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Issuer of report:The Hongkong and Shanghai
Banking Corporation Limited, Seoul Securities
Branch
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examine whether the negatives are priced in
headwinds from China, labour costs and new products
and KRW36k (KRW38k), on lower earnings expectations
Is the worst behind us: Hyundai and Kia shares have fallen 19-20% from their
peak this year due to weak China sales; ongoing labour issues including ordinary
wage; and weakening product competitiveness. The market seems keen to find out if
all the negatives are priced in as shares offer relatively attractive valuations. We
expect more structural headwinds from China ¨C supply disruption, dispute with local
partner and potentially lower pricing strategy; weakening product cycle with delayed
powertrain upgrades; and the court ruling on ordinary wage suit.
1) China: The recent suspension of HMCˉs China plants would lead to increased
sourcing from local parts makers for cost cutting. If sales keep falling, Korean
automakers will have no choice but to accept JV partnersˉ demands to change their
sourcing strategy and strengthen price competitiveness of their products, in our view.
2) Product cycle and competitiveness: We still believe HMCˉs key success was
due to value for moneyˉ positioning in the market (lower priced vehicle with relatively
better performance among mass brands) but we think it would take some time for
them to introduce competitive new models with attractive pricings. The higher number
of new SUV models in 2017-2018e does not dramatically improve its sales volume, in
our view, given lack of powertrain upgrades despite increased R&D spending.
3) Labour issues: The recent court ruling on ordinary wage should put more pressure
on profitability given plants in Korea have been the most lucrative factories (mainly due
to higher domestic pricing, not costs). This change should also add burden on wage
negotiations of HMC as we believe the labour union will demand similar payment hikes.
Estimates: For HMC, we lower our earnings estimates by 9.9%/7.3% for 2017/18e,
reflecting weaker China contribution, while for Kia we lower our earnings by 45.2%/9.2%
for 2017/18e. For Kia, we reflect KRW1trn provisions for ordinary wage dispute as the
company filed that they will book such provision in 3Q17. Reiterate Hold on Hyundai
Motor and Kia Motors and lower TPs to KRW139k and KRW36k, respectively, reflecting
lower earnings expectations;
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