HMG to Improve Global Competitiveness
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
The main drags on production for the global automotive industry in 2021, namely chip supply shortages and the global logistics crisis, are to be resolved, albeit only after some time. In 2022, the main issue for the industry should be the securing of foundations for sustainable long-term growth through differentiation efforts amid the ongoing shift of global automotive industry paradigm.
This year, most global finished carmakers are enjoying sound profit growth in spite of production disruptions, backed by improved cost structures and recovering demand. However, entering 2022, consumer attention is to focus on a limited number of leading plays and electrification. In particular, as some companies fail to catch up with the ongoing paradigm shift and begin to lag behind, market confidence in potential long-term leading plays should strengthen, leading to higher valuations.
We forecast that long-term valuations will climb for HMG companies in line with their successful business structure transition. When a volume cycle sets in alongside normalizing production, auto parts makers tend to show higher earnings sensitivity. In this regard, Hyundai Mobis and Hyundai Wia deserve special attention for full-fledged electrification business growth (Mobis) and mid/long-term business structure reshaping (Wia). In addition, sales should come in sound at Kia on the global launch of the Sportage and EV6.
I. Robust global business conditions to sustain through 2023
In Sep 2021 (YTD), global auto demand grew to around 60.16mn units (+9.2% y-y). But, from July, global auto demand growth started to decline on a monthly basis, due mainly to production disruptions caused by chip shortages. While global demand remains solid, auto inventory has fallen to a record low. In the process of production normalization, 2022 earnings are to improve. Global car makers are expected to enjoy favorable business conditions through 2023, as they start to introduce E-GMPs in earnest and see years of delayed demand. In Sep 2021 (YTD), global EV sales came to 4.31mn units (+134.1% y-y), already exceeding last year’s sales of 3.21mn.
II. HMG to improve global competitiveness
Due to years of sluggish Chinese business, HMG’s improved global competitiveness has been underestimated thus far. Excluding China, its global market share has risen steeply compared to the boom years of the early 2010s. Also, thanks to its successful introduction of E-GMP, HMG’s brand status is strengthening around the globe. Its recent market share increase in the US is attributable to structural factors (eg, improved product competitiveness, enhanced brand power) rather than one-off factors. Given such, we view that the firm will maintain solid earnings growth even after production normalization.
III. Successful business structure transformation key to sustainable growth
Automakers can survive only if they make a successful business structure transformation allowing for sustainable future growth. The competitive landscape of the global auto market will likely be reshaped centering on a few leading firms and a handful of new companies, with GM/Ford/Toyota/Volkswagen/HMG expected to maintain their position as leading automakers. With a virtuous cycle (sound new models effects and earnings improvement) to last through 2023, HMG is predicted to succeed in its business structure transformation, and in the process, valuation re-rating should arrive.
IV. Top pick
We maintain our Positive stance on the auto/parts sector. While auto production has been disrupted owing to semicon supply shortages in 2021, auto production and auto wholesale appear to have confirmed bottoms in September and October, respectively. Considering solid demand, we expect automakers’ earnings to improve in 2022, backed by an easing of the Covid-19 crisis and resolving of semicon supply issues. The global auto market should remain bullish through 2023. Auto parts makers such as Hyundai Mobis and Hyundai Wia are to display greater earnings sensitivity to volume growth cycles and full-fledged introduction of E-GMP. At Kia, healthy sales momentum is expected in 2022, thanks to the global launch of the Sportage and EV6.