1Q22 Earnings to Prove Healthier than Feared
The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. -- Ed.
Anticipated production stabilization in 2H22 should help to alleviate growing market concerns towards rising cost burden. As it should take some time to rebuild inventories up to previous levels, we forecast that auto prices will remain strong in 2H22. Though uncertainties continue to linger, we believe that automotive shares have already priced in most risk factors.
1Q22 earnings to prove healthier than feared
In 1Q22, Hyundai Motor Group (HMG)’s ex-factory sales likely dropped to around 1.22 units (-9% y-y), owing to the delayed resolution of supply chain bottlenecks. However, profits for the group should prove healthier than feared, considering: 1) reductions in incentives and product mix improvement amid auto inventory shortages; and 2) favorable forex rate conditions.
We revise down our estimate for HMG’s 2022 ex-factory sales by about 3.9% from around 7.23mn units to 6.95mn units (+9.0% y-y), in light of sustained supply chain disruptions and geopolitical risks. However, negatives were concentrated in 1Q22, and in 2H22, auto supply is expected to stabilize in line with auto chip supply improvement. In addition, the geopolitical risks that have pushed up cost burden should ease.
Favorable base effect to emerge for earnings from 2Q22
Amid delayed supply stabilization and growing macroeconomic uncertainties, including interest rate and oil price uptrends, worries are also rising over the long-term demand outlook. That said, considering that: 1) automotive demand in 2021 recovered to only 85% (around 80.70mn units) of the pre-pandemic level (roughly 95mn units); and 2) delayed demand was added to by the accelerated transition to electrification, we believe that concerns over demand downturn are excessive. Over the mid/long term, auto demand should continue to grow.
Assuming production stabilization in 2H22, favorable base effect should materialize for around one year (from 2Q22 through 1Q23) for both sales and earnings. Also positive, HMG is securing mid/long-term growth sustainability along the path of its successful business structure transition, which includes the rollout of its dedicated EV platform (E-GMP). We recommend that investors focus on: 1) Kia, for its strong growth momentum driven by the global launch of flagship vehicles (EV6, Sportage) and introduction of a three-shift system in India; and 2) Hyundai Mobis, for the full-fledged top-line growth of its electrification business. Elsewhere, HMC is to enjoy E-GMP lineup expansion momentum upon the launch its Ioniq 6 in 2H22.