KOREA_AUTOS：UNFAVOURABLE_FX_OUTLOOK_TO_WEIGH_ON_EARNINGS_AND_MOMENTUM-2013-01-17.ppt

,IndustrialsKorea AutosKorea AutosUnfavourable FX outlook to weigh onearnings and momentumKorea Autos summary,abcGlobal Research Strong KRW leading to negative pricingand earnings downgrade Cutting 2013e OP of HMC,Kia andMobis by 7%,12%and 8%respectively,12.4%lower than consensus on average Remain N on HMC,OW on Kia andMobis(remove V),but lower TP to,TickerPrice(KRW)Mkt Cap(KRWbn)Mkt cap(USDm)RatingTP(KRW)Forecast div.yield(%)Potential return(%)2013 PE(x)2013 PB(x),HyundaiMotor Corp005380 KS210,50046,03843,540Neutral240,0001.015.06.91.1,Kia Motors000270 KS53,40021,64620,472Overweight70,0001.729.95.81.0,Hyundai Mobis012330 KS255,50024,87123,522Overweight320,0000.925.27.31.2,KRW240,000,KRW70,000 andKRW320,000New KRW assumption at USD1/KRW1,045:HSBCscurrency team have lowered their KRW forecast in 2013 toUSD1/KRW1,045,owing to:1)robust balance of paymentsinflows;2)higher tolerance of KRW appreciation by the newadministration;and 3)political focus shifting towards small,Potential return equals the percentage difference between the current share price and thetarget price,including the forecast dividend yieldNote:Pricing as at 16 Jan 2013,elsewhere(F&Vs,Peer Comps table)as at 15 Jan 2013Source:Bloomberg,HSBC estimates17 January 2013Paul Choi*AnalystThe Hongkong and Shanghai Banking Corporation Limited,Seoul Securities Branch,and mid-sized enterprises,putting less pressure on BoK tomaintain a weaker KRW.Our currency team also forecastfurther gradual appreciation to USD1/KRW1,010 in 2014.Sentiment vs.earnings:KRW appreciation negatively affectsprofitability of all auto companies with capacity constraints.Besides,the weak JPY continues to sap sector sentiment withpotential pricing competitiveness and a better earnings outlookon Japanese OEMs.Our sensitivity analysis implies that a 1%appreciation in the KRW against the greenback should lowerearnings of HMC and Kia by 1.6%,3.2%,respectively.,+822 3706 8758,Revising down earnings forecast:We now apply our new FXassumption of USD1/KRW1,045 and lower our 2013e earningsfor HMC,Kia and Mobis by 7%,12%and 8%respectively.Wealso adjust 2013 shipments forecast on HMC and Kia by+1.1%and-3.3%to 4.71m and 2.76m units,expecting volume growthat 6.9%and 1.5%in 2013.While we are not concerned aboutvolume,we continue to remain cautious on pricing risk ashighlighted in our report on HMC,Hyundai Motor(005380 KS):Downgrade to N:Pricing risk mounting,Oct.24 2012.Lower TP on HMC,Kia and Mobis:We cut our target,View HSBC Global Research at:http:/*Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulationsIssuer of report:The Hongkong and Shanghai BankingCorporation Limited,Seoul Securities BranchDisclaimer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaimer,which forms part of it,prices for HMC,Kia and Mobis to KRW240,000,KRW70,000 and KRW320,000 respectively to reflectchanges in our assumptions.Despite its weakening productcycle and growing pricing risk,we remain Neutral on HMCgiven its low valuation.We prefer Kia(OW)in the Koreanauto space owing to its better product cycle and mix.We areOW on Mobis but remove V flag.,IndustrialsKorea Autos17 January 2013FX impact on earnings Earnings downgrade on the Korean auto sector by the streetseems likely given the strong KRW We lower 2013e earnings by 7%and 12%for both HMC and Kiato reflect renewed forecasts on volume and USD1/KRW1,045 Our revised 2013e OP estimates are 12.4%(on average)lowerthan consensus:Remain N on HMC,OW on Kia and Mobis,abc,KRW appreciation=negativeearningsWe believe that FX has played a key role forHMC in achieving its pricing in KRW terms asthe current product cycle was based on the plandevised