Hyundai Motor Company: normalization of production, favorable exchange rates

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The author is an analyst at KB Securities. He can be contacted at [email protected] — Ed.

Hold BUY, target price KRW 240,000

We maintain BUY and TP of KRW240,000 on HMC. Our DCF-based TP (6.6% WACC; 0.7% TGR) is unchanged, with WACC of +0.9pp offset by upward revisions to OP 2022E/2023E of 19.2% /14.9% due to better than expected sales and surprisingly favorable exchange rates. Our TP implies 7.4x 12m fwd P/E, 0.71x P/B and is up 33.7% (compared to the September 28 close).

3Q22 forecast: OP of 3.18 tn KRW (+97.6% YoY) above market consensus of 16.4%

We are revising the OP for 3Q22E upwards to 3.18 tn KRW (+97.6% yoy, +6.5% qq), which is above the market consensus of 16.4% and to our previous estimate of 43.8%. Wholesale volume in 3Q22 is expected to reach 926,000 units (+11.4% YoY), 1.1% higher than our previous estimate. We expect a contribution margin per unit of KRW 8.17 million (+14.0% YoY), 13% higher than expected, due to the strong rise in KRW/USD.

Increased sales volume through rapid standardization of production; a favorable exchange rate should contribute to the OP gain

As global OEMs continue to grapple with chip shortages, HMG, which quickly normalized production, is delivering strong margins and sales volume growth. In July, the global automotive market grew by around 0.6% YoY (-11.5% excluding China) while HMC unit sales jumped 11.6% YoY (+11.4 % excluding China). HMG’s relatively favorable position in current currency conditions allows it to offer a higher OPM than its rivals.

Risk factors: 1) Consumers’ long-term purchasing power declines 2) Competitors’ production normalizes 3) Rising interest rates cause credit crunch

The following risk factors may force a ratings downgrade: (1) If long-term consumer purchasing power declines due to inflation in Europe and rate hikes in the United States, automotive demand could contract. (2) If the production of competitors normalizes, the intensification of competition may reduce the contribution margin per unit. (3) If rising interest rates lead to a credit crunch, auto financing could deteriorate.

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