Korea Automobile Sector: Hyundai Motor Group's September And 3Q18 Wholesale Volumes

by: Hyundai Motor Investment & Securities


Hyundai Motor Group’s (HMG) ex-China global wholesale volume was 1,555K (+0.4% YoY, -4.3% MoM) in 3Q18.

Domestic plants and Kia Motors’ US/Chinese plants saw declines in shipments due to fewer business days.

Wholesales volume slightly improved YoY, excluding China.

Industry and stock outlook

Retail sales remained mostly intact despite weak seasonality, except Turkey (Hyundai Motor Company (OTCPK:HYMTF), the Middle East (Hyundai), and China (Kia). As of September, Chinese retail sales were still sluggish but in the US, the new Santa Fe sold 5,400 units.

Regarding China, the major cause of earnings deterioration of the auto sector, we expect to see a moderate recovery in the mid/long term. In the US, we expect finished vehicle makers to enjoy an earnings recovery thanks to: 1) increased exports amid favorable FX and a greater number of business days; and 2) incentive declines with the launch of new models.

Although the pace of recovery is slower than expected, we expect finished vehicle makers to beat auto parts makers in this regard. At the current price level, we prefer Hyundai to others. Among auto parts suppliers, we like Hanon Systems for the prospect of robust top-line growth despite weak sector fundamentals, Hankook Tire (OTC:HAOOF) and Hyundai Mobis for the stocks are severely oversold.

3Q18 volume modest despite fewer business days; 4Q18 to see higher volume and better mix

Volume was modest in 3Q18 although fewer business days (e.g., Chuseok and summer vacation), weak seasonality, drought of new models in China and intensifying competition worked to slow the pace of recovery. Wholesales volume was relatively modest (-0.7%) and retail sales stayed firm despite a shipment decline (-3%), which worked to lower inventory levels.

Recovery in 4Q18: We expect to see favorable seasonality, more business days, new model releases in China (Tucson F/L, La Festa, Yipao) from October, higher utilizations thanks to the launch of Santa Fe and a large SUV in North America, better product mix and incentive declines.

Concerns about the weakness of other currencies

Favorable movements of USD and EUR vs. 1H18 helped to boost the parent company’s profitability and affect overseas pricing strategies in a positive way. Recovering utilizations at domestic plants should boost export margins. However, steeper-than-expected depreciations of other currencies such as RUB and BRL may weigh on earnings.

Hyundai’s gradual recovery in North America from 4Q18 to limit sector’s earnings decline

The slowing retail sales recovery since October has weighed on the recovery of auto parts makers too. However, we believe further downside is limited thanks to cost-cutting effects stemming from higher utilizations. HMG’s earnings in North America will likely be driven by incentive declines rather than retail sales. From 4Q18 in particular when Santa Fe’s dealer inventory increases, incentive declines will become more pronounced, which should contribute to operating profit growth.

Recommend Hyundai for its sector-fastest earnings recovery and Mobis for its earnings stability

Despite FX and trade risks amid macro uncertainties, Hyundai’s earnings should recover gradually, led by North America. We recommend Hyundai for its prospects for an earnings recovery in North America driven by Santa Fe, and Hanon for its robust earnings growth prospects after the acquisition of Magna International (MGA). We also like Mobis for its earnings stability and Hankook as the stock has been severely oversold despite the prospects for an earnings recovery in 2H18.

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