20161006-三星证券-3Q_preview_Top-down_or_bottom-up__56页_2mb

Sector Update Summary

Core Content

This document provides an analysis of the Korean automotive sector, focusing on the performance of major automakers and parts makers, and their outlook for the third quarter of 2016. It highlights the interplay between top-down and bottom-up factors influencing the sector's profitability and share prices.

Main Points

Top-Down Indicators

• Forex Rates and Demand are the primary top-down factors affecting the auto sector, especially for global automakers.
• The top nine automakers control 70% of the global market, with little difference in their market shares and profits, making the sector highly sensitive to forex and demand fluctuations.
• Utilization rates are critical for profitability, as fixed costs account for 20% of sales at full utilization. Low utilization rates mean forex benefits are less impactful.
• In 2015, the Korean automakers (Hyundai Motor and Kia) saw their utilization rates fall, impacting their profitability.
• The won weakened to KRW1,600/USD during the global financial crisis, causing a 50% drop in HMC's share price.
• Emerging Markets (EMs) show signs of recovery, with demand and forex rates stabilizing, which is expected to boost utilization in the fourth quarter.

Bottom-Up Indicators

• New models and product competitiveness are key differentiators within the sector.
• Kia has outperformed Hyundai Motor (HMC) in recent years due to its strong SUV and MPV lineup, including the Niro model.
• HMC is expected to lead the sector turnaround in 2016 with expanding SUV and premium offerings, and a redesigned Grandeur set to debut.
• Kia plans to expand its SUV and performance models, including a GT version similar to HMC's N brand.

3Q 2016 Outlook

• Despite strikes at HMC and Kia, which impacted 3Q production by 130,000 and 50,000 vehicles respectively, the sector is expected to exceed forecasts due to inventory declines and rebounded sales in China.
• HMC's net profit is expected to rise 15% y-y due to equity-method gains from subsidiaries in China and forex gains.
• Kia's net profit is expected to improve as its Chinese subsidiary turned profitable.
• Parts makers such as Mobis and Wia are expected to benefit from the sales rebound in China.
• Tire makers like Hankook Tire and Nexen Tire are expected to maintain high profitability due to product mix improvements.

Share Price Performance

• HMC is expected to outperform Kia in the fourth quarter due to its premium and SUV offerings.
• Kia's share price recovery is likely to lag due to domestic sales slowdown and court rulings on wages.
• Corporate governance and shareholder-friendly policies are expected to lift sector stocks.

Key Information

Target Prices

• Hyundai Motor (005380 KS): KRW190,000 (35.7% upside)
• Kia Motors (000270 KS): KRW55,000 (30.5% upside)
• Hyundai Mobis (012330 KS): KRW350,000 (26.6% upside)
• Hyundai Wia (011210 KS): KRW140,000 (61.3% upside)
• Hanon Systems (018880 KS): KRW8,400 (-32.8% downside)
• Mando (204320 KS): KRW350,000 (32.6% upside)

Inventory and Sales Trends

• HMC's global production in 3Q 2016 remained flat y-y despite strikes, due to a low base overseas.
• Retail sales for HMC in 3Q 2016 fell 15.5% q-q and 3.1% y-y to 1.08m vehicles.
• China's sales rebounded significantly, contributing to the sector's positive outlook.

Profitability Sensitivity

• Korean automakers and parts makers are sensitive to won appreciation against USD and EUR.
• HMC is more sensitive to won appreciation due to its heavy reliance on exports.
• Kia is less sensitive due to diversified sales and profitable Chinese subsidiary.

Regional Performance

• Emerging Markets (EMs) are showing rebound in demand indicators, with India and China leading the recovery.
• US demand for pick-up trucks has increased, which benefits Toyota more than Honda and Nissan.

Strategic Moves

• HMC plans to launch a redesigned Santa Fe in 2018 and a large SUV or pickup truck to meet US consumer demand.
• Genesis will introduce new models annually through 2020, including the G70 in 2017 and an SUV in 2018.
• Kia will roll out small SUVs on the K2 platform in 4Q 2016 and K3 in 1Q 2017.

Conclusion

The document recommends maintaining an OVERWEIGHT stance on the Korean automotive sector due to improved utilization rates and rebounded demand in EMs, despite 3Q challenges from strikes and currency fluctuations. HMC is expected to outperform due to its premium and SUV strategies, while Kia and parts makers are also likely to benefit from the sector's recovery.