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Sector Update Summary: Auto and Parts Industry (2016.7.18)

Core Content

This report provides an analysis of the performance and outlook for the Korean auto and parts sector in the second quarter of 2016. It outlines the current state of automakers and parts makers, highlights key factors affecting their results, and provides forecasts for the future performance of the sector, particularly focusing on the potential recovery in emerging markets (EMs).

Main Points

Automakers Performance

• Hyundai Motor (HMC) and Kia Motors both exceeded revised forecasts in 2Q, driven by:
  • Strong domestic sales
  • Low base from the previous year
  • Stabilizing forex rates in EMs
• HMC reported:
  • Global wholesale shipments up 16.2% q-q and 4.3% y-y
  • Global retail sales up 13.2% q-q and 5.6% y-y
  • Operating profit up 24.9% q-q but down 4.2% y-y
  • Net profit down slightly (-2.8% q-q)
• Kia reported:
  • Global wholesale shipments up 6.8% q-q
  • Global retail sales up 14.4% q-q and 5.7% y-y
  • Operating profit up 15.8% q-q and 12.8% y-y
  • Net profit down 16.8% q-q

Parts Makers Performance

• Hyundai Mobis and Mando are highlighted as top picks, while Hyundai Wia is also noted for potential rebound in 4Q.
• Hanon Systems and S&T Motiv are expected to disappoint due to one-off costs and restructuring issues.
• Halla Holdings and PHA also saw mixed results, with some segments underperforming.

Key Factors Affecting Performance

• Emerging Markets (EMs) are expected to recover in 2H 2016, driven by:
  • Stabilizing forex rates
  • Rising demand
  • New car launches and price hikes
• US and China earnings are expected to stagnate until 2018, due to:
  • Incentive hikes
  • Currency weakness
• Ordinary wage issues have impacted several companies, including:
  • Hyundai Wia: Set aside KRW87b in provisioning, with additional annual labor costs of KRW12b
  • Kia: Anticipated to set aside KRW600b-1.8t in provisioning, with labor costs up to 10.4% of annual operating profit
  • Mando: Set to reduce annual labor costs by KRW12b due to early retirement program

Target Prices and Outlook

• Hyundai Motor (HMC): Target price KRW190,000 (+42.9%)
• Kia Motors: Target price KRW55,000 (+31.3%)
• Hyundai Mobis: Target price KRW315,000 (+18.6%)
• Mando: Target price KRW300,000 (+34.5%)
• Hyundai Wia: Target price KRW140,000 (+63.4%)
• S&T Motiv: Target price KRW70,000 (+15.9%)

The auto sector is upgraded to OVERWEIGHT, as EM sales volumes show signs of improvement.

Key Information

2Q Highlights

• Automakers: Bettered forecasts due to:
  • Robust domestic sales
  • Low base from previous year
  • Stabilizing forex rates
• Parts Makers: Expected to disappoint due to:
  • One-off costs (e.g., restructuring, labor costs)
  • Lower-than-expected operating profits

Outlook

• EM Recovery: Expected to significantly improve automakers' performance in 2H 2016
• US and China: Earnings rebounds may not occur until 2018
• Tire Makers: Benefiting from raw material price declines and won weakening
• Labor Cost Impact: Expected to vary by company, with some facing significant cost hikes

Investment Recommendation

• Focus on EM Sales: Investors should prioritize EM sales over US and China
• Top Picks: Hyundai Mobis and Mando remain top picks; Hyundai Wia and tire makers are also worth attention

Summary Table

Conclusion

The auto sector in Korea is showing signs of recovery, particularly in EMs, with HMC and Kia outperforming expectations. While parts makers face challenges due to one-off costs and restructuring, the overall sector is upgraded to OVERWEIGHT as EM sales volumes are expected to improve significantly. Investors should focus on EM performance and monitor labor cost impacts.