20171130-三星证券-Three_developments_to_shape_sector_in_2018_99页_4mb

Sector Update Summary

Core Content

This document provides an update on the Korean automotive sector, highlighting key developments expected in 2018 and the outlook for the industry's performance. The sector is currently in a phase of recovery, driven by product and pricing policy changes, labor cost reductions, and corporate governance reforms. The report outlines the performance of major players such as Hyundai Motor (HMC), Kia Motors, Hyundai Mobis, Hanon Systems, and Hankook Tire, with a focus on their growth potential and target prices.

Main Points

1. Sector Outlook

• The Korean automotive sector is expected to recover from five years of earnings slumps in 2018.
• The combined net profit of automakers and parts makers is projected to grow by 53% over the next two years, reaching KRW15t in 2019.
• Automakers are anticipated to rebound, but with a 6–12 month lag due to the US market not recovering until 2H18.
• The sector is upgraded to OVERWEIGHT, indicating strong growth potential and significant change.

2. Top Picks

• Hyundai Mobis and Hyundai Motor (HMC) are identified as top picks.
• Hyundai Mobis is expected to benefit the most from the growing adoption of electric vehicles (xEVs), with a target price of KRW330,000 (25.2% upside).
• HMC is expected to be reassessed for its asset holdings, new business ventures, and mass production capabilities.

3. Key Developments

Development 1: New Products and Pricing Policies

• HMC plans to launch five SUVs in 2018, including a fourth-generation Santa Fe in 1Q18, a facelifted Tucson in 3Q18, and Genesis and A-segment SUVs in 4Q18.
• The new models will feature next-generation Smart Stream engines with 50% thermal efficiency by 2020.
• HMC is returning to a "value for money" pricing strategy and reducing incentives to improve competitiveness.
• HMC and Kia are expected to lead in xEV momentum, with models like the Kona EV, Niro EV, and Soul EV launching in 2018.
• The Santa Fe is seen as a potential barometer for the success of the next new car cycle.

Development 2: Mandatory Retirements and Reduced Working Hours

• Labor costs in the sector are expected to decline due to the retirement of baby boomers, improving operating margins by 0.2–0.3% points per year over the next five years.
• Reduced working hours and increased xEV production are expected to reduce labor strife and make personnel management more flexible.
• Despite a contraction in domestic production, overseas plants are expected to offset this decline.

Development 3: Corporate Governance Overhaul

• The Hyundai Motor Group (HMG) is transitioning to a holding company structure to reduce circular shareholding and improve shareholder alignment.
• This change is expected to reveal hidden asset values and spur reratings.
• To gain minority shareholder support, HMG is likely to increase dividend payouts.
• The restructuring will make operations more flexible and competitive.

Key Information

Target Prices

Revenue and Profit Projections

Growth Drivers

• SUV expansion: HMC is increasing its SUV lineup from 3 to 7 models, with a focus on A-segment to luxury.
• xEV momentum: With Tesla's production issues, HMG's xEV platforms and mass production capabilities are expected to gain attention.
• Product improvements: The new Smart Stream engines and CVVD technology are expected to improve fuel efficiency and engine performance.
• Market share gains: HMC's SUV and luxury vehicle sales are forecasted to grow, especially in China and the US.

Outlook for 2018

• Parts makers and tire companies are expected to lead in profit recovery.
• Automakers will see lagging rebounds due to the US market's slow recovery.
• China exposure and falling labor costs will be critical for parts makers to recover faster than automakers.

Summary

The Korean automotive sector is on the verge of significant transformation in 2018, driven by new product launches, improved pricing strategies, and corporate governance reforms. HMC and Kia are expected to lead in xEV development, while parts makers like Hyundai Mobis are set to benefit from the shift towards electric vehicles. The sector's market cap has declined since 2011, but the upcoming changes are anticipated to boost performance and profitability, with a focus on SUVs, xEVs, and luxury vehicles. The restructuring of HMG is expected to enhance shareholder value and improve the group's overall competitiveness.