Favorable FX Rates
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Internal/external catalysts behind earnings surprise; operating conditions may worsen in 2H22
— 2Q22 OP came in far above the market consensus, as production normalized quickly despite the chip shortage while external factors, especially FX rates, were favorable. That said, we believe operating conditions could worsen in 2H22.
2Q22 OP of KRW2.98tn beats consensus by 32.6% on favorable FX rates, fading chip shortage
— HMC posted 2Q22 OP of KRW2.98tn (+58.0% YoY, +54.5% QoQ), beating the consensus/KB estimate by 32.6%/9.9%. OP jumped KRW1.16tn YoY largely on an uptick in contribution margin per unit (+KRW914.9bn from ASP increase; +KRW641.0bn from FX rate).
— We estimate contribution margin per unit (ASP – variable cost per unit) at KRW8.06mn (+KRW1.57mn YoY/+KRW0.35mn QoQ). ASP (automobile sales ÷ wholesale unit sales excl. China) reached KRW30.36mn (+KRW3.92mn YoY/+KRW1.84mn QoQ). Variable cost per unit came in at KRW223.0mn (+KRW2.36mn YoY/+KRW1.49mn QoQ). Costs appear to have increased because of the overall rise in raw material prices and ongoing chip shortage.
— In terms of the KRW1.57mn YoY increase in contribution margin per unit, KRW0.68mn appears to have been from FX rates. In fact, favorable FX rates resulted in OP improvement of KRW641.0bn YoY. USD and CAD appreciation as well as TRY depreciation seem to have benefited HMC. The remaining KRW.088mn increase in contribution margin per unit seems to have come from reduced purchasing incentives (due to lower competition) and increased unit sales weighting for SUVs (+5.1pp YoY) and Genesis vehicles (+0.1pp YoY).
— Unit sales normalization also contributed to the robust earnings. Since the chip shortage began in 3Q21, unit sale fluctuations had caused OP erosion. In 2Q22, however, global unit sales (excl. China) inched up 0.3% YoY. We attribute this to flexible production capacity distribution among car segments and active communication with chip suppliers and car dealers.
— Overall, the 2Q22 earnings surprise was the result of internal competitiveness (e.g., normalized production amid chip shortage) and favorable external conditions (e.g., FX rates).
Setbacks caused by chip shortage mostly addressed; QoQ unit sales decline typical in 3Qs; macro changes should be monitored closely
— Operating conditions may deteriorate in 2H22 vs. 2Q22.
— Unit sales may deteriorate QoQ in 3Q22, though 2Q22 unit sales were flat YoY and setbacks caused by the chip shortage have mostly been addressed. We expect seasonal factors to cause unit sales to vary, as 3Q ex-factory shipments and wholesale unit sales typically decline QoQ because of summer vacation.
— Macro changes should be monitored closely. Any residual cost pressure from 1H22 will likely be factored into 2H22 while the Russia-Ukraine war and COVID-related measures remain threats to supply chains. Also, potential inflation and the slowing economy may hinder consumer spending while rising interest rates may undermine unit sales and add to loss provisions at Finance.