EUR 850.00 For Business Accounts Only

Morningstar | Hyundai 3Q Result Dragged down by One-Off Items and Deteriorating Cost Structure; FVE Maintained at

Hyundai Motor has posted a disappointing third-quarter result with revenue up by merely 1% and operating income down 76% year over year. While the weak quarterly result is primarily due to one-off factors such as currency headwinds and a jump in product recall provision, we continue to find deteriorating cost structure in the group’s U.S. operation to be more worrisome. However, Hyundai’s operational performance should improve in the fourth quarter as one-off factors dissipate. We maintain our fair value estimate of KRW 133,000 on the company and think shares are fairly valued.

Lackluster sales continued in China and North America, with both regions seeing 4% year-on-year wholesale sales volume drops in the third quarter. We think Hyundai will continue to struggle in China as the automobile market becomes increasingly competitive. While management did not revise down its fiscal 2018 sales volume target of 900,000 for the region, we think a more realistic number would be around 800,000. On the green car policy front, Hyundai is scheduled to rollout multiple electric vehicles to fulfill the country’s new energy vehicle, or NEV, credit requirement.

During the third quarter, one-off items amount to an estimated KRW 725 billion, KRW 500 billion for recall provisions, and KRW 225 billion resulted from currency headwinds. Excluding these one-time items, we think Hyundai’s operating income would have been around KRW 1,000 billion, more in line with last year’s results. The company has disclosed that their U.S. operation is running at losses due to low factory utilization rate and a high level of incentives offered to buyers. While Hyundai’s strategic shift toward producing more SUVs will help most likely spread the fixed costs in manufacturing, we do not see any drastic drop in incentives offered in the near term.