HMG’s Future Strategy Instills Strong Confidence
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
Major domestic players’ earnings likely passed bottom point in 2Q20
Despite lingering Covid-19-related uncertainties, we believe that earnings at major domestic auto/parts makers passed bottom point in 2Q20, expecting earnings recoveries to begin from 2H20. It will likely take some time for global automotive demand to rebound back to the pre-Covid-19 level. That said, with governments around the world set to implement policies in order to facilitate the automotive industry recovery, earnings recovery momentum should sustain through 2021 (also partly on low-base effects).
Boost OP forecasts and TPs for HMC and Kia Motors
We view HMC and Kia’s 2Q20 results as confirming that sound new model effects and product mix improvement can offset the negatives of macro-economic uncertainties. In 2H20, earnings should continue to improve as both recovering overseas automobile demand and exports of new models (G80, GV80, and Sorento) are to push up export ASPs. We believe that margin improvement stemming from accumulating new model rollout effects will further widen through 2021. In light of cost structure improvement thanks to new model effects, we boost our OP forecasts for HMC and Kia, in turn raising our TPs for both players.
Pay attention to xEV market latecomers (ie, traditional automakers)
Global automakers are to begin introducing their exclusive xEV platforms in earnest from 2021. The entry of these late starters into the global xEV market should kick off an accelerated growth phase for the global xEV market. Moving ahead, we advise paying closer attention to companies that are well positioned: 1) to benefit fully from the expansion of the xEV market (eg, rechargeable battery makers); and 2) to see valuation re-ratings (such as traditional car/parts makers who are latecomers to the xEV market).
HMG’s future strategy instills strong confidence
The automotive industry is to see a deepening differentiating trend between those that are situating themselves to succeed amid the transition to a new ‘Green and digital’ economy, and those that are not. From next year, we expect it to become more apparent which players will be facing long-term survival concerns. Looking at HMG, we believe the group has been well coping with the ongoing transition into the future mobility via its Open Innovation strategy—the group has established a self-driving technology JV with Aptiv and also strengthened cooperation with rechargeable battery makers.
Investment ideas: Electrification and HMG Top pick: Hyundai Mobis
We offer Hyundai Mobis as our sector top pick. Being HMG’s specialized maker of automotive electrification parts, the firm is well situated to benefit from the ongoing global trend towards electrification. In particular, a widening electrification business sales portion is to highlight Hyundai Mobis’s growth potential despite a steady decline in global automotive demand. And, HMG’s introduction of E-GMP from 2021 should lead to better margins at Hyundai Mobis’s electrification domain. Overall, strong top-line growth and an improving bottom line at the firm’s module business are to translate into mid/long-term valuation hikes. By 2025, we expect Hyundai Mobis’s annual sales and OP to top W52tn and W4tn, respectively. Meanwhile, Hanon Systems and S&T Motiv remain as attractive electrification plays from a long-term investment perspective.
Meanwhile, expectations towards improved fundamentals on new model rollout cycles should translate into valuation re-ratings for both HMC and Kia. We believe that Kia’s earnings recovery momentum will pick up steam from 2H20, backed by normalizing production at its production facilities in India.