in 2006-07 when the KRW was at aroundUSD1/KRW900-950.Although we agree that thecurrency rate is not the single biggest contributorto the improved profitability in the past 2-3 years,this could be a swing factor for share priceperformance.HSBCs macro team forecasts thatKRW will appreciate by 7.2%y-o-y toUSD1/KRW1,045 in 2013 and will furtherappreciate to USD1/KRW1,010 by year-end 2014.USD and EUR trend vs.KRW,The HSBC currency team forecast the KRW toappreciate by 3.0%to EUR1/KRW1,405 in 2013,which could potentially be a setback to HMCspricing strategy in the overseas markets.As we highlighted before,we are not concernedabout sales volume this year,but we now expect afurther negative impact on net pricing in 2013,mainly owing to:1)a strong KRW;and 2)anaging product cycle,especially with HMC.Therefore,the stronger KRW outlook has beenreflected in our new estimates on earnings acrossthe auto stocks,which are now 12.4%(onaverage)lower than the market consensus.HMC share price vs.KRW/JPY trend,130120,(100=2009.01.01),(KRW)300,000250,000,(KRW)1615,110100908070602009,2010,2011,2012,2013,200,000150,000100,00050,000Jan-10,Jul-10 Jan-11 Jul-11HMC share price(RHS),Jan-12 Jul-12KRW/JPY(LHS),14131211,2,Source:Bloomberg,USD,EUR,Source:Bloomberg,IndustrialsKorea Autos17 January 2013KRW forecast against major currencies,abc,1Q12,2Q12,3Q12,4Q12,1Q13e,2Q13e,3Q13e,4Q13e,1Q14e,2Q14e,3Q14e,4Q14e,KRW/USDKRW/EURKRW/JPYKRW/INRKRW/CZKKRW/CNYKRW/HUF,1133.101512.6513.6722.2760.92179.945.11,1145.401442.5514.3520.5956.22180.265.00,1111.381436.9714.2621.0257.21176.885.05,1064.401405.0612.3619.4355.94170.884.80,1060.001420.4012.9320.0055.05170.425.07,1050.001407.0013.4620.1954.12169.085.12,1040.001404.0013.6820.3955.06168.015.20,1030.001390.5013.9220.6054.53166.675.15,1020.001397.4013.7820.8255.90165.585.18,1010.001383.7013.6520.6156.48164.235.12,1010.001393.8013.6520.6156.89164.765.16,1010.001414.0013.6520.6157.71165.035.24,Source:HSBC estimates,Bullish momentum in KRW topersist post electionAccording to the HSBC FX team,a highertolerance of KRW appreciation is likely to be seenunder President Park Geun-hyes term.Previously,a strong KRW was more likely to be resisted bythe Bank of Korea to maintain the exportcompetitiveness of Korean conglomerates.However,as the political focus will likely shifttowards smaller companies and importers,thereshould be less political pressure on the BoK tomaintain a weaker KRW.The currencys strengthis ensured by robust balance of payments inflows.That said,we expect the current policy efforts tolimit excess volatility of the KRW.Macro-prudential measures should remain a key part ofthe KRW story.Over time,such measures haveensured financial stability and led to lower levelsof foreign currency debt.This,in turn,shouldcontinue to support the KRWs gradualappreciation,along with other factors such as acyclical recovery of the economy and theimproving outlook for the global economy.Welook for USD/KRW to grind lower to 1,030 byend of 2013.,EUR,RMB,INR,etc.If KRW strengthens againstthe currencies of the major markets,to which theKorean auto names are highly exposed,this couldhave a negative operational impact on them as thestronger KRW should lead to a reduction in allearnings generated overseas.Besides,anappreciating KRW should also place them in amore difficult position to extend pricing strategiesin both domestic and overseas markets,whileforeign brands can be more flexible with adjustingtheir prices,providing a chance to expand theirprofitability and market share.Automakers with a larger domestic productionbase than overseas usually have higher revenuesensitivity to FX as they have a greater portion ofexport volume,earnings from which would betranslated into domestic currency