Industry and stock outlook
The Korean auto sector's fundamentals are expected to improve continuously on the back of: 1) favorable FX movements; 2) sales turnaround led by a better product mix and cost reductions; 3) likely recovery in demand in China and India on economic stimulus measures; and 4) dissipating worries about strikes after smooth negotiations with the labor union.
Earnings forecasts for finished vehicle makers are expected to be upgraded as short-term uncertainties ease and the business environment turns favorable. We continue to recommend Hyundai Motor Company (OTCPK:HYMTF) in light of its product mix improvement and reduced costs on the introduction of a new modular platform; Hyundai Mobis as a key beneficiary of HMG’s xEV strategy; Kia Motors (OTCPK:KIMTF) on stronger domestic sales; and Hanon Systems on the prospect of strong order flows in 4Q19 related with xEVs and Volkswagen’s (OTCPK:VLKAF) MEB platform.
HMG’s August wholesale volume, shipments and retail sales
Wholesales: global 592K units (-3.1% YoY, +1.3% MoM)
A decline in the number of business days, continued weakness in China, falling demand in emerging markets such as Russia and India. Ex-China volume was 517K units (-0.6% YoY, -0.7% MoM). Hyundai shipped 363K units globally (-6.2% YoY), 306K units ex-China (-3.2% YoY). Kia shipped 229K units globally (+2.1% YoY), 211K units ex-China (+3.3% YoY).
Global shipments reached 566K units (-6.2% YoY, -3.4% MoM). There were fewer business days in Korea. Kia shipments were up in the US and India, Hyundai Palisade shipment volume reached 6,950 units. Total ex-China volume amounted to 4.89mn (-4.7% YoY, -5.5% MoM) with Hyundai: reporting global shipments of 356K units (-8.7% YoY), and 299K units ex-China (-6.3% YoY). Kia's global shipments reached 211K units (-1.6% YoY) and its ex-China shipments amounted to 190K (-2.1% YoY). For retail, total global shipments reached 570K units (-3.1% YoY, -3.4% MoM). China sales were weak and US sales strong (Santa Fe 10,200 units, Palisade 5,600, Teluride 5,700), India Seltos 2,500. Ex-China volume reached 502K units (+0.2% YoY, -3.3% MoM) with Hyundai's global shipments totaling 345K units (-4.7% YoY), ex-China 295K (-1.3% YoY and Kia's global shipments reaching 225K (-0.4% YoY), ex-China 206K (+2.6% YoY). Global inventory, stretching two to three months, mostly unchanged MoM as increases in Europe and China offset a drop in Korea and the US: Korea had 53K units (-12K MoM), the US 3.1 months (-0.1 month MoM), and Europe 2.6 months (+0.1 month).
Estimated incentives in the US for Hyundai USD2,693 (-9% YoY), Kia USD3,461 (-13% YoY), representing 70% of the market (USD3,825, +1.2% YoY); milder than Toyota ((TM) +2% YoY), Honda ((HMC) +16%), and GM (+9%); further decline likely in 4Q19 as new SUV and Sonata sales are expected to pick up in earnest.
Implications: Higher earnings visibility, better business environment
1H19 recovery driven solely by product mix; 2H19 to see structural earnings growth driven by a better mix, higher volume, and lower cost. Favorable FX put HMG in an advantageous position vs. competitors. From 1H19, new models helped improve the product mix; cost cuts alone helped overcome sales declines; product mix improvements were a major reason behind the earnings recovery. From 2H19, favorable FX, revamped volume models to stimulate demand, leading utilizations higher; costs to be reduced further as more new models adopt the new platform; SUVs and luxury sedans to further improve the product mix. Reaching sales target for new models to help establish economies of scale and reduce marketing costs (marketing cost-to-sales ratio currently 13% vs. target of 9% and industry average of 11%).
Short-term risks are easing, xEV strategies taking clear shape for long-term growth. For the easing of short-term risks: worries about potential labor strikes eased after successful negotiations with the labor union; economic stimulus measures in China and India expected to buoy demand from 4Q19; in all, the earnings forecasts for 2H19 to be upgraded gradually.
Long-term xEV growth strategy: HMG’s xEV dedicated platform e-GMP’s sales target is announced and related orders are being awarded; the players receiving related orders or stand to receive such orders will benefit; also, players to receive orders related to GM’s (GM) and Ford’s (F) electric vehicle platforms are worth noting.
Finished vehicle makers to see their earnings estimates upgraded as warnings forecasts to be adjusted upward, especially for finished vehicle makers. Favorable FX to help expand export margins and give competitive edge to Korean players. The continued improvement in product mix to facilitate sales turnaround and reduce costs. Expectations are mounting for a recovery of demand in China and India as governments work to stimulate their respective economies. Smooth negotiations with the labor union eliminate worries about possible production disruption in Korea; automotive sector fundamentals to continue to improve.
We recommend Hyundai, Kia, and Hanon Systems
We like Hyundai due to its product mix improvement (GV80, G80, Sonata) and reduced costs on the introduction of a new modular platform; Mobis for it is relatively undervalued despite being a key beneficiary of HMG’s xEV strategy; Kia on stronger domestic sales with new models; and Hanon Systems on the prospect of strong order flows from 4Q19 related with xEVs (HMG, Ford) and Volkswagen’s MEB platform.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Hyundai Motor Company is a passive shareholder in our bank.