Growing Sales Volume Thanks to Rapid Production Normalization
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Maintain BUY, target price of KRW100,000
We maintain BUY and TP of KRW100,000 on Kia Corp. Our DCF-based TP (10% WACC; 1.0% TGR) is unchanged, with +2.0pp WACC offset by upward revisions to 2022E/2023E OP of 57.0%/18.5% due to unexpectedly favorable FX rates resulting in higher-than-expected profitability per unit. Our TP implies 6.3x 12m fwd P/E, 0.97x P/B and has 35.3% upside (vs. Sept. 28 close).
3Q22 preview: OP of KRW2.46tn (+85.3% YoY) to beat market consensus by 15.7%
We forecast 3Q22 OP at KRW2.46tn (+85.3% YoY, +10% QoQ), which is above the market consensus by 15.7% and our previous estimate by 85.3%. Contribution margin per unit should reach KRW8.64mn (+22.2% YoY) thanks to a sharp rise in KRW/USD. 3Q22 wholesale sale volume should total 722,000 units, in line with our previous forecast.
Growing sales volume thanks to rapid production normalization; favorable FX rate should contribute to OP gain
While global OEMs are still struggling with chip shortages, Hyundai Motor Group, which has rapidly normalized production, is securing solid margins and growth in sales volume. As of July, the global auto market grew about 0.6% YoY (-11.5% excl. China) while Kia unit sales jumped 10.4% YoY (+11.9% excl. China). Kia Corp.’s position under current FX conditions sets the stage for it to deliver superior OPM compared to rivals.
Risk factors: 1) Consumers’ long-term spending power declines 2) Rivals’ production normalizes
The following risk factors may force a ratings downgrade: (1) If consumers' long-term spending power declines on inflation in Europe and rate hikes in the U.S., auto demand may shrink. (2) If rivals’ production normalizes, intensified competition may shrink contribution margin per unit.