Hanon Systems' Gyeongju plant in North Gyeongsang Province / Courtesy of Hanon Systems

By Park Jae-hyuk

Hanon Systems' worsening profitability and credit rating have caused concerns among some market insiders about a possible setback in its major shareholders' yearlong attempt to sell the company, according to industry officials, Thursday.

The auto parts supplier announced on Wednesday that its second-quarter operating profit dropped 40.2 percent year-on-year to 60.1 billion won ($46 million).

Although quarterly operating profit exceeded market consensus and quarterly revenue reached a record 2.1 trillion won, the company's profitability has deteriorated throughout this year, due to declining car production caused by the automotive semiconductor shortage and China's lockdown measures.

The company's aggressive investments over the past few years have also increased its net debt to 2.7 trillion won as of the end of the second quarter from 2.3 trillion won at the end of last year, prompting domestic credit ratings agencies to lower its credit rating to AA- from AA.

"It seems to be difficult for the company to enable a meaningful level of improvement in its financial structure in a short period of time," Korea Investors Service said in its report. "We will also monitor how changes in its major shareholders will affect the company's sales and finance."

Such a skeptical outlook has aroused questions about whether Hanon Systems will be able to attract potential buyers on the M&A market.

Despite the rumors that Carlyle, Bain Capital, Germany's Mahle, France's Valeo and Japan's Nidec have shown interest in the acquisition deal, Hanon Systems has reiterated that nothing has been decided yet about the sale of its shares owned by its major shareholders.

"Our largest shareholder told us that it has selected Morgan Stanley and Evercore as advisers to continue talks about the sale of its stake and various other measures with potential buyers," Hanon Systems said in its regulatory filing last month. "However, we heard that the negotiation has been delayed, due to having postponed the process of conducting due diligence amid the ongoing COVID-19 pandemic, global supply chain disruptions and growing uncertainty in the market environment."

When Hanon Systems was put up for sale in June last year, the combined 70-percent stake held by its largest and second-largest shareholders was estimated to be worth up to 8 trillion won, but its stock price has shown a downward curve since then, halving the value of the stake.

There is speculation that the lower price may increase the number of potential buyers interested in the acquisition deal.

The interest rate hike to curb inflation, however, has worsened investor sentiment toward the M&A market, so some observers even forecast that procedures to sell Hanon Systems will not be resumed until next year.

At this moment, Hanon Systems expects stabilizing raw material prices to improve in profitability during the second half of this year. In addition, it seeks a further increase in sales, as global carmakers are set to expand their production later this year.

Domestic securities analysts also raised their price targets for Hanon Systems stock, saying the company will experience an earnings recovery during the second half of the year.