First Read: Korea Autos "May US sales back to growth; hybrid sales accel..."

Research evidence excerpt

First Read: Korea Autos "May US sales back to growth; hybrid sales accel..."

Valuation Method and Risk Statement

We base our price targets for Korean automakers and suppliers on PE methodology, sanity

checked against peers and their own histories. The automobile sector is cyclical in nature,

influenced by household income, labour markets, and broader macroeconomic conditions

that can be difficult to predict. Competition can erode profitability of automakers quickly.

Automakers need to invest heavily in product development, with CAPEX to stay competitive

and comply with tightening regulations on vehicle emissions and safety. The industry’s

transition to software-defined vehicles poses existential risk for traditional automakers that

fail to adapt. The sector has in the past exhibited high levels of volatility in terms of

profitability and valuation. Sector earnings and performance are highly sensitive to variations

in volume, pricing, raw material costs and currency.

Risk statements for individual stocks:

Hyundai Motor: Our price target is based on PE multiples. Demand for automobiles is highly

sensitive to the macroeconomic cycle, especially household income and employment, which

could lead to downside surprises to our estimates. Changes in raw material costs can have a

material impact on profitability. Competition can erode the company’s profitability quickly

through pricing discounts and dealer incentives. Higher short-term interest rates and sharp

decline in used car prices could negatively impact the company’s profits from auto financing

business.

Kia: Our price target is based on PE multiples. Demand for automobiles is highly sensitive to

the macroeconomic cycle, especially household income and employment, which could lead

to downside surprises to our estimates.