HMG’s Global Competitiveness Improving
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
In 2023, global auto sales are to prove better than feared. Despite macro uncertainties, we hold a positive outlook, noting the easing of the supply disruptions caused Covid-19 and ample pent-up demand. As global auto sales have returned to only 85% of the pre-pandemic level, we have high confidence in backorder figures.
Owing to tight inventory levels during the pandemic, sales incentives dropped sharply and waiting periods for cars lengthened abnormally. But, with production levels normalizing, sales incentives should rise, and waiting periods are set to shorten. Such changes should be viewed as a natural normalization process. Noting that inventory buildup is likely to progress at a moderate pace, we expect sales incentives to remain below past levels for some time. When combined with rising utilization rates and the strong dollar, such factors should ensure strong earnings for automakers.
We positively view HMG’s improved global competitiveness and its resulting rise in global market share. The firm is also expected to boast a greater competitive edge over second-tier Japanese players. In line, we maintain Buy ratings on HMC and Kia, focusing on their solid profit fundamentals and valuation merit. In the process of production recovery down the road, parts suppliers are to show higher earnings momentum. In particular, we advise paying attention to Hyundai Mobis’s mid/long-term earnings, as the company is expected to roll out its electrification business in earnest and win more overseas orders.
I. Global auto sales to prove better than feared
Concerns over falling global auto demand are mounting on macro uncertainties. Such concerns are justified given that vehicles are big-ticket durables. That said, in this industry cycle, we believe that global demand will prove better than feared, given recent supply setbacks from chip shortages and ample pent-up demand. Accordingly, while there are abundant backorders, global sales have returned only to 85% of the pre-pandemic level. We expect global sales to keep recovering through 2024.
II. Natural normalization process underway
Amid recovering demand after the pandemic, supply disruptions for automotive chips have resulted in a sharp drop in inventories and abnormally long waiting periods for new buyers. With production getting back to normal, sales incentives are expected to rise and waiting periods are likely to shorten. However, such changes should be viewed as a natural normalization process. And, even when production is recovering, rapid inventory expansion looks unlikely, given sizable backorder volume. We forecast that tight inventory will sustain for a considerable time to come. With prices likely to remain high, rising utilization rates should lead to sound earnings growth at automotive companies.
III. HMG’s global competitiveness improves
Backed by its improved product competitiveness and successful adoption of E-GMP, HMG’s brand recognition has enhanced, resulting in a rise in global market share. In particular, the company is showing greater competitiveness versus Japanese rivals. Also positive is that more opportunities lie ahead in the Asia/Pacific region thanks to the firm’s plans to operate new factories in India and Indonesia. Going forward, we expect valuation re-rating amid intense competition in the global auto industry.
IV. Top picks
We maintain our Positive rating on the industry. While macroeconomic uncertainties linger, automakers’ earnings should fare better than feared, in light of a sound demand base. We maintain our bright outlook for automakers with sound earnings fundamentals and valuation merit, such as HMC and Kia. As production recovers, parts companies should show higher earnings sensitivity. We draw particular attention to Hyundai Mobis, noting that the firm is likely to enter the electrification business in earnest and benefit from expanding overseas orders.