20161130-三星证券-2017_outlook__Where_to_invest_11页_531kb

Summary of Sector Update: Auto Parts Industry

Core Content

This report provides an analysis of the Korean auto parts sector with a focus on investment opportunities in 2017. It outlines the performance of the sector in 2016, the challenges facing carmakers, and the recommended strategies for investors in the auto parts industry.

2016 Review

• Carmaker Performance: Hyundai Motor (HMC) and Kia Motors experienced slower growth in 2016 due to increased competition and marketing incentives, leading to a decline in operating margins.
• Auto Parts Sector: Korean auto parts suppliers also saw margin compression, though their sales growth was slightly better than carmakers.
• EV Hype and Investor Sentiment: EV-related parts makers saw strong share price performance in the first half of 2016 due to anticipation of the EV era, driven by events like the Volkswagen Dieselgate scandal and Tesla's Model 3 launch. However, investor sentiment turned negative in the second half due to concerns over Model 3 delays and the Trump administration's energy policies favoring fossil fuels.
• Market Volatility: Shares of EV-related parts makers were volatile, reflecting the fluctuating investor sentiment.

2017 Outlook

• Carmaker Growth: HMC and Kia are expected to see slower growth in 2017, with combined global shipments increasing by 5.5% y-y.
• EM Currency Volatility: Emerging market (EM) currencies, especially in Russia, Brazil, and Mexico, remain volatile due to uncertainty following the US presidential election. This is expected to continue affecting companies with significant EM exposure.
• Investment Strategy: The report recommends investing in firms that:
  1. Diversify their client base beyond HMC and Kia.
  2. Have products in high demand, independent of carmaker growth.
  3. Have limited exposure to EM currencies.

Recommended Stocks

Key Points

• Dae-II Corporation is highlighted for its growth in dual-clutch transmission (DCT) sales and its diversified client base, including Geely.
• Kopla benefits from HMG's increasing use of engineering plastics and has a strong presence in the US and China.
• SL Corporation has a diversified customer base and strong performance in its US subsidiary, SL America, with expected future contracts with Ford.
• Woory Industrial is growing due to demand for PTC heaters, particularly in the EV market, and has growth drivers from its joint venture in China and expansion into the green-car market.

Limitations and Risks

• Companies with significant exposure to EM currencies are at risk due to continued volatility.
• The auto parts sector is expected to underperform compared to the broader market due to slow carmaker growth.
• The report emphasizes the importance of product demand and client diversification in driving performance.

Investment Considerations

• Investors should prioritize firms with diverse client bases, in-demand products, and limited EM exposure.
• The report suggests that EV-related investment sentiment has declined, affecting stock prices.
• The KRW/USD exchange rate has remained stable, but EM currencies like the MXN, BRL, and RUB have weakened significantly.

Compliance and Disclaimer

• The analyst did not hold any shares in the covered companies as of November 29, 2016.
• Samsung Securities' holdings in the companies would not exceed 1% of outstanding shares if debt instruments were converted.
• The report is not tailored to individual investors and does not constitute an offer or solicitation to buy or sell securities.
• It is not intended for public distribution and is subject to various legal restrictions in different jurisdictions.

Conclusion

The auto parts sector in South Korea faces challenges in 2017 due to slower carmaker growth and EM currency volatility. However, firms with diversified customers, strong product demand, and limited EM exposure are viewed as more attractive investment opportunities. The report identifies Dae-II Corporation, Kopla, SL Corporation, and Woory Industrial as favorable choices based on these criteria.