later on.From aprofitability perspective,companies with smallerearnings will have a higher swing in earningsowing to FX changes.HMC and Kia:Domestic vs.Overseas production breakdown100%,FX sensitivities,80%,56.8%,41.6%,In this section,we have conducted an FXsensitivity test on earnings for HMC and Kia.It isnot easy to see the overall impact of majorcurrencies given Hyundai Motor Groups broadexposure to different regions globally,and thus,itis exposed to various currencies,including USD,60%40%20%0%,15.2%28.1%HMCEx port,Domestic,17.7%40.7%KiaOv erseas,Source:Company data3,IndustrialsKorea Autos17 January 2013HMC:FX sensitivity test,We conclude that a 1%appreciation in KRW,abc,USD,EUR,against the greenback would change 2013e,Total Exposure(USDm,EURm)Hedge(5%)Warranty(USDm,EURm)Net Exposure(USDm,EURm)FX(KRW)FX chg assumptionChg in exposure(USDm,EURm)2013e OP(KRWbn)OP sensitivity to 1%chg in FXSource:HSBC estimates,19,8719945,09213,7861,045-1%-138-1.6%,1,433727386231,405-1%-68,679-0.1%,operating profit for HMC and Kia by-1.6%and-3.2%respectively.As we highlighted earlier,wecan see that Kia is more sensitive to FXmovement than HMC owing to:1)a higherportion of exports(40.7%vs.HMCs 28.1%)andlower earnings compared with HMC.For Hyundai Mobis,its net exposure to USD,stands at roughly USD3.7bn and we estimate a,Kia:FX sensitivity test,1%appreciation in KRW to decrease OP by 0.5%,USD,EUR,according to our sensitivity analysis.In terms of,Total Exposure(USD,EUR)Hedge(30%)Warranty(USDm,EURm)Net Exposure(USD,EUR)FX(KRW)FX chg assumptionChg in exposure(USDm,EURm)2013e OP(KRWbn)OP sensitivity to 1%chg in FX,16,0464,8141,87011,2321,045-1%-112-3.2%,3,7351,1212542,6151,405-1%-263,481-0.8%,EUR,it has only a-0.1%impact on its operatingprofit.However,for emerging market currencies,including INR and RUB,Mobis hedges against itsFX losses as little as possible owing to highhedging costs.Thus,the weak FX in emergingmarkets(e.g.KRW/INR)has been deteriorating,Source:HSBC estimatesBased on our sensitivity analysis,HMC and Kiahave net exposure of USD13.8bn and USD 11.2bnrespectively.Since we cannot give a detailedbreakdown of regions to which the companies,profitability at its Module division.Despite thecontinuously stable demand we expect in 2013,KRW appreciation is magnifying the downsiderisk to earnings of Korean auto names.Hyundai Mobis:KRW/INR trend,export,we have divided the market into three:North America,Europe,and RoW(rest of theworld)excluding China.As a reminder,sales,(KRW)27.0025.00,(KRW)40.0038.00,generated from China are not integrated into theoverall sales since earnings from the Chinesesubsidiary are recognised under equity income(for both HMC and Kia),and thus,has no impacton their operating profits.As we have assumedrevenues from export volume to RoW in USD,23.0021.0019.0017.00,Dec-09,Jun-10,Dec-10KRW/INR,Jun-11,Dec-Jun-11 12KRW/RUB,Dec-12,36.0034.0032.00,terms,sensitivity to USD seems much greater,than to the Euro.However,if we look at exportvolume to the North American market alone,theimpact on overall earnings from the USDmovements should not be as drastic.4,Source:Bloomberg,IndustrialsKorea Autos17 January 2013HMC and Kia:2013 shipments forecast vs.guidance,abc,(unit)HMCDomesticOverseasKiaDomesticOverseas,HSBC forecast4,706,000647,7444,058,2562,761,915483,9672,277,948,Guidance4,660,000668,0003,992,0002,750,000480,0002,270,000,Diff.