EUR 850.00 For Business Accounts Only

Morningstar | 005380 Updated Forecasts and Estimates from 28 Jan 2019

Hyundai Motor posted disappointing preliminary fourth-quarter results that were below our expectation. While revenue came in at KRW 25.7 trillion, up 4.8 % year on year, the firm delivered an operating income of KRW 501 million, down 35% over the same period last year. While waiting for Hyundai to publish full financials for the quarter, we do not expect to make any material changes to our fair value estimate of KRW 133,000. Hyundai’s shares are fairly valued in our view.

As we expected, the automaker continues to lose ground in China, with volume down 23% in the fourth quarter. Even though an across-the-board cooldown in Chinese auto sales shoulders part of the blame, we are increasingly concerned with Hyundai’s significant underperformance relative to the industry. The cooldown in Chinese auto sales reaffirms our thesis that growth rates were likely to be more subdued after the 10% automobile purchase tax was reinstated in early 2018. At the same time, we also attribute an ongoing downturn in the automobile market to negative wealth effects resulting from the sluggish Chinese stock market, looming Sino-U.S. trade war, and P2P loan market crackdown. While the company is targeting a 9% growth in China sales for 2019, we suspect some of the incremental sales will be coming from money-losing electric vehicles. Hyundai must sell a fixed number of these vehicles to fulfill China’s New Energy Vehicle credit requirement.

For the rest of the auto division, volume posted a small 1% decline. Tightening emission standards in Europe and softening in the Turkish economy were the main drags. Profitability at the Korean plant, which accounted for 40% of the total output, will continue to be a key focus. If Hyundai cannot reach an agreement with the unionized workforce, a labor strike will disrupt production and lead to low utilization of existing capacity.

Lastly, losses stemming from various subsidiaries and increased tax expenses dragged earnings into the negative territory during the fourth quarter. Management disclosed that most of the losses were due to impairments booked on the construction subsidiaries. We view these expenses as one-off items with limited impact on Hyundai’s long-term profitability.