3Q22 Forecast: OP of KRW3.18tn (+97.6% YoY)
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Maintain BUY, target price of KRW240,000
We maintain BUY and TP of KRW240,000 on HMC. Our DCF-based TP (6.6% WACC; 0.7% TGR) is unchanged, with +0.9pp WACC offset by upward revisions to 2022E/2023E OP of 19.2%/14.9% due to better-than-expected sales and unexpectedly favorable FX rates. Our TP implies 7.4x 12m fwd P/E, 0.71x P/B and has 33.7% upside (vs. Sept. 28 close).
3Q22 forecast: OP of KRW3.18tn (+97.6% YoY) above market consensus by 16.4%
We revise up 3Q22E OP to KRW3.18tn (+97.6% YoY, +6.5% QoQ), which is above the market consensus by 16.4% and our previous estimate by 43.8%. 3Q22 wholesale sale volume should reach 926,000 units (+11.4% YoY), 1.1% higher than our previous estimate. We see contribution margin per unit at KRW8.17mn (+14.0% YoY), or 13% higher than previously expected, on the sharp rise in KRW/USD.
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, HMG, 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 HMC unit sales jumped 11.6% YoY (+11.4% excl. China). HMG’s relatively favorable 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 3) Rising interest rates lead to credit crunch
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. (3) If rising interest rates lead to a credit crunch, auto financing may deteriorate.