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Fundamental View
AS OF 17 Mar 2023
Hyundai’s automotive sales and profitability gained momentum in 4Q22, and we are constructive on its FY23 outlook for wholesale unit volumes and profitability. A potential concern for Hyundai in 2023 involves customers of its moderately-priced vehicles in North America – Hyundai’s largest market by volume – 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 next year, although management is working to limit the impact.
Business Description
AS OF 17 Mar 2023- 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 & Catalysts
AS OF 17 Mar 2023- Management targets consolidated revenue growth of 10.5% to 11.5% in FY23, driven by higher wholesale volumes and an increase in average selling prices related to improving mix. Its FY23 consolidated operating margin target of 6.5% to 7.5% compares to 6.9% in FY23 and should benefit from high plant capacity utilization (96.8% in 4Q22) and mix. At the same time, management called out expected margin headwinds including limited global demand growth, sales incentive normalization, and market uncertainties such as currency and interest rate hikes.
- We estimate the combination of revenue growth and low end of its operating margin target would yield profit growth in FY23 in the mid-single-digit range. The increase in margin dilutive eco-friendly vehicle sales from 5% of global wholesales units in FY22 to 8% in FY23 is another factor that could weigh on its consolidated margins in FY23, especially considering its U.S. EV sales will likely not qualify for consumer tax credits based on our current understanding of the Inflation Reduction Act.
Key Metrics
AS OF 17 Mar 2023| KRW bn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Revenue | 75,265 | 82,487 | 80,577 | 94,143 | 113,718 |
| EBIT | 1,467 | 3,161 | 890 | 5,459 | 9,464 |
| EBIT Margin | 1.9% | 3.8% | 1.1% | 5.8% | 8.3% |
| EBITDA | 5,228 | 7,173 | 5,272 | 10,216 | 14,547 |
| EBITDA Margin | 6.9% | 8.7% | 6.5% | 10.9% | 12.8% |
| Total Liquidity | 17,050 | 15,975 | 17,082 | 19,745 | 26,639 |
| Net Debt | (8,350) | (6,749) | (4,453) | (5,202) | (11,035) |
| Total Debt | 6,995 | 7,628 | 10,920 | 12,569 | 12,940 |
| Gross Leverage | 1.3x | 1.1x | 2.1x | 1.2x | 0.9x |
| Net Leverage | -1.6x | -0.9x | -0.8x | -0.5x | -0.8x |
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CreditSights View
AS OF 21 Jun 2023Our Outperform recommendation on Hyundai notes is based on relative value, expectations of growing market share in developed markets, its innovative EV product offerings that we believe should fuel further share gains, solid free cash flow generation, 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: June 21, 2023
Recommendation Changed: January 13, 2023
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Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
Bond:
SBIIN 4.875 28
Credit Rating:
-/BBB/-
