[ANALYST REPORT] Hyundai Motor: Gradual demand recovery

2Q operating profit estimated at W1.69tr (-3.2% YoY)

Hyundai Motor is expected to post 2Q16 sales of W23.6tr (+3.2% YoY) and operating profit of W1.69tr (-3.2% YoY, 7.2% margin). Domestic sales amounted to 120,000 units (+2% YoY) through May, but total domestic shipments came in at 300,000 units (-8% YoY) as exports went down 13% YoY 180,000 units.

Domestic shipments, however, improved markedly from 1Q16 when there were concerns over capacity utilization rates. Domestic plant shipments stood at 240,000 units in January-February. Earnings should come in line with expectations in 2Q as total domestic shipments are forecast to reach 470,000 (-6% YoY, +18% QoQ). Global shipments will likely improve gradually on the base effect at the Chinese subsidiary.

Demand in emerging markets to improve gradually in 2H

The share price has been burdened by sluggish demand in emerging countries. Cumulative shipments of Hyundai Motor Brazil (HMB) and Hyundai Motor Manufacturing Russia (HMMR) have decreased 14.9% and 13.0% YoY, respectively, far lower than our estimates made early this year (HMB: -3.2%, HMMR: -4.4%).

WTI price has climbed 32.5% YTD to US$49/bbl. Demand from emerging markets should rebound gradually. The strategic Creta model, which was a huge hit in India, should be rolled out successively in emerging markets. For several reasons, the outlook is brighter for 2H than 1H.

Retain BUY for target price of W180,000

We retain our BUY rating on Hyundai Motor for a target price of W180,000. We applied a PER of 8.0x, which is a 30% discount (average multiple during downturn) to MSCI Korea’s 12-month forward PER of 11.1x. For a long-short pair trade, we recommend long on Hyundai Motor given its two-track approach (launch of Genesis brand and strategic models in emerging markets). Toyota Motor is a short candidate due to problems of its manufacturing plants.

Source: Shinhan Investment Corp. http://www.shinhaninvest.com/eng/