The author is an analyst from Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. — Ed.
Auto actions will serve as defensive play in the current environment
Almost all consumer goods cannot escape the impacts of an economic downturn or recession. Auto stocks are typical cyclical stocks that generate low returns at the onset of a downturn. However, we believe that the current market cycle will be different from previous ones. The fears of recession which weigh heavily on the financial market are less felt by the automotive sector. Pent-up demand resulting from supply constraints during the COVID-19 pandemic is expected to remain strong through the end of the year. Demand is also supported by relatively low interest rates on auto loans in the United States, which have risen 2.0%p since the start of the year against a 3.2%p rise in interest rates on Mortgages.
Expected 3Q22 operating profit at 3.3 tr KRW (+108% YoY)
The market focused on movements in exchange rates, a key variable for earnings. For 3Q22, we assume that the USD/KRW exchange rate is 1,334 KRW on average and 1,431 KRW at the end of the quarter. Export gains resulting from a sharp rise in the average USD/KRW rate (+177 KRW YoY) will likely boost Hyundai Motor’s operating profit by around KRW 800 billion YoY. However, we note the negative impact of the recent rise in interest rates on short-term profits. A loss on foreign currency conversion could be incurred with provisions amounting to 10tr KRW. A rise of 138 KRW QoQ in the USD/KRW rate at the end of the quarter is expected to increase collateral provisions by around 600 billion KRW QoQ. In other words, positive currency effects will be offset by negative effects.
We focus more on the sustainability of structural growth than on currency trends. Hyundai Motor is benefiting from higher trim model sales growth with improved product quality in a seller’s market. New car prices are also increasing with the 2023 model year changes. Inventory days in major markets are still 30 days. US sales incentives are estimated at $500 in Q3, down $118 from Q2. Hyundai Motor is expected to report operating profit of KRW 3.3 tr (+108% year-on-year) in the third quarter, with robust sales and favorable exchange rates driving growth.
Hold BUY for a target price of 260,000 KRW
We maintain our BUY rating on Hyundai Motor for a target price of KRW 260,000. Stocks are undervalued despite strong earnings due to recurring concerns about a spike and the negative impact of the US Inflation Reduction Act (IRA). We believe a reassessment is underway amid rising expectations for Q3 earnings. Now is the time to pay attention to market conditions rather than forex.