Hyundai Motor Gets Chinese Government NEV Subsidy in February - More Signs of Normalizing in China

China November Auto Demand: SAAR Weakens MoM but FY17 Demand Likely to Be up by 3-4%

Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

<p>A casual glance at FNGuide's consensus earnings estimates for Hyundai Motor suggests that sellside consensus is currently assuming a 4Q17 earnings turnaround at Beijing Hyundai Motor Co. (BHMC) with 2018 representing a turnaround year.  </p><p>BHMC's earnings contribution takes place at the pre-tax profit line, which is consistent with global automotive OEM practice for those unfamiliar with the practical accounting effect of local JV partner majority ownership in China for foreign auto companies.  We have looked at the gap between operating profit and pre-tax profit in consensus earnings estimates for FY17 and FY18 as a starting point for our analysis:</p><ol><li>BHMC sales recovery in 2018 seems built into consensus estimates, which would be reasonable given what we estimate to be BHMC's current 825k unit break even point.  In 4Q, QTD BHMC average SAAR is 993k units, up from an average of 782k units in 3Q17 and from 642k units in 2Q17.  </li><li><div class="content-highlight">Current valuations actually looks to 2018 earnings outlook which should be realistic given the time of the year.  Based on latest consensus estimates Hyundai Motor has been trading in a range of 9.7-10.5x 2017E PER and 7.5-8.1x 2018E PER.  The latter year is similar in range as historical FY2016.  With consensus estimates anticipating a strong pre-tax profit turnaround, the prospect of BHMC earnings recovery expectations in 2018 should already be largely priced in.</div></li></ol><p>As currently the 3rd largest automaker in the world, the Hyundai-Kia group is not likely to grow at breakneck pace in the coming 3-5 years unless the global auto industry sees another emerging market motorization, the size of which must rival that of China for Hyundai-Kia to grow like it did in the last decade in unit terms.  However, the fact that both Hyundai and Kia have lower ASP's compared with the other top 10 global automakers reflects its current mix which favors A-C segment sedans.  While this is currently seen as a negative, we would argue that there is still potential for ASP expansion on stable volumes over the next 5 years without even making wild assumptions about the Genesis brand.  Herein lies the dream and the potential - but that topic lies outside of the scope of this note nor is that event imminent in 2018, so we shall revisit it when it is more timely.</p>

A casual glance at FNGuide's consensus earnings estimates for Hyundai Motor suggests that sellside consensus is currently assuming a 4Q17 earnings turnaround at Beijing Hyundai Motor Co. (BHMC) with 2018 representing a turnaround year.  BHMC's earnings contribution takes place at the pre-tax profit line, which is consistent with global automotive OEM practice for those unfamiliar with the practical accounting effect of local JV partner majority ownership in China for foreign auto companies.  We have looked at the gap between operating profit and pre-tax profit in consensus earnings estimates for FY17 and FY18 as a starting point for our analysis:BHMC sales recovery in 2018 seems built into consensus estimates, which would be reasonable given what we estimate to be BHMC's current 825k unit break even point.  In 4Q, QTD BHMC average SAAR is 993k units, up from an average of 782k units in 3Q17 and from 642k units in 2Q17.  Current valuations actually looks to 2018 earnings outlook which should be realistic given the time of the year.  Based on latest consensus estimates Hyundai Motor has been trading in a range of 9.7-10.5x 2017E PER and 7.5-8.1x 2018E PER.  The latter year is similar in range as historical FY2016.  With consensus estimates anticipating a strong pre-tax profit turnaround, the prospect of BHMC earnings recovery expectations in 2018 should already be largely priced in.As currently the 3rd largest automaker in the world, the Hyundai-Kia group is not likely to grow at breakneck pace in the coming 3-5 years unless the global auto industry sees another emerging market motorization, the size of which must rival that of China for Hyundai-Kia to grow like it did in the last decade in unit terms.  However, the fact that both Hyundai and Kia have lower ASP's compared with the other top 10 global automakers reflects its current mix which favors A-C segment sedans.  While this is currently seen as a negative, we would argue that there is still potential for ASP expansion on stable volumes over the next 5 years without even making wild assumptions about the Genesis brand.  Herein lies the dream and the potential - but that topic lies outside of the scope of this note nor is that event imminent in 2018, so we shall revisit it when it is more timely.

Hyundai Motor: BHMC Turnaround Assumed in Current Consensus Earnings Estimates