The author is an analyst for NH Investment & Securities. He can be reached at soohong.cho@nhqv.com -- Ed.
In 2024, global automotive demand should continue to recover, but growth momentum is set to slow y-y. Although demand has yet to return to pre-pandemic levels (95mn units), a significant portion of accumulated pent-up demand from during the pandemic has been unleashed in 2023. Moreover, slowing EV demand and heightened macro uncertainties (high interest rates) are likely to weigh on market growth in 2024.
We believe that the global xEV market has entered a transition phase, shifting from early adoption to mainstream. The global EV market is to experience major reshaping (polarization focused on a few companies with strong cost competitiveness and abundant liquidity) in the process of slowing global demand and intensifying market competition. Companies that can navigate the turbulence and validate their competitiveness should be able to escape long-term value traps.
While weaker earnings momentum in 2024 is inevitable, we believe peak-out concerns are already largely priced into sector valuations. We maintain a positive view towards HMC and Kia, which have enhanced earnings fundamentals and abundant liquidity. In addition, we draw attention to Hyundai Wia (business restructuring) and Hyundai Mobis (overseas order expansion).
I. Auto demand growth to slow in 2024
In 2023, global auto sales are estimated at around 88mn units (+8.7% y-y), growing higher than expected at the beginning of the year thanks to the unleashing of pent-up demand amid production normalization. As auto sales have yet to return to the pre-pandemic level of 95mn units and inventories remain low, demand should remain healthy through 2024. That said, demand growth is likely to slow in 2024, considering decreasing backorders and high interest rates.
II. Global EV market in transition phase
The global xEV (EV/PHEV) market appears to have entered a transition phase, shifting from early adoption to mainstream. For EVs to become mainstream, an improvement in user convenience, as well as price cuts will be needed. Meanwhile, as market leaders with strong cost competitiveness have triggered a price war, earnings improvement at new EV players could be further delayed. We believe that cost competitiveness (economies of scale) and liquidity are the main elements for sustainable growth.
III. Competitive landscape of global auto market to change
Going forward, we expect a realignment of the competitive landscape as global demand growth slows and EV competition intensifies. The EV market is likely to become polarized between startups (Tesla, BYD, etc) that have reached economies of scale (cost competitiveness) and a handful of legacy automakers with liquidity. Global automakers that are able to well adapt to market changes should be able to escape long-term value traps. HMG is expected to make a successful business structure transition, backed by its sound earnings and ample liquidity.
IV. Top picks
We present a Neutral rating for the auto industry, drawing attention to the possibility of demand slowdown. That said, as peak-out concerns have mostly been reflected in auto plays’ valuations, we draw attention to their price merit. We positively view finished car makers HMC and Kia, noting their strengthened profit fundamentals and valuation appeal. We also recommend Hyundai Wia (transitioning to electrification) and Hyundai Mobis (to enjoy overseas order expansion).