20170410-三星证券-1Q_preview_-_HMG_needs_HMC_to_step_up_its_game_14页_499kb

Sector Update Summary

Core Content

This document provides an analysis of the performance and outlook for the Korean automotive sector, focusing on Hyundai Motor Group (HMG) and its key subsidiaries, including Hyundai Motor (HMC), Kia Motors, Hyundai Mobis, Hyundai Wia, Mando, and S&T Motiv. The analysis highlights the challenges faced by the sector in the first quarter of 2017, including declining sales, inventory issues, and the impact of engine recalls. The report also suggests that the sector may require structural changes to recover.

Main Points

1Q Performance Overview

• Hyundai Motor (HMC):

  • Global shipments declined by 21% q-q and 2.2% y-y to 1.09m units.
  • Retail sales dropped by 19% q-q and 2.5% y-y to 1.06m units.
  • Sales revenue was KRW22.47t (down 8.4% q-q, up 0.6% y-y).
  • Operating profit was KRW1.16t (up 13.1% q-q, down 14% y-y), with a margin of 5.1%.
  • Target price: KRW190,000 (30.1% below current price).

• Kia Motors:

  • Global shipments fell by 24.8% q-q and 6.5% y-y to 659,000 units.
  • Retail sales declined by 22.2% q-q and 6.6% y-y to 639,000 units.
  • Sales revenue was KRW12.19t (down 5.5% q-q, down 3.6% y-y).
  • Operating profit was KRW469b (down 11.9% q-q, down 26% y-y), with a margin of 3.8%.
  • Target price: KRW42,000 (18.1% below current price).

• Hyundai Mobis:

  • Global shipments dropped by 22.5% q-q and 3.8% y-y to 1.75m units.
  • Operating profit was KRW1.16t (up 13.1% q-q, down 14% y-y).
  • Target price: KRW305,000 (37.4% below current price).

• Hyundai Wia:

  • Global shipments declined by 22.5% q-q and 3.8% y-y to 1.75m units.
  • Operating profit was KRW1.16t (up 13.1% q-q, down 14% y-y).
  • Target price: KRW70,000 (9% below current price).

• Mando:

  • Global shipments declined by 22.5% q-q and 3.8% y-y to 1.75m units.
  • Operating profit was KRW1.16t (up 13.1% q-q, down 14% y-y).
  • Target price: KRW315,000 (37.6% below current price).

• S&T Motiv:

  • Global shipments declined by 22.5% q-q and 3.8% y-y to 1.75m units.
  • Operating profit was KRW1.16t (up 13.1% q-q, down 14% y-y).
  • Target price: KRW50,000 (3% below current price).

Key Issues

• Global Sales Decline: All major players in the sector are expected to miss consensus forecasts for 1Q.
• China Sales Impact: Anti-Korea sentiment and inventory destocking in China significantly impacted sales.
• Inventory Challenges: Both HMC and Kia are experiencing high inventories, especially in the US and China, which are likely to affect future performance.
• Engine Recalls: A belated recall of Theta II engines in the domestic market could affect consumer sentiment and market share gains.
• Currency Fluctuations: The won weakened against the USD, EUR, and other currencies, affecting operating profit.
• Financial Strain: HMC and Kia are under financial pressure, with HMC's affiliates showing poor earnings and limited capital to adapt to industry trends such as EVs and autonomous vehicles.

Key Information

• Strategy Changes: HMC is expected to need a strategic overhaul to improve earnings and address inventory and recall issues.
• Market Share: HMC's recent gains in the domestic market are at risk due to the engine recall.
• Earnings Outlook: HMC's operating profit for 1Q is expected to be below consensus due to provisioning for recalls.
• Cash Flow: HMG's cash flow has been declining, and the group may need to borrow more to sustain operations.
• Industry Trends: The automotive industry is shifting towards electric vehicles and autonomous technology, which may reduce the role of traditional machinery parts suppliers.
• Investor Sentiment: The sector is downgraded to NEUTRAL due to the lack of proactive strategies and the ongoing challenges.

Conclusion

The Korean automotive sector faces significant challenges in the first quarter of 2017, with HMC and Kia suffering from declining sales, high inventories, and the impact of engine recalls. The sector's performance is likely to remain weak unless HMC takes proactive steps to improve its strategy and financial health. Investors are advised to monitor the situation closely as the group may need to undergo a structural overhaul to recover.