A challenging 2013: earnings visibility
in focus, need to be selective
A challenging outlook for 2013; we favor Hyundai Motor, Hankook and Glovis
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Sanjeev Rana
Research Analyst
(+82) 2 316 8910
sanjeev-r.rana@db.com
Chanwook Park
Research Analyst
(+82) 2 316-8940
chanwook.park@db.com
Emily Yi
Research Associate
(+82) 2 316 8913
emily.yi@db.com
Top picks
Hyundai Motor
(005380.KS),KRW206,000.00
Buy
Hankook Tire (161390.KS),KRW44,500.00 Buy
Hyundai Glovis
(086280.KS),KRW210,500.00
Buy
Companies Featured
Hyundai Motor
(005380.KS),KRW206,000.00
Buy
Kia Motors (000270.KS),KRW53,600.00 Buy
Hyundai Mobis
(012330.KS),KRW261,000.00
Buy
Hankook Tire (161390.KS),KRW44,500.00 Buy
Nexen Tire (002350.KS),KRW15,450.00 Hold
Hyundai Glovis
(086280.KS),KRW210,500.00
Buy
Hyundai Wia (011210.KS),KRW160,500.00 Buy
Mando (060980.KS),KRW122,500.00 Hold
Price Target Changes
Company Previous Current % Chg
Hyundai Motor 310,000 300,000 -3.2%
Kia Motors 78,500 73,000 -7.0%
Hyundai Mobis 370,000 345,000 -6.8%
2013E Net Profit Changes
Company Previous
(Wbn)
Current
(Wbn)
% Chg
Hyundai Motor 9,876 9,638 -2.4%
Kia Motors 4,526 4,339 -4.1%
Hyundai Mobis 3,825 3,683 -3.7%
This report changes target prices and
estimates for Hyundai Motor, Kia Motors
and Hyundai Mobis. Please refer to p.10
for details
The auto sector lagged Kospi by 7% in 2012 and investors are concerned about
how it will hold up in 2013, given slowing global car demand growth,
unfavorable currency movement, rising competition and an aging model lineup.
Major concerns around auto stocks are now well-known and priced in, to
an extent. Amid the slowdown and macro uncertainty, we favor Hankook Tire
and Glovis, which have decent earnings visibility and relatively less exposure to
currency and pricing pressure. We also still like Hyundai Motor on its cheap
valuation and focus on mix improvement which should keep its margin stable.
Global demand growth to slow, but Hyundai still gaining market share
We expect global auto demand growth in 2013 to slow to 3% after 5.7%
growth in 2012. US auto demand, which showed solid 13% growth in 2012,
driven by pent-up demand and improved credit availability, is expected to slow
to 3% in 2013. We expect demand in Europe to fall another 4% after an 8%
decline in 2012. Demand in China and India is expected to grow 10%/15%
after 6%/8% growth, respectively, in 2012. In Korea, we expect market
demand (including imports) to rise 1% after a 3% decline in 2012, driven by a
boom in imported car sales. For Korean automakers, we expect Hyundai and
Kia’s 2013 global shipments to grow 7.9%/4.1% (8.5%/7.1% in 2012E),
implying combined global market share of 9.1% in 2013E vs. 8.7% in 2012E.
Automakers: valuations attractive but lack catalysts, earnings upgrade unlikely
We forecast Hyundai’s shipments to rise to 4.75m units (+7.9%) in 2013. This
is higher than its 4.66m target, but given its history of conservative guidance,
we believe it is achievable. For Kia, we forecast 2.83m unit (+4.1% YoY) sales
in 2013, which is higher than its guidance. Kia’s lack of production capacity in
key markets, such as the US and China, is the main reason behind our
subdued forecast. Between the two, we believe Hyundai is better positioned to
defend its market share and profitability due to recent capacity expansions,
strong brand perception and mix improvement. Having said that, despite
valuations being very attractive, we expect OEMs’ share price to remain rangebound
in 1H, given KRW strength, competition and lack of strong catalysts.
Auto parts – Hankook and Glovis attractive on replacement/captive demand
Given OEMs’ slowing growth momentum and unfavorable forex, part makers’
earnings visibility should also come under pressure. Names such as Hankook
Tire and Hyundai Glovis, which are relatively less affected by currency and
have decent earnings visibility driven by capacity expansion and replacement/
captive demand, should therefore find favor with investors. Hyundai Glovis’
commission-based business structure has enabled it to record stable margins,
regardless of business environment. Its natural hedging structure in sales and
cost (c.70% of forex exposure) has also made it relatively safe on forex. We
expect Glovis to show stellar growth in its China and PCC business in 2013.
Hankook Tire should benefit from the expected recovery in replacement tire
demand and new plant starts in China and Indonesia. We see downside risk to
Mando and Mobis’ earnings on unfavorable forex and/or margin pressure.
Valuation and risks
We use PER, SOTP and GGM models as our valuation methodologies. Key
sector risks include a strong KRW and lower-than-expected global demand.