20160406-三星证券-Autos__NEUTRAL___Falling_inventory_and_incentives_to_lift_2Q_results_33页_1mb

Sector Update Summary

Core Content

This report provides an analysis of the automotive sector in South Korea, focusing on the performance of Hyundai Motor (HMC), Kia Motors, and related companies in the first quarter of 2016 (1Q16), with an outlook for the second quarter (2Q16) and potential risks in the second half (2H16). The report also includes insights on tire manufacturers, such as Hankook Tire and Hankook Tire Worldwide.

Main Points

1Q Performance Overview

• Auto Makers:

  • Hyundai Motor (HMC): Global shipments fell 22.3% q-q and 6.4% y-y to 1.11m vehicles. Retail sales declined 18% q-q and 5.4% y-y to 1.06m units. Sales were forecasted to fall 11.8% q-q but rise 4.3% y-y to KRW21.8t, with operating profit shrinking 13.7% q-q and 17.7% y-y to KRW1.3t, resulting in a margin of 6%.
  • Kia Motors: Global shipments dropped 22.6% q-q and 6.2% y-y to 704,000 vehicles. Retail sales volume fell 16.7% q-q and 4.7% y-y to 658,000 units. Sales were expected to fall 7.7% q-q but rise 5.6% y-y to KRW11.8t, with operating profit growing 4.8% q-q and 5.4% y-y to KRW539b, resulting in a margin of 4.6%.
  • Weaknesses: Both HMC and Kia experienced weak demand in emerging markets and reduced utilization to adjust inventory. HMC also faced losses due to weakening Russian and Brazilian currencies and poor performance in its financial subsidiary.

• Parts Makers:

  • Suffered more than carmakers due to the decline in global production. HMC and Kia's global production fell 7.1% y-y to 1.81m units, with China plant shipments dropping 16.2% y-y to 369,000 units.
  • Mobis: Operating profit fell 13.7% q-q to KRW682b and 17.7% y-y to KRW2,631b.
  • Via, Hanon, Mando: All recorded lower operating profits compared to Samsung's estimates, indicating continued challenges in the sector.

• Tire Makers:

  • Hankook Tire: Expected to see solid results due to improved product mix and a weaker won. Target price is KRW305,000, with a 31.7% upside.
  • Hankook Tire Worldwide: Likely to benefit from M&A opportunities and the delisting of Atlas BX. Target price is KRW26,000, with a 16.3% upside.

2Q Outlook

• Inventory and Incentives: Inventory burdens at HMC and Kia are expected to ease, and incentive payments should decline due to new car launches and FTA tariff cuts. HMC and Kia are projected to save KRW296b and KRW64b respectively from US incentives.
• Emerging Markets: Stabilizing currencies in Russia and Brazil should improve automakers' performance in 2Q. HMC and Kia may benefit from higher ASPs and reduced forex exposure.
• China Shipments: Sales promotions for new models (Elantra for HMC, Sportage for Kia) are expected to boost shipments from China plants. HMC's fourth plant in China is set to open in 4Q16, potentially increasing capacity and reducing reliance on China.

Risks in 2H

• HMC's Financial Business: Expected to face declining profitability due to the expiration of lease contracts, leading to significant losses from buybacks.
• Kia's Utilization and Wage Issue: Utilization at HMC's Chinese plants could be a concern if shipments remain weak. Additionally, an impending court ruling on ordinary wages at Kia could lead to large retroactive payments, potentially affecting its operating profit.
• Excise Tax Cut in Korea: The 30% excise tax cut, effective on Jun 30, may negatively impact auto demand in the country.

Key Information

Target Prices

• Hyundai Motor (005380 KS): KRW190,000 (31.9% upside)
• Kia Motors (000270 KS): KRW63,000 (37.6% upside)
• Hyundai Mobis (012330 KS): KRW305,000 (31.7% upside)
• Hankook Tire (161390 KS): KRW60,000 (14.1% upside)
• Hankook Tire Worldwide (000240 KS): KRW26,000 (16.3% upside)

Operating Profit Forecasts (1Q16 vs. Samsung vs. Consensus)

2Q Earnings Improvement

• HMC: Expected to see a decline in US incentives (KRW91b) and savings from FTA tariff cuts (KRW205b).
• Kia: Anticipated to reduce US incentives (KRW176b) and benefit from the launch of redesigned models.

Utilization and Capacity

• HMC's fourth plant in China is expected to start operations in 4Q16 with initial production of the successor to Verna, and full capacity could reach 300,000 units.
• Kia's third plant in China is underperforming, producing only 68 units per hour versus the planned 99. The plant is set to begin producing the Sportage in 2016.
• Kia's Mexico plant is set to start operations in May 2016, reducing reliance on China and its associated earnings volatility.

Foreign Exchange Impact

• The won weakened in 1Q16, affecting sales and profitability. However, the end-quarter won appreciated against the USD, which may help in reducing incentive costs and improving ASPs.

Leasing and Incentives

• Increased incentives from 2013 to 2016 have led to significant losses from buybacks, especially for HMC and Kia. These losses are expected to be a key factor in the financial performance of the companies in the coming years.

Conclusion

The automotive sector in South Korea faced challenges in 1Q16 due to weak demand in emerging markets and currency fluctuations. However, there is potential for recovery in 2Q16, driven by inventory adjustments, reduced incentives, and improved forex conditions. Tire manufacturers are expected to benefit from the weak won and falling raw material prices. Risks remain in 2H16, particularly related to HMC's financial business, Kia's wage issue, and the impact of the excise tax cut on domestic demand.