. In both cases, a sustained rise in
raw-material costs should depress margins. Given this, we regard Hyundai Motor (HMC) as an
attractive investment, especially in light of its 13% YTD underperformance versus Kia Motors (Kia).
In the broad Capital Goods Sector in Asia, several stocks stand out as potential winners.
Companies such as Larsen & Toubro (L&T), with cost-plus contract clauses, fare relatively well in
an inflationary environment, in contrast to KEC International (KECI), which has mostly fixed-price
contracts. The Korea machinery suppliers have benefited from a strong pricing environment in
China, with Doosan Infracore being our preferred play. We also expect the Korea shipyards to
pass on their rising cost burden, as this has been the case in previous cyclical upturns. The China
power-equipment suppliers, meanwhile, are burdened by government-controlled pricing, except in
new industries with strong demand, such as nuclear power. In this context, Shanghai Electric
Group (SHE) fares well.
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