The US Used Car Market in an Unprecedented Boom
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Rising used car prices to lift earnings
The auto finance business has been the major driver of Hyundai Motor’s earnings growth since 3Q20. Net profit margin of Hyundai Capital America (80% stake) bounced back to 8-10% after stagnating around 1-2%, owing to the preemptive write-off of bad assets piled up during the market downturn. We see further upside with the unprecedented boom in the US used car market. US auto finance companies, which have a high portion of lease financing, see bigger profits on used car sales when the residual value rises. The recent supply disruption is pushing up demand for used cars. With Hyundai Capital America as a consolidated subsidiary, Hyundai Motor stands to benefit from the market boom going forward.
Production cutbacks likely limited despite market concerns
Faced with worsening auto chip shortages in 2Q21, Hyundai Motor temporarily halted production at some of its plants – Ulsan plant 3 (May 18), Ulsan plant 5 (May 17-18), Asan plant (April 12-13 and 19-20, May 24-26), and the plant in Chennai, India (April 10-15, May 25-29). However, the Asan plant still has Sonata vehicles in inventory and the shutdown of the Indian plant was caused mainly by COVID-19 quarantine measures and summer vacations than chip shortages. Production cutback concerns still remain with Ford, GM, and Volkswagen revising down their sales guidance, but we believe the actual decline in output will be limited at Hyundai Motor.
Retain BUY for a target price of KRW300,000
We retain our BUY rating on Hyundai Motor for a target price of KRW300,000. The automaker’s strength in business portfolio has come to light with the leverage effect in auto financing. We find it positive that it is making efforts on multiple fronts to sharpen its edge, including the electrification strategy and investments in in-house production.