2Q23 preview
The author is an analyst for Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
Good times for all
Auto sales volume data have come in at strong levels as expected, pointing to record-high earnings for automakers in 2Q23. Global wholesale volume reached 1.06mn vehicles (+9% YoY, +4% QoQ) at Hyundai Motor and 0.81mn (+10% YoY, +5% QoQ) at Kia in 2Q23. Overseas sales volume, a key factor in automaker earnings, came in at solid levels of 0.86mn (+8% YoY, +3% QoQ) at Hyundai Motor and 0.66mn (+11% YoY, +5% QoQ) at Kia, out of which US sales accounted for 46.3% and 30.2%, respectively. With the USD/KRW rate averaging KRW1,290 for the quarter, automaker margins should have remained at high levels in 2Q23 thanks to the large share of US sales in total exports.
We notice a recent shift in the main driver of margin gains at domestic automakers. In 2022, profitability improvement was driven mainly by ASP hikes that more than offset the negative impact of sales volume declines and cost increases. This year, in contrast, automakers are seeing sales volume growth and costs declines amid limited changes in ASP levels. In the absence of ASP declines, improvement in both sales volume and costs likely led to record-high profit margins at automakers in 2Q23. Such changes are also positive for the profitability of parts suppliers, which have remained overlooked by investors due to prolonged low-margin conditions. While automakers were able to secure larger margins from prices hikes carried out for high-end models and new cars, auto parts suppliers saw relatively limited improvement in ASP levels over the same period. With persistently high costs adding to the burden, parts suppliers have been in desperate need for the positive trickle-down effects of auto sales volume growth.
Auto wholesale volume at Hyundai Motor and Kia has recovered to pre-pandemic 2019 levels as of 2Q23. Major cost factors have also reverted to pre-pandemic levels, following the downturn of aluminum prices in 3Q22, iron ore and rubber prices in 4Q22, and transportation costs in 1Q23. All in all, we believe the conditions are all set for an upturn in profitability levels at auto parts suppliers.
We expect 2Q23 earnings results to confirm profit gains at both automakers and parts suppliers. Believing the time is right to invest into long-overlooked major parts suppliers, we recommend Hyundai Mobis and HL Mando as our top picks.