● 2Q16 operating profit misses consensus at W11.8bn (+39.6% YoY, 2.6% margin)

Hanjin Transportation posted 2Q16 sales of W447.1bn (+13.4% YoY) and operating profit of W11.8bn (+39.6% YoY, 2.6% margin). Sales beat the market consensus by 1.4%, while operating profit missed by 13.3%. Net profit skyrocketed 8,855% YoY to W106.2bn due to W155.1bn in gains from the disposal of a stake in Seoul Express Bus Terminal.

● Margin gains expected in courier delivery and port logistics in 2H16

Door-to-door courier delivery service accounts for the lion`s share of sales (29.8% in 1H16). The division turned in sales of W129.8bn (+4.2% YoY) and operating profit of W2.1bn (-52.3% YoY). Operating profit fell YoY, but jumped 61.5% QoQ. Operating profit margin improved 0.6%p YoY. Cost-cutting efforts in 1Q, such as reduction of trunk routes, have started to bear fruit in 2Q. Operating profit margin of the courier delivery division is estimated to increase to 2.4% in 2H.

The port logistics division posted sales of W98.4bn (+48.9% YoY) and operating profit of W8.4bn (+546.2% YoY, 8.5% margin). Operating loss should have declined from W2.3bn in 1Q to the 1bn range in 2Q as Hanjin Incheon Container Terminal, which opened this March, handled over 15,000 TEU of cargo since April. We expect operating profit of W18.4bn (+22.7% HoH) in 2H as Hanjin Incheon Container Terminal should break even and the decline in handling volume at Pusan New-Port Terminal slows.

● Upgrade to BUY rating and raise target price to W43,000

We upgrade our rating for Hanjin Transportation from Trading BUY to BUY in view of earnings forecast upgrade and valuation merit. We raise our target price from W38,000 to W43,000. There is no meaningful growth in courier delivery volume yet. However, operating profit growth of the port logistics division is positive.

By Park Kwang-rae, Analyst at Shinhan Investment

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