Industry Paradigm Changes

The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com, -- Ed.

 

In light of both shrinking production/consumption due to the impact of Covid-19 and concerns towards EMs stemming from plunging oil prices, we revise down our earnings forecasts and TPs for major automakers. Affected by a change in industry paradigm, the auto sector has entered a ‘stand-alone’ phase, in which ideal strategy is to differ substantially by firm. Going forward, as share prices begin to recover, we advise crafting a portfolio consisting of a small basket of companies offering high growth potential.

Covid-19 effects

Global auto demand uncertainties have expanded as of late, with Covid-19 causing production/consumption shocks amid plunging international oil prices and EM currency deterioration. Accordingly, in 2020, Hyundai Morot Group is expected to record its lowest global sales (ex-factory) since 2012, with the figure estimated at less than 7mn units (6.97mn units, -2.0% y-y).

The basic assumption underlying current earnings forecasts is that Covid-19 effects will be concentrated in 1H20, followed by a 2H20 earnings recovery driven by deferred demand and production normalization. Earnings forecast uncertainties remain high, however, due to the possibility of prolonged impacts from the Covid-19 outbreak. Prior to stabilization in macro variables, auto company shares might continue trading at significant discounts to fair valuation.

Investment strategy: Focus on OEM + auto parts plays with strong electrification potential

In the global automotive industry, the era of volume growth is fading. Affected by a change in industry paradigm, global demand slowdown (sluggish industry conditions) is likely to prolong even after the fading of Covid-19 effects.

Upon a lessening in Covid-19 effects, we advise focusing on automakers, as well as auto parts plays that stand to benefit from electrification. We note that Hyundai Motor Co. (HMC) and Kia Motors (Kia) have entered a new model cycle utilizing the 3rd-gen platform. Considering this factor, we expect the firms’ intrinsic value to show improvement by next year. Meanwhile, believing that the keywords for automakers’ long-term survival are ‘business structure conversion’ rather than ‘utilization rate’, we expect that auto parts players will need to adopt novel strategies moving forward. In addition to HMC and Kia, we like Hyundai Mobis and Hanon Systems, both of which stand to benefit from the trend of electrification (a growth factor with the potential to offset declining demand for internal combustion engine vehicles).

 

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