Automakers Favored over Auto Parts Companies
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Strong earnings offset by concerns over a peak out
Led by Hyundai Motor and Kia, global automakers reported strong earnings for 1Q22. Their profitability should be solid in 2Q22 as well. Share price gains, on the other hand, pale in comparison to earnings growth due to worries that the current up-cycle driven by supply chain disruptions may be peaking out. From a bottom-up perspective, there are concerns that domestic automakers, regardless of the market conditions, will lose their competitive edge against global peers without further improvement in marketability. We believe auto market conditions will remain strong on robust demand through 2H22. Domestic automakers are expected to see additional growth and prove their competitiveness in the EV market, dispelling any concerns.
Cars may come to be regarded as a daily necessity; focus on new variables
The auto market boom triggered by supply disruptions will likely be extended by demand. As automakers struggled with supply chain woes and high inflation, their share prices have been largely affected by specific price indicators. Used vehicle price indexes, product mix changes, and lower incentive spend have been useful tools in estimating the extent of earnings gains.
The key variables in 2H22 will be the manufacturer’s suggested retail price (MSRP), forex rates, and capacity utilization. Auto sales should continue to expand given the massive size of deferred demand created by supply chain disruptions in 2019-2021 (40mn-50mn units worldwide over the three years). Cars may come to be regarded as a daily necessity that shows a rise in prices over time. The extent of price gains will be determined by MSRP and forex trends. The impact of rising costs should be fully offset by improvement in capacity utilization rates upon normalization of supply chains (estimated domestic sales volume growth of 10%).
As for the EV market, we believe the key variables will shift from global sales volume and mid/long-term investment roadmap to EV sales power (EV sales volume/number of EV models), considering intensifying competition and changes in supply chain management (SCM). The sales power indicator will help us measure marketability and fixed-cost saving effect (break-even point).
Investment strategy:Automakers favored over auto parts companies
We previously held an upbeat outlook on automakers for 1H22 in view of price hikes and auto parts suppliers for 2H22 on expectations for sales volume growth. With both prices and sales volume projected to increase in the second half, we continue to favor automakers over auto parts manufacturers. Our sector top pick is Hyundai Motor given high visibility of sales volume growth in 2H22. The automaker has been overlooked by investors due to its relatively weak auto business. We forecast auto earnings will recover once sales return to normal levels in 2Q-3Q.