20160309-三星证券-Second_quarter_to_dictate_2016_results_45页_3mb

Sector Update Summary

Core Content

This document provides a detailed analysis of the Korean auto and tire sectors in early 2016, focusing on the impact of foreign exchange rates, inventory levels, and market conditions on the performance of key companies: Hyundai Motor (HMC), Kia Motors, and Hyundai Mobis. It also discusses the broader implications of developed markets (DMs) and emerging markets (EMs) decoupling, as well as the potential recovery in the sector.

Main Points

• Forex Impact:

  • The Korean won has weakened against the US dollar faster than expected, affecting the competitiveness of imported brands in Korea.
  • Currency volatility, especially in China and Japan, has made it difficult to use forex rates as a reliable basis for investment decisions.
  • Korean carmakers are heavily exposed to EMs, which have been negatively impacted by weak demand and currency depreciation.

• Inventory and Utilization:

  • In 2015, Korean automakers managed to keep utilization high by shifting more shipments to DMs.
  • However, this strategy is no longer sustainable due to excessive inventory levels.
  • Both HMC and Kia reduced global utilization in January 2016 to cut inventory, which may impact earnings.

• Earnings Momentum:

  • Despite unfavorable business conditions, the document suggests that earnings momentum will be strongest in the second quarter (2Q) of 2016.
  • US incentives fell year-on-year in February, and inventories are expected to decrease in March due to the release of redesigned models.
  • Sales are believed to have bottomed in February, leading to a stronger earnings recovery in 2Q.

• Market Recovery in China:

  • Chinese auto demand is expected to recover in March following the tax cut and the launch of new models.
  • HMC and Kia are planning aggressive sales promotions around the release of the new Elantra and Sportage.
  • The Chinese market is a key driver for HMC and Kia, with HMC planning to expand its presence by opening a fourth plant in 2016 and a fifth in 2017.

• Valuation and Target Prices:

  • The estimated rock-bottom share prices for HMC, Kia, and Hyundai Mobis are KRW126,000, KRW38,000, and KRW184,000, respectively.
  • These estimates assume that global inventories will return to end-2014 levels and use the lowest P/B multiples observed in 2015.
  • Target prices are set at KRW190,000 (28.4%) for HMC, KRW63,000 (33.3%) for Kia, and KRW305,000 (22%) for Hyundai Mobis.

• Tire Sector Outlook:

  • Tire makers are shifting their market portfolio toward DMs, which are showing stronger demand recovery.
  • With the rise in SUV and pickup truck demand, tire companies are expected to benefit from improved sales mixes and higher ASPs.
  • Korean tire makers like Hankook Tire are expanding their presence in the US through new plant openings.

Key Information

• US Incentives:

  • HMC's US incentives fell 2.8% y-y in February, while Kia's fell 2.1% y-y.
  • These declines are expected to continue, improving the companies' profitability.

• Inventory Trends:

  • HMC's global inventory was at 2.3 months at end-2015, with a rise to 3.7 months in January 2016.
  • Kia's global inventory was at 3.2 months at end-2015, with a 0.8-month increase.
  • Both companies are targeting a reduction in inventory to end-2014 levels by end-2016.

• Market Share:

  • Korean automakers are losing market share in DMs and EMs due to competitive pressures and weak demand.
  • HMC and Kia's sales in China fell by 15.2% and 13% y-y in January 2016, respectively.

• Risk Factors:

  • The US may hike interest rates in June, potentially rekindling concerns over EM currencies and auto demand.
  • The expiration of the Korean excise tax cut in June could slow auto demand in Korea.
  • A court ruling on ordinary wages at Kia could lead to significant retroactive payments, affecting profitability.

Conclusion

The Korean auto sector is expected to see a recovery in 2Q 2016, driven by reduced US incentives, inventory adjustments, and a rebound in Chinese demand. However, long-term challenges remain due to DM-EM decoupling and the ongoing impact of weak oil prices. Tire makers are shifting focus to DMs, where they can benefit from stronger demand and improved profitability. The outlook for HMC and Kia is cautiously optimistic, with potential for share price rebounds as inventory issues are addressed and new models are launched.