The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.

 

Earnings miss market consensus but core operations meet expectations 

— 1Q21 OP fell short of the market consensus. The results were not disappointing, however, as the shortcoming was mainly attributable to worse-than-expected FX trends. In fact, core operations (i.e., production and sales) were in line with expectations. 

1Q21 OP of KRW1.1tn falls 6.7% short of market consensus 

— We believe the biggest takeaway from 1Q21 OP is the expectations-beating effect of FX trends. China sales disappointed, but overall OP contribution from production and sales was mostly in line with our estimate, backed by robust sales in other markets. — Kia Corp. posted 1Q21 OP of KRW1.1tn (+142.2% YoY), which is short of the market consensus and our estimate by 6.7% (KRW77.6bn) and 9.4% (KRW111.4bn), respectively. If the OP decline noted in the March sales report of KRW131.8bn is reflected, OP would have been in line with our estimate.

— Breaking down OP into production, sales, FX rates and quasi-fixed costs (warranty costs, marketing expenses, R&D costs), FX rates were the biggest factor contributing to the expectations miss. According to management, the YoY difference in FX rates eroded OP by KRW209.0bn, which was significantly higher than our estimate of KRW135.3bn.

— Quasi-fixed costs also contributed to the disappointing OP. Warranty costs declined just KRW13.3bn YoY, well short of our estimate of KRW64.8bn. 

— OP contribution from production and sales appears to be mostly in line with our expectations. China sales fell short of our estimate, but unit sales from other markets were close to expectations. Specifically, the decline in unit sales eroded OP by KRW38.5bn. However, improving option-package sales seem to have lifted OP by KRW41.9bn more than expected. In fact, domestic ASP jumped 11.3% YoY to KRW28.1mn and export ASP rose 18.1% YoY to USD19,300. Of note, North American inventory shortages resulted in a 4.9% YoY decline in regional sales, which appears to have undermined OP. 

— Pre-tax profit beat the consensus by 6.7% (KRW126.0bn) and our estimate by 9.4% (KRW182.1bn). Equity-method gains jumped KRW172.0bn YoY, backed by brisk performance by financial subsidiaries (e.g., Hyundai Capital America) and the Arrival IPO.   

Impact of memory chip shortage to ramp up from 2Q21 but unlikely to impact stock

— Reduced car shipments due to the automotive chip shortage should impact earnings from 2Q21, but we do not believe this will affect Kia Corp. stock. Assuming unit sales fall 4.2% below our forecast over the next six months, competition should also ease because of production disruptions at rivals. Furthermore, Kia Corp. can partially offset the impact of the chip shortage by selling down inventories and focusing efforts on higher-margin models. As such, we estimate the memory chip shortage will erode OP by only KRW186.0bn.