Auto parts/tire
The author is an analyst for Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
Mainstay auto parts business to deliver decent results
In 3Q23, concerns over slowing client demand intensified with high interest rates weighing on overall auto demand, pent-up demand losing steam, and worries rising over labor strikes. However, July and August sales reports from captive clients Hyundai Motor and Kia showed decent global wholesales volume at 680,000 units (+3% YoY, -0% MoM) and 520,000 units (+3% YoY, -3% MoM), respectively. As a result, we expect Hyundai Wia’s mainstay auto parts business to deliver solid performance for 3Q23. Company-wide earnings should come in at sales of KRW2.3tr (+9% YoY, -1% QoQ) and operating profit of KRW67bn (+20% YoY, +3% QoQ), meeting market expectations.
Engine business faring better than feared
The auto sector's accelerating shift to electrification continues to drive up investor concerns over Hyundai Wia’s engine business. Just five years ago, the engine business was considered the company's main growth driver as the only domestic manufacturer of auto engines with a bulk of sales secured from the supply of small/mid-size (Gamma, Kappa) engines to captive clients.
Although the faster-than-expected advent of electric vehicles (EVs) did spark a downturn of the combustion engine industry as a whole, Hyundai Wia’s engine business has been faring better than feared to date. Sluggish improvement in capacity utilization rates in China remains a burden, but earnings have been gradually recovering after hitting a trough. The recovery is not only attributable to the recent slowdown in EV sales, but also to structural factors. As most of the EVs built on the electric global modular platform (E-GMP) of Hyundai Motor and Kia fall into C- and D-segments, the drop in engine demand has centered mainly on larger-size Theta and Nu engines. In addition, small/mid-size engines are also used in hybrid cars, further limiting the impact of the shift to EVs on Hyundai Wia’s engine sales.
Additional momentum expected from new growth drivers
While concerns over Hyundai Wia's engine business are clearly overblown, we believe the future direction of shares will hinge mainly on the company's new growth drivers. Hyundai Wia has been focusing on the expansion into EV thermal management systems as well as growth of its robotics & autonomous (RnA) business. Following the successful mass production of EVs on the E-GMP, Hyundai Motor Group is now preparing for the launch of next-generation EV platforms, eM and eS. In the process, Hyundai Wia is expected to receive increasing orders for its EV thermal management systems. The RnA business saw growth in order intake from Hyundai Motor Group Innovation Center in Singapore, and more orders are expected to flow in from Hyundai Motor Group Metaplant America in Georgia going forward.