“Target Prices Cut to KRW 670,000 and KRW 260,000″… Why Hyundai Motor and Kia Have Little to Smile About Even After Selling More Cars [Weekend Money]

Both automakers’ Q3 operating profits forecast to fall short of expectations
Raw material costs and sales mix weigh on results
Focus shifts to next year’s new models and expanded local production

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Hyundai Motor, which sold fewer cars, and Kia, which sold more, both have little reason to celebrate this time. Although their sales volumes moved in opposite directions, analysts say third-quarter earnings at both companies may fall short of market expectations. Raw materials purchased at higher prices are now entering their factories, and profits also depend on which models sold well. Investors in the automakers are already turning their attention to next year’s new-model calendar.

In a report on October 8, Kim Seongrae, a researcher at Hanwha Investment & Securities, forecast third-quarter operating profits of about KRW 2.4 trillion for Hyundai Motor and KRW 2.39 trillion for Kia. Both figures are below market expectations of KRW 3 trillion and KRW 2.55 trillion, respectively. Kia is expected to post a 63.6% increase in operating profit from a year earlier, yet still fall short of expectations. The reason is that the comparison is against weak results last year, while market expectations had risen even higher. Against this backdrop, Hanwha Investment & Securities lowered its target prices for Hyundai Motor and Kia to KRW 670,000 (-11.8%) and KRW 260,000 (-7.1%), respectively. On October 8, Hyundai Motor shares closed at KRW 325,000 and Kia shares at KRW 106,700.

The two companies face somewhat different challenges in meeting expectations. At Hyundai Motor, production disruptions caused by a strike led to lower sales. The report estimated that production stoppages in July and August caused a shortfall of about 55,000 vehicles. Production of midsize and large sport utility vehicle (SUV) hybrids, which are relatively profitable, was also affected. In other words, the company was unable to make enough of the vehicles that could have generated higher profits.

Kia expanded its sales through increased sales of hybrids in North America and electric vehicles in Europe. However, higher sales volumes are not expected to translate directly into higher profit margins. Strong sales of relatively low-margin entry-level electric vehicles in Europe are expected to weigh on the profitability of its overall sales mix.

Raw materials are weighing on both companies. Copper and aluminum, whose prices rose sharply in April and May, are expected to raise costs as they are used in production in the third quarter after a time lag.

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The outlook for next year, however, is not bleak. Hanwha Investment & Securities expects sales volumes and profitability to improve together next year as production of delayed new models ramps up starting in the fourth quarter. For Hyundai Motor, factors supporting the outlook include the new Tucson, the IONIQ 3 aimed at the European market, and Genesis hybrids. For Kia, the report highlighted expanded U.S. production of the Telluride and Sportage hybrids, as well as the impact of the Seltos hybrid launch.

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The key is to build popular vehicles where demand is strong. Analysts say that increasing local production of hybrids popular in North America could help the companies run their factories more efficiently and reduce tariff costs. Researcher Kim forecast that Hyundai Motor’s operating profit would rise 22.3% next year from this year, while Kia’s would increase 13.5%. He said, “Expanding production and sales of new models that can meet local demand will offset the negative impact of foreign exchange rates as existing models age,” adding, “Kia’s relative appeal as a dividend stock could also come into focus because its shares are undervalued.”

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