Entering Virtuous Cycle Structure
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
Considering HMC’s global wholesale sales guidance, a production volume recovery should become highly visible from 4Q21. Amid earnings growth momentum, both strengthening brand status in advanced markets and smooth business structure changes should catalyze share price expansion.
Entering virtuous cycle structure, aided by more stable production
We maintain a Buy rating and a TP of W300,000 on HMC. In 2022, Covid-19 impacts should ease, and semiconductor supply issues are also likely to subside. Next year, we believe that the company will enter its strongest earnings period since early 2010, backed by both ongoing new model effects and the successful introduction of an EV-only platform (E-GMP). Global demand is solid, while inventories only amount to about one month.
HMC’s global sales (wholesale) guidance target for 2021 is around 4mn units. Taking this into account, we forecast 4Q21 sales of about 1.09mn units, slightly below the 2020 level (1.4mn units). If excluding China (where HMC’s sales remain sluggish), HMC’s 4Q21 sales volume should also prove roughly similar to that for HMC’s 4Q19 global sales (excluding China). Judging HMC’s production guidance to be the most optimistic it has presented this year, we anticipate meaningful production normalization from 4Q21.
3Q21 review: Favorably view product mix improvement
HMC announced consolidated 3Q21 sales of W28.9tn (+4.7% y-y) and OP of W1.6tn (OPM of 5.6%). The firm faced both a global utilization decline (due to semiconductor supply issues) and raw material price hikes, but these negatives were partially offset by product mix improvement (thanks to the launch of the Genesis and increased sales of SUVs). Also contributing to the better-than-expected 3Q21 results were earnings buffer factors, including reduced (q-q) provisioning for sales guarantees.
The improved product mix translated into y-y sales growth (+W2.471tn). However, forex translation losses (-W337bn) and decreased overall sales volume (-W1.0tn) weighed upon earnings. But continuing to deliver sound profitability, HMC’s financing arm posted 3Q21 OP of W570bn (+12.9% y-y; OPM of 12.5%)—given an ongoing recovery in global demand, normalizing production, favorable new model effects, and higher value for used cars, this sound profitability trend should sustain going forward.