Top Picks: Hyundai Motor, Kia, Hyundai Mobis
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
Although there are near-term uncertainties on the supply side due to semiconductor shortages, the impact on the long-term earnings outlook for the automobile industry should prove negligible. Demand is expected to show a very solid uptrend in line with the full-scale global release of deferred demand (which has been building over the past few years). We believe that new model-sparked virtuous cycle effects for Hyundai Motor Group (HMG) will sustain through 2023 amid both a recovery in downstream sector demand and successful new car effects.
Traditional automakers such as HMC, Ford, GM, Toyota, and Volkswagen, which have been on the defensive in the process of the paradigm shift in the automotive industry, are now improving their responsiveness. Automakers that succeed in transforming their businesses to the new economy (via open innovation and the introduction of xEV exclusive platforms) should be rewarded with stronger valuations for being sustainable mid/long-term plays.
We trust in the sustainability of HMG. The chances of governance restructuring at the firm are steadily growing. We believe that both HMC and Kia warrant long-term interest, pointing out expectations towards further profitability improvement as they enter virtuous cycles. We also like Hyundai Mobis in light of both its high growth potential for electrification and anticipated benefits from mid/long-term governance restructuring.
Top pick 1: HMC (005380.KS); TP of W330,000
Successful new model roll-out effects and business structure transition should drive HMC’s mid/long-term share price uptrend.
HMC is in an early phase of a long-term ROE upcycle. The firm’s global brand power is expected to strengthen, thanks to its: 1) strengthened product lineup; and 2) global roll out of its luxury Genesis brand (G80, GV80, GV70).
In the clean mobility domain, the introduction of an in-house xEV platform (E-GMP) in 2021 should help to strengthen its presence in the xEV market.
Also boding well is its ambitious FCEV business initiative. Under ‘Hydrogen Vision 2030’, the firm plans to expand its FCVE production capacity to 0.5mn units over the long term.
Top pick 2: Kia (000270.KS); TP of W120,000
With a series of global launches for flagship models (Sorento, K-5, Carnival, and Sportage) set to be completed by this year, successful new model effects should keep spurring Kia’s earnings momentum through 2H21.
While there exist uncertainties regarding auto chip supply disruptions and the resurgence of Covid-19, we positively view Kia’s growth in the US and solid utilization rates at its Indian plant.
Having successfully launched its first E-GMP-based EV model the EV6, Kia aims to greater shift away from ICEVs towards EVs via its Plan S strategy.
Top pick 3: Hyundai Mobis (012330.KS); TP of W530,000
The electrification business should drive long-term growth for Hyundai Mobis. Among the three main affiliates of HMG, Mobis is expected to show the strongest top-line growth through 2025—2025 sales are estimated at W56tn and OP at W4.2tn (OPM of 7.6%).
Sales at the electrification business came in at W4.2tn in 2020, accounting for 11.5% of total sales, and are estimated to climb to W19.6tn (35%) in 2025. The business’s profitability improvement should begin in earnest from 2021, in line with HMG’s E-GMP introduction.
The company’s profit growth momentum is expected to rebound this year, backed by volume growth stemming from a global demand uptick, and profitability improvement at the electrification business.
The expected business and governance structure overhaul for HMG also bodes well for Mobis.