Hyundai Motor: Strong Auto Financing Outweighs Impact of Cutbacks

The author is an analyst with Shinhan Investment Corp. He can be reached at [email protected] – Ed.

Rising used car prices to increase income

The auto finance business has been the main driver of Hyundai Motor’s profit growth since 3Q20. Hyundai Capital America’s net profit margin (80% stake) rebounded to 8-10% after stagnating around 1-2%, due to the preventive write-off of bad assets accumulated during the market downturn. We are seeing even more on the upside with the unprecedented boom in the US used car market. US auto finance companies, which have a high leasing share, see larger profits on used car sales when residual value increases. The recent supply disruption is driving up demand for used cars. With Hyundai Capital America as a consolidated subsidiary, Hyundai Motor is expected to benefit from the market boom in the future.

Production cuts are likely limited despite market concerns

Faced with worsening automotive chip shortages in 2Q21, Hyundai Motor temporarily halted production at some of its factories – Ulsan 3 plant (May 18), Ulsan 5 plant (May 17-18), ‘Asan (April 12-13 and 19-20) May 24-26) and the factory in Chennai, India (April 10-15, May 25-29). However, the Asan plant still has Sonata vehicles in inventory and the closure of the Indian plant was mainly caused by COVID-19 quarantine measures and summer vacations rather than chip shortages. Production curtailment issues persist with Ford, GM and Volkswagen downgrading their sales forecasts, but we believe the actual drop in production will be limited at Hyundai Motor.

Hold BUY for a target price of 300,000 KRW

We are maintaining our PURCHASE rating on Hyundai Motor for a target price of KRW 300,000. The strength of the automaker in its business portfolio has been shown through the leverage effect of auto financing. We find it positive that it is making efforts on several fronts to refine its lead, including the electrification strategy and investments in internal production.

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