(%)1.0%-3.0%1.7%0.4%0.8%0.4%,2012A4,401,947667,7773,734,1702,720,753482,0602,238,693,Exp.Growth(%)6.9%-3.0%8.7%1.5%0.4%1.8%,Source:Company data,HSBC estimates,2013 global shipment forecast-not much concern withvolumeHMC and Kia recently released their guidance for2013 shipments,aiming for 4.0%growth in theircombined volume in 2013.While HMC istargeting 4.66mn units in 2013,which is 5.9%growth from the total shipments in 2012,Kia isseeking 1.1%growth to reach 2.75mn units thisyear.Based on their guidance,we have maderevisions on our shipment forecasts for 2013.Previously,we forecasted HMCs shipments in2013 to be 4.66mn units,but we have inched thisup to 4.71mn units,which represent 6.9%y-o-yvolume growth in 2013.For Kia,we cut our 2013shipments forecast to 2.76mn units from theprevious 2.86mn units,which is still slightlyhigher than the companys guidance for the year.HMC and Kia tend to give conservative annualguidance,but we are not concerned about theirsales volume for this year as well.However,we dosee not much upside from their guidance given theydo not have major capacity expansion planned inthe overseas plants and will likely to experiencedomestic production constraints in 2013.Pricing risk remains high withunfavourable FXWhile the Korean OEMs are approaching the endof the current product cycle,their globalcompetitors such as Japanese OEMs have recentlyentered into a new product cycle,introducing newmodels with noticeable improvements in design,performance and fuel efficiency.This deters,Korean brands from implementing a conservativepricing strategy,which have become morediscouraged by the appreciating KRW.Weaker Yen should favour Japanese,whileincreasing pricing risk for KoreansWhile there is not much direct impact from theweaker Yen on Korean automakers,it couldindirectly suppress the Koreans pricing strategy.The weaker Yen could allow Japanese automakersmore room for adjustments with their pricing,enhancing their price competitiveness.This couldtrigger voluntary price cuts by Korean automakers,leading to a decrease in their overall ASP.Besides,their relatively aged and less attractive model line-ups compared with their Japanese counterpartsshould also increase incentive levels across themarkets as companies try to secure market share.As such,we think this could create much moredownside on earnings for Korean automakers thanthe direct impact from FX movements given thatit would aggravate negative net pricing,thusundermining their growth profile.From investorsperspective,Japanese auto stocks look moreappealing than Koreans as the weakening yenshould boost their earnings,while lowering thevaluation significantly as pricing is a key swingfactor in the profitability of auto OEMs.Challenging domestic market environment topersistBoth HMC and Kia retreated 2.3%y-o-y and2.2%y-o-y respectively in the domestic market in2012,mainly owing to sluggish sales triggered bymounting household debts and reduced disposableincome.For HMC,all models in its luxury line,5,600,400,IndustrialsKorea Autos17 January 2013Korea:HMC&Kia incentive trend in 2012,Korea:Annual market share trend,abc,(000 KRW)800,100%80%,2.6%3.4%4.2%5.1%4.2%5.8%6.7%8.7%,60%22.7%22.5%21.4%26.0%28.4%31.2%31.2%31.4%40%20%48.7%48.3%49.1%47.0%48.4%42.4%43.3%43.4%,200,0%,0,Jan,Mar,May,Jul,Sep,Nov,2005 2006 2007 2008 2009 2010 2011 2012Hy undai KiaGM Daew oo Ssany ong,HMC,Kia,Renault-Samsung,Import cars,Source:Company data,HSBCposted a double-digit decline last year(Equus:-30.9%,Genesis:-21.7%,Genesis Coupe:-19.5%,Grandeur:-17.7%).While we think the weakconsumer sentiment should last in 2013,competition with imported cars should be moreintense,thanks to KRW appreciation.A numberof foreign brands import their cars manufacturedfrom their plants in Japan and US to sell them inthe Korean market,and lately,the Wons valuehas been appreciating sharply against thecurrencies of those two countries.Thus,we thinkthe foreign brands are likely to extend moreaggressive pricing strategies in the Korean market,which should put greater pressure on HMC andKia to adjust down their n