Hyundai and Kia Fare Well vs. Peers
The authors are analysts of Shinhan Investment Corp. They can be reached at yjjung86@shinhan.com and ik.jung@shinhan.com, respectively. -- Ed.
Product mix of domestic automakers continues to improve in July
Domestic auto wholesales (excluding imported cars) increased 10.2% YoY to 144,000 units in July. Demand was solid despite the reduced tax break on car purchases and weak seasonality. With the cap on tax deduction removed, the tax break is working in favor of high-priced models. Hyundai Motor and Kia Motors have fared well as they have focused on their new luxury car line-up. The two automakers grabbed a market share of 86.2% (+4.3%p YoY) combined. The market for B-segment SUVs lost sales momentum after a steep growth in 1H20 due to the reduced tax benefit. Efforts to improve the product mix should continue in 2H20, centering on mid/large-size models such as Grandeur, Genesis, and Sorento.
2Q20 review of global automakers: Earnings driven by competitiveness
Earnings releases for 2Q20 revealed continuing advances by Tesla, Hyundai, and Kia (BMW, Toyota, and Honda yet to announce results). In 1Q20, automakers that have a strong domestic supply chain stood out in sales (Tesla +40% YoY, Kia -7% YoY, Hyundai -12% YoY, global -24% YoY). The sales gap narrowed in 2Q20, but the profit gap widened further among the players.
Among the nine automakers that reported 2Q20 results, only Tesla (operating margin of 5.4%), Hyundai (2.7%), and Kia (1.3%) posted profits. The three automakers set to roll out their earnings reports likely have incurred losses. Hyundai and Kia were able to perform better than their competitors mainly due to improvement in their product mix, rather than a swift recovery of capacity utilization. They effectively weathered the market downturn with the timely launch of new models, solid domestic demand, and line-up upgrade in response to the changing market trend.
We believe Hyundai and Kia’s new models will remain highly marketable for the time being, with their competitors suffering earnings weakness and new launch delays. Their liquidity-strapped peers are focusing on investments in the vehicle electrification supply chain. Ford Motor is working on the development of an all-electric F-150 and Transit BEV, aiming for launch in 1H22. Nissan Motor plans to roll out Ariya, an all-electric SUV, in late2021.
Retain OVERWEIGHT; top picks are Hyundai Motor, Hyundai Mobis, Mando
We retain our OVERWEIGHT rating on the auto sector in view of the domestic automakers’ competitiveness in the global market and profit leverage maximizing in 2H20 on rising capacity utilization. Hyundai Motor should enjoy a significant increase in ASP led by its Genesis brand. Hyundai Mobis sees a faster-than-expected improvement in profitability of the after-sales parts business. Mando has begun to benefit from the effects of restructuring and confirmed its product competitiveness with new order intakes surpassing expectations.