Negatives for Earnings Outweigh Positives
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Domestic: Supply lags behind demand
Domestic auto sales (excluding imported cars) came in at 106,000 units (-5.0% YoY) for August, extending the downtrend for the sixth consecutive month. Auto chip shortages have worsened due to the delta variant’s spread in Southeast Asia. Automakers are facing difficulties in meeting demand as inventories are being depleted with back orders piling up amid solid demand. The combined domestic market share of Hyundai Motor and Kia remained high at 86.6% (-0.9%p YoY), but sales volume fluctuated widely by model depending on supply conditions. At Hyundai Motor, disruptions in production were relatively more severe for upscale Grandeur and Genesis brands. Both automakers experienced minor disruptions for EVs compared to internal combustion cars with production normalizing on the Electric-Global Modular Platform (E-GMP).
Overseas: Supply shortages on inventory depletion
Overseas plant shipments at Hyundai Motor reached 171,000 units (-13.4% YoY) and Kia 97,000 units (+5.3% YoY) in August. In developed markets, shipments dropped in spite of moderate retail sales due to chip shortages (supply chain disruptions). Demand from emerging markets improved in India and Brazil, but remained sluggish in some countries like Russia and China.
Both automakers did well in the US where retail sales decline was limited and incentive cuts were bigger than their rivals. We believe the stage is set to maintain high profitability. In Europe, on the other hand, retail demand contracted slightly recently. With limited upside for earnings in sight, they are pushing a sales strategy focused on eco-friendly vehicles (BEV+PHEV) as a means to evade the EU’s fuel economy standards and build a green brand image. The share of eco-friendly vehicles in total sales volume in Europe reached 24.9% at Hyundai and 22.9% at Kia in August. The share should further increase at Kia in 2H21 along with exports of the Kia EV6.
Retain OVERWEIGHT; our top pick is Kia
Production disruptions caused by external variables are dragging on longer than expected. We are seeing negatives for earnings (fixed costs rising due to inflexible production system, inventory depletion hurting sales) outweigh positives (cost reduction, depletion of low-margin inventories, flexible production system centering on high-margin models). We believe the earnings outlook is better for Kia with higher earnings visibility backed by solid sales of high-margin models.