EUR 850.00 For Business Accounts Only

Morningstar | Hyundai Reports Strong 1Q Results on Better Product Mix; Maintaining KRW 133,000 FVE

No-moat Hyundai Motor delivered operating income of KRW 825 billion during the first quarter, an increase of 21% from the same period last year. Strong operational performance was driven by a 7% top-line expansion and 80-basis-point rise in gross profit margin. While we applaud Hyundai’s efforts in building out its SUV product offerings, much of the resulted upside has already been captured by our current forecasts. We maintain our fair value estimate of KRW 133,000 and view the shares as fairly valued.

Improvement in Hyundai’s product mix was the major driver behind the firm’s strong first-quarter results. Sales of SUVs made up 38% of the 1 million vehicles sold in the first quarter, a material increase from last year’s 34%. More-expensive SUVs carry higher margins for Hyundai, boosting the bottom line. We believe there is more upside to the automaker’s operating margin over the rest of 2019 as the firm launches its large SUV, Palisade, and luxury sedan G90. On the expense front, there will undoubtedly be added marketing costs associated with new product launches, and we expect marketing expense as a percentage of sales to hover around 3.5%. Although there remains little detail on how exactly Hyundai will deliver its KRW 30 trillion cost-cutting plans by fiscal 2025, we think the most practical way to reduce costs is through better utilization of existing manufacturing plants. The shutdown of a manufacturing plant was a sensible move, given that the utilization rate has been running below 50%.

We expect 2019 global light-vehicle demand to be flat to down 3%, but a possible no-deal Brexit and international trade conflict represent substantial risks to our forecast. We continue to hold low expectations for Hyundai's performance in China, given its brands’ weak value propositions to the country’s consumers. With planners in China continue to provide support to green cars at the expense of gasoline ones, we think Hyundai is a bit too late to the electric vehicle race. We see strong auto demand coming out of India, Brazil, and Russia, which will help offset some of the sales volume declines. In the case of more mature markets like Korea, the United States, and Europe, Hyundai’s future successes depend heavily on marketing its SUV and Genesis to consumers.

The National Highway Traffic Safety Administration’s investigation into Hyundai’s noncollision fire incidents has not reached any conclusive results. Therefore, the automaker has yet to book any related provisions. If Hyundai vehicles are found to have defects or safety issues, the automaker is expected to incur more provisions ahead.