20151007-三星证券-Fundamentals_to_recover_from_4Q_30页_1mb

Sector Update Summary: Auto and Auto Parts Industry (2015.10.7)

Core Content

This report provides an update on the performance of the Korean auto and auto parts industry, focusing on the third quarter of 2015 (3Q15) and the outlook for the fourth quarter (4Q15) and the remainder of 2015. It outlines the performance of key companies, including Hyundai Motor (HMC), Kia Motors, Hyundai Mobis, Hyundai Wia, Pyeong Hwa Automotive (PHA), Hankook Tire, Nexen Tire, and Kumho Tire, in the context of currency fluctuations, market conditions, and operational performance.

Main Points

1. 3Q15 Performance Overview

• Hyundai Motor (HMC):
  • Combined 3Q operating profit was in line with market consensus.
  • The weak won helped offset the impact of emerging market devaluation and US sales incentives.
  • Warranty provisioning increased due to the won's depreciation.
  • Utilization rate in China dropped to 82%, contributing to lower net profit.
• Kia Motors:
  • Operating profit increased year-over-year (y-y) due to favorable exchange rates and sales-mix improvement.
  • Domestic sales surged by 15.5% to 135,000 units, a record for the quarter.
  • Non-operating profit was disappointing due to low utilization in China (55%) and forex losses.
• Hyundai Mobis:
  • Operating profit was in line with estimates.
  • The company had forex valuation losses due to the depreciation of the Russian ruble and Brazilian real.
• Hyundai Wia:
  • Operating profit was slightly higher than consensus.
  • The weak won benefited the company, but its net profit was unchanged.
• Pyeong Hwa Automotive (PHA):
  • Net profit improved significantly, and it is not exposed to Russia or Brazil.
• S&T Motiv:
  • Operating profit and net profit were in line with estimates.
• Hankook Tire:
  • 3Q performance was weak due to falling ASPs and raw material price declines.
  • Expected to see improvement from 4Q as utilization at carmakers rises.
• Nexen Tire:
  • Expected to report solid results due to lower exposure to China and benefits from the weak won.
• Kumho Tire:
  • 3Q performance was weak due to poor China operations and low utilization at Korean plants (due to labor strikes).

2. Market Conditions and Currency Impact

• The Korean won depreciated significantly against the US dollar, euro, and other currencies.
• The weak won positively impacted operating profits for most companies.
• The depreciation of the Russian ruble and Brazilian real negatively affected HMC and Mobis, especially due to their exposure to these markets.
• The won strengthened against the euro, which negatively impacted companies like Hankook Tire and Hanon Systems with heavy European exposure.

3. Forex Rate Changes

• KRW/USD: Averaged 1,169 in 3Q15 (up 13.9% y-y and 6.5% q-q).
• KRW/EUR: Averaged 1,302 in 3Q15 (down 4.4% y-y and up 7.4% q-q).
• KRW/CNY: Averaged 186 in 3Q15 (up 11.5% y-y and 5.0% q-q).
• KRW/RUB: Averaged 18.6 in 3Q15 (down 34.4% y-y and down 10.9% q-q).
• KRW/BRL: Averaged 332 in 3Q15 (down 26.5% y-y and down 7.1% q-q).

4. Expected Turnaround in 4Q

• A sector-wide recovery is expected to begin in 4Q due to base effects, a weak won, and a rebound in utilization.
• The launch of redesigned Avante and Sportage is anticipated to boost global utilization for HMC and Kia.
• China utilization is expected to recover due to completed inventory corrections and reduced purchase taxes on small cars.
• The Volkswagen (VW) scandal is expected to slow the market share gains of German brands, benefiting HMC and Kia.

Key Information

Target Prices

• Hyundai Motor: KRW190,000 (+20%)
• Kia Motors: KRW60,000 (+18%)
• Hyundai Mobis: KRW230,000 (0% change)
• Hyundai Wia: KRW150,000 (+21%)
• Pyeong Hwa Automotive: KRW18,000 (+24%)
• Hankook Tire: KRW50,000 (+28%)

Recommendations

• The report advises buying on potential corrections in auto shares ahead of 3Q results.
• Kia is favored due to its potential for y-y base effect and forex-rate sensitivity.
• Pyeong Hwa Automotive (PHA) and Mando are highlighted as favorable auto parts firms, with strong recovery potential in China due to tax cuts and improved utilization.

Market Exposure

• HMC and Kia: Both are heavily exposed to China, Russia, and Brazil, which impacted their performance in 3Q.
• PHA and Mando: These companies have less exposure to Russia and Brazil, reducing their forex risks.
• Hankook Tire and Hanon Systems: Heavily exposed to European markets, which were negatively affected by the won's appreciation.

Summary of 3Q15 Performance

Outlook

• Earnings Recovery: Expected to begin in 4Q and continue until the end of 2016.
• Utilization Rates: Likely to improve in China from October onwards.
• Forex Impact: The weak won is a positive factor for most companies, while the appreciation against the euro negatively affects European-focused firms.
• China Tax Cuts: Expected to boost demand for small cars and, consequently, auto parts and tire manufacturers.
• VW Recall: May slow the market share gains of German brands, providing an opportunity for HMC and Kia.

Conclusion

The auto and auto parts sector is expected to experience a recovery from 4Q onwards, driven by a weak won, improved utilization rates, and favorable market conditions in China. While 3Q performance was mixed, with solid operating profits but disappointing non-operating profits for HMC and Kia, the outlook remains positive for the remainder of the year. The report recommends buying on corrections and highlights Kia, PHA, and Mando as top picks due to their strong fundamentals and recovery potential.