Successful Entry into Indian Market
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
While short-term earnings uncertainties are inevitable, Kia looks to have secured the strongest sales growth potential among global OEMs this year, thanks to its successful entry into the Indian market. In 2H20, when macro stabilization is anticipated, the firm should enjoy rapid earnings recovery relative to sector peers.
Uncertain market conditions vs robust new car effects
We maintain a Buy rating on Kia Motors (Kia) with a TP of W40,000. While earnings sluggishness is likely to intensify in 2Q20 due to uncertainties stemming from the impact of Covid-19, new car effects and successful entry into the Indian market should serve as a buffer.
In 2020, Kia’s global sales are expected to reach 2.35mn units (-2.7% y-y). Although sluggish earnings look inevitable in 2Q20, earnings should gradually recover from 3Q20, as: 1) product mix improvement should accelerate, backed by healthy new car effects for the Telluride (large SUV); and 2) a virtuous cycle of flagship RV model releases should set in. As a result, sales growth should be noticeable in 2H20, as Covid-19 effects fade.
1Q20 review: New car effects and successful entry into Indian market
Kia posted 1Q20 sales of W14.6tn (+17.1% y-y) and OP of W444.5bn (-25.2% y-y; OPM of 3.1%). Eliminating the one-off effects from the repayment of ordinary wages in 2019, 1Q20 OPM improved by 0.6%p y-y.
Backed by new car effects, product mix improvement, favorable forex rate effects, and realization of overseas inventory sales, the company’s 1Q20 results outperformed market concerns. We note that volume growth (excluding in China) accelerated in 1Q20 thanks to the firm’s successful entry into the Indian market from end-2019.
The decline in pre-tax profit proved significant in 1Q20, mainly due to: 1) increased losses at the Chinese subsidiary; and 2) forex valuation losses stemming from weak won and EM currencies. We estimate the Chinese subsidiary (DYKIA)’s sales and equity-method loss at approximately W600.0bn (-46.5% y-y) and W68.0bn (widening deficits), respectively.