Hyundai Motor Co.: The Worst to Pass in 2Q20

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

We expect HMC’s global auto production/sales to be at their worst in 2Q20. However, as such expectations are already reflected in the market, the impact on share prices should be limited. Considering HMC’s improving product competitiveness, we expect full-fledged OP recovery once Covid-19 fades.

Global production/sales to gradually recover in 2H20

We maintain a Buy rating and TP of W110,000 on Hyundai Motor Company (HMC). Although uncertainty exists due to the impact of Covid-19, new car effects and product mix enhancements have been confirmed. In other words, with the firm’s intrinsic corporate value improving, its earnings recovery process should begin in earnest once the Covid-19 crisis fades.

We forecast 2020 global sales of 4.03mn units (-8.6% y-y). Covid-19 is likely to have the greatest impact on global production/sales in 2Q20. Against this backdrop, we expect the firm’s OP to drop to BEP in 2Q20, but starting in 3Q20, OP recovery should begin in line with the normalization of production/sales and deferred demand.

1Q20 review: Positive forex rates, product-mix improvement, and inventory realization effects in play

HMC posted 1Q20 sales of W25.3tn (+5.6% y-y) and OP of W863.8bn (+4.7% y-y; OPM of 3.4%), with both figures exceeding our estimates. Despite a decline in global utilization rates, product-mix improvement resulting from strong sales of high-value-added new cars (such as the Palisade and GV80), the weakened won, and strong overseas inventory sales led to better-than-expected 1Q20 results. Excluding one-off items related to the establishment of an Aptiv JV (W105.6bn), adjusted OP came in at W758.2bn (-8.1% y-y; OPM of 3.0%).

In 2Q20, HMC’s OP is likely to hover around BEP. Domestic sales are expected to be favorable thanks to intensive production of vehicles with long waiting lists (such as the Grandeur) prior to the end of tax cuts in June, and utilization rates in China are also anticipated to recover. However, as global plant operations, including in the US and India, are likely to remain disrupted, the firm’s sales are predicted to drop significantly. The possibility of falling profitability due to rising delinquency rates at financial subsidiaries such as Hyundai Capital America is also a concern.