20171012-三星证券-3Q_results_likely_to_mark_a_bottom_24页_1mb

Sector Update Summary

Core Content

This document provides a sector update on the performance of Korean automakers and auto parts suppliers for the third quarter of 2017. It includes target prices, earnings expectations, market performance, and investment recommendations.

Main Points

3Q Results Overview

• Hyundai Motor (HMC) and Kia Motors are expected to report results showing a slowdown in the pace of deterioration year-over-year (y-y), but still weak compared to previous quarters.
• HMC is likely to meet consensus for its 3Q results, while Kia is expected to report an operating loss due to provisioning for "ordinary wages."
• Hyundai Mobis and S&T Motiv are expected to see a bottom in their earnings and share prices, with Hyundai Mobis reporting a target price of KRW300,000 (24% upside) and S&T Motiv likely to benefit from a KRW1b tax refund.
• Hyundai Wia is expected to report a target price of KRW60,000 (-6.3% downside), indicating a weak performance.

Market Performance

• Korean domestic sales saw significant growth, driven by a low base from previous strikes and model launches.
• China sales for HMC and Kia showed signs of stabilization, with a slower decline in 3Q compared to 2Q, indicating potential recovery.
• US sales remain the weakest, with HMC and Kia struggling due to aging models and rising inventories.

Key Risks

• Possible dividend cuts due to poor 2017 earnings.
• Labor strikes could occur in the fourth quarter, particularly if negotiations fail.
• Kia is less likely to face prolonged strikes due to its expected operating loss, which may reduce pressure on workers.

Investment Strategy

• The report recommends focusing on Hyundai Motor, Hyundai Mobis, and S&T Motiv, as they are expected to have reached the bottom in 3Q.
• Green-car sales showed strong growth, with HMC and Kia reporting a 110% y-y increase in 3Q and a 135.8% y-y increase over 1Q-3Q, indicating a positive trend in this segment.

Key Information

Target Prices

• Hyundai Motor: KRW175,000 (12.9% upside)
• Kia Motors: KRW36,000 (10.6% upside)
• Hyundai Mobis: KRW300,000 (24% upside)
• Hyundai Wia: KRW60,000 (-6.3% downside)
• Hanon Systems: KRW14,000 (12.9% upside)
• Mando: KRW310,000 (14.6% upside)

Performance Highlights

• HMC/Kia combined global shipments fell slightly y-y to 1.76m vehicles, but the decline slowed in 3Q.
• Kia is expected to post an operating loss due to the "ordinary wage" court ruling, which requires provisioning of KRW888b as operating costs and KRW270b as non-operating costs.
• Hyundai Mobis and S&T Motiv are expected to recover gradually from the impact of weak HMC/Kia performance in China, with Hyundai Mobis likely to benefit from the expansion of SUV and green-car lineups.

Financial Outlook

• HMC's global retail sales fell 6.6% y-y to 1.8m units, while Kia's fell 4.5% y-y to 696,000 units.
• Hyundai Mobis's operating profit in 3Q was KRW547b, missing consensus, but the company is expected to recover.
• HMC/Kia's green-car sales are projected to exceed 200,000 vehicles for the year, driven by new model launches in 2018.

Other Key Points

• Green-car sales are expected to continue growing due to the planned 2018 model launches.
• Hyundai Mobis is the largest supplier of core and eco-friendly parts for HMC and Kia, giving it a competitive advantage.
• HMC and Kia are expected to reduce production in the US to address inventory issues.
• HMC and Kia are likely to reduce their operating profit due to the impact of the "ordinary wage" issue and the need to cut production.

Conclusion

The sector update highlights a mixed performance across Korean automakers and auto parts suppliers. While HMC and Kia continue to struggle in the US and China, there are signs of stabilization and potential recovery in the Korean market. The report emphasizes the importance of green-car sales and suggests that Hyundai Mobis and S&T Motiv are strong candidates for investment due to their expected recovery and growth. However, risks such as dividend cuts and labor strikes remain, particularly in the US and China markets.