Morningstar | Hyundai's Operational Weakness Continued in 2Q, FVE Lowered to KRW 133,000. See Updated Analyst Note from 26 Jul 2018
Hyundai reported another lackluster result for second-quarter 2018, with operating profit down 29%. While the firm attributes disappointing financial performance to rising fixed costs and unfavorable foreign exchange environment, we now think operational softness will most likely continue as Hyundai's incentive program fails to excite consumers in the U.S. and rising competitiveness of mass-market SUVs in China weakens Hyundai's value proposition. We lower fair value estimate to KRW 133,000 from KRW 150,000 to reflect both near-term pricing pressure and uncertainties around whether the firm can strengthen its product offerings in the longer term.A bulk of our fair value estimate adjustment results from our less optimistic margin outlook as a result of intensifying competition. While revenue for the second quarter posted 2% year-over-year growth, weak sales volume for China and the U.S., each coming in at 3% year-over-year decline, weighed on Hyundai's result. Given Hyundai's sluggish sales numbers coming out of the U.S., we lower U.S. volume forecast from 3% to flat line for 2018. Furthermore, potential 25% automobile import tariffs by the current U.S. administration will hurt Hyundai's business outlook in the country, as roughly half of the firm's cars sold in the U.S. are manufactured abroad.
At the same time, Hyundai is underexposed in the SUV space, which is quite disadvantageous for its sales in China. With Chinese consumers continuing their preference for automobile shifting from sedan to SUV. With the SUV space being primarily dominated by Chinese domestic automakers such like Geely and Great Wall Motor, Hyundai's turnaround story in China hinges on its ability to come out with differentiated product offerings to capture consumer attention. In fact, Hyundai has announced its strategy to focus on SUVs and premium sedans in China. We think it is too early to judge whether such an approach will promise better operational performance in the future.
Hyundai Motor is engaged in the manufacture and distribution of motor vehicles and parts. Co.'s passenger automobiles include Accent, Elantra, Sonata, Azera, Genesis, XG and Tiburon. Co.'s recreational vehicles include Santa FE, Tucson, Veracruz and Entourage. Co.'s commercial vehicles include H-1 Truck, Mighty II, 5 Ton Cargo, Tractor, Dump Truck, Aero Town, and Aero Queen.
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