Auto Production on Gradual Recovery Path
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Domestic: Sales on a clear recovery path in 4Q21
Domestic auto sales (excluding imported cars) came in at 106,000 units (-21.5% YoY) for October, with the YoY downtrend continuing for eight consecutive months. Shortages in automotive chips peaked in September, and domestic auto sales rose by 16% MoM in October. Although yet to see a full recovery, further improvement over the next months should add support to the view that the bottom was reached in 3Q21. Hyundai Motor and Kia's combined market share in the domestic market once again rose to a new record-high this year at 89.9% (+6.0%p YoY). We also note that production at the two domestic automakers is recovering at a faster pace than peers.
Overseas: Slower recovery in output but focus on margins continues
Shipments out of overseas plants reached 169,000 units (-27.7% YoY, +2.6% MoM) at Hyundai Motor and 97,000 units (-21.0% YoY, +10.8% MoM) at Kia in October. Output at US and China plants gradually improved from record-low levels reported for September, but overall recovery in shipments out of overseas plants visibly differed by region in October and is likely to proceed at a slower pace vs. domestic shipments going forward.
Stalled wholesale/retail operations, due to extreme inventory shortages, weighed on sales in the US at both Hyundai Motor and Kia. Automakers have been protecting margins from the impact of limited operating activities by cutting back on incentives, which will remain the most important factor to keep an eye on until local production and exports recover to sufficient levels. In Europe, sales of eco-friendly vehicles are nearing a jump to new levels, with bottlenecks still seen in supply chains in the region but the BEV+PHEV portion in local auto sales rising to 23.8% (+6.0%p YoY) at Hyundai Motor and 26.8% (+7.3%p YoY) at Kia on increasing exports of EV models built on the Electric-Global Modular Platform (E-GMP) in Korea. We believe the two companies have successfully adapted to strengthening fuel economy standards in Europe and have secured a solid footing as an eco-friendly car brand in local markets.
Retain OVERWEIGHT; top picks are Hyundai Motor and Kia
We are starting to pick up signs of a gradual recovery in auto production after supply chain disruptions peaked in 3Q21. With domestic plants starting to run for extended hours from November, auto production and sales are increasingly likely to record a visible recovery in 4Q21. Automaker cash flows are also improving with the continuing seller’s market leading to the depletion of inventory, including models previously sold at lower prices. Given the upturn in market conditions and expectations for an increase in year-end dividends, we believe now is the time to focus on automakers.