Fundamental ViewAS OF 13 Dec 2022
We are constructive on Hyundai’s automotive segment performance in FY22 and its evolving EV strategy. At the same time, we believe North American buyers of the company’s moderately priced vehicles could be more susceptible to an economic downturn in 2023, which could weigh on sales and profit. In addition, we believe the EV sourcing requirements included in the Inflation Reduction Act (IRA) are more favorable to domestic automakers and could blunt Hyundai’s EV sales growth beginning in 2023, although management is working to limit the impact.
Business DescriptionAS OF 13 Dec 2022
- Hyundai Motor Co., Ltd. engages in the manufacture and distribution of motor vehicles and parts. It operates through the following business areas: Vehicle, Financial and Others. The Vehicle division offers motor vehicles. The Financial division provides financing, leasing and credit cards. The Other division includes manufacture of railways. The company was founded on December 29, 1967 and is headquartered in Seoul, South Korea.
- Hyundai Capital America benefits from a support agreement with Hyundai Motor (HMC). HCA investor relations confirmed its support (keepwell) agreement contains a fixed charge coverage provision that it views as particularly strong compared to other peers. HCA’s support agreement stipulates that HMC will make cash contributions to HCA if the fixed charge coverage is below 1.1x, allowing the company to mitigate the impact on capital from losses. Key provisions of the support agreement listed in the business update include (1) HMC agrees it, its controlled subsidiaries, and entities subject to joint control, will own 100% of HCA, (2) HMC will cause HCA and its subsidiaries to maintain positive consolidated tangible net worth, (3) HMC will take all necessary actions to ensure HCA maintains a minimum Fixed Charge Coverage of 1.1x, and (4) Third-party enforceability rights.
Risk & CatalystsAS OF 13 Dec 2022
Management intends to reverse its sales trends in China — which have declined by two-thirds since 2016 — by focusing on the premium EV segment, China’s fastest growing light vehicle category.
In March 2022, Hyundai’s China joint venture announced it is receiving a ₩600 billion (~$470 million) capital infusion from its parent companies to strengthen its capital stability and further its electrification initiatives.
We believe the amount of HYNMTR paper outstanding, and the disclosure hurdle could explain the trading differential between KIA/HYUCAP and HYNMTR notes. While we believe HYNMTR notes trade cheap for their rating, our lack of access to its financials prevents us from being more constructive on its notes.
Key MetricsAS OF 13 Dec 2022
|KRW bn||FY18||FY19||FY20||FY21||LTM 3Q22|
CreditSights ViewAS OF 13 Dec 2022
Our Outperform recommendation on Hyundai notes is based on relative value, the company’s growing market shares in developed markets, their innovative EV product offerings that we believe should fuel further share gains, and resilient automotive profit margins. Hyundai targets increased light vehicle wholesales in 2023. While vehicle affordability concerns are expected to weigh on light vehicle demand in 2023, we believe Hyundai’s value-oriented light vehicle offerings could be somewhat insulated from affordability concerns and may benefit from a customer trade down effect. Hyundai and Kia are independent automakers that are aligned through cross-ownership, common governance structures and chairman, and joint ownership of captive finance subsidiaries.
Recommendation Reviewed: February 28, 2023
Recommendation Changed: January 13, 2023