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

 

Further spurred by the slated launch of the new Sportage, strong new model effects should help Kia’s earnings growth momentum sustain into 2H21. We also positively view the firm’s successful introduction of new models (including the EV6) based upon its xEV exclusive platform (E-GMP). Although there are some short-term concerns regarding supply-demand conditions for automotive semiconductors, we view solid demand for Kia’s new models as being a more important factor for its mid/long-term earnings outlook.

Virtuous cycle effects and mid/long-term earnings uptrend to sustain

We maintain a Buy rating and a TP of W120,000 on Kia. With its successful new car launches continuing, solid earnings momentum is to sustain in response to a better product mix. Successful new model effects (K-8/EV6) seen in 1H21 should continue into 2H21 in line with the slated release of a new model of the firm’s flagship SUV, the Sportage.

Some short-term concerns persist towards supply-demand conditions for automotive semiconductors, but we point out that Kia has secured a solid demand base. Kia’s global auto sales (ex-factory) for 2021 are projected to reach around 2.81mn units (+16.2% y-y). Positives in play include global demand recovery, strengthened competitiveness of new models, and sales growth momentum in the US and India. We see 2021E sales of W68.77tn (+16.2% y-y) and OP of W4.62tn (+123.5% y-y; OPM 6.7%).

▶ 1Q21 review: Successful new model effects in play; OPM of 6.5%

Kia announced 1Q21 consolidated sales of W16.58tn (+13.8% y-y) and OP of W1.08tn (+142.2% y-y; OPM 6.5%), meeting our estimates. Although Kia’s Chinese market sales remain sluggish, we draw attention to domestic market profitability, healthy US market sales, and ongoing Indian market sales expansion.

Although there was some negative impact from an unfavorable turn in forex market conditions, margins widened on the spread of virtuous cycle effects (improved product mix)—the firm’s global utilization rate picked up and global sales of the Sorento began rising. Meanwhile, the portion of RVs (SUVs/minivans) at Kia upped to 59.7% (vs 1Q20: 53.3%). Operating losses look to be continuing at the company’s Chinese business. However, looking at subsidiaries contributing to equity-method gains, profitability on the financing business side (including for Hyundai Capital America (HCA)) has improved significantly, and earnings at other major subsidiaries are also recovering.