Sector Report

Korea autos – Virtuosity

by Dohyoung Kim / Apr 16, 2019


Hyundai Motor (HMC) and Kia tune up their models every 4-5 years, rejuvenating close to 30-40% of their total volume. This year marks the start of a new movement. With powertrain upgrades, better segment positioning, improved pricing and a favourable won exchange rate, local carmakers are orchestrating a virtuous cycle. But after multiyear declines in EPS, the street has erred on the side of caution and this provides an opportunity to scale the earnings upcycle.

Anatomy of previous cycle
The 2014 refresh cycle disappointed partly due to the carmakers’ wrong segment positioning, limited upgrades in powertrains, an unfavourable forex environment and unattractive pricing. It led HMC and Kia into a vicious cycle where falling sales led to rising inventory levels and incentives, which caused a decline in utilisation and profits. Consequently, share prices also derated.

Signs of a virtuous cycle
We sense that the latest refresh cycle will be a virtuous one. This time, it coincides with the first powertrain upgrades in 10 years, which will equip most of the new and updated models with a new smart-stream engine. We have already seen the new Sonata DN8 from Hyundai that launched this month, which is 10% more fuel efficient than its predecessor.

Better segment positioning and forex environment
Segment-wise, both HMC and Kia’s share of SUV models are above the industry average of 34%. IHS expects this category to post a 4.9% Cagr in the next three years versus overall industry growth of 1.9%. Despite the powertrain upgrades, we note that HMC and Kia’s new and refreshed models are priced competitively versus previous models. In addition, the won is trading more favourably than in past years.