Undervalued Auto Industry... "Performance, Technology, and Collaboration All Strong"

Performance Improvement Despite Exchange Losses and COVID-19
Solid Roadmap Compared to Overseas Companies
Technology and Collaboration Progressing Rapidly

[Asia Economy Reporter Minwoo Lee] Despite the global semiconductor supply shortage, Hyundai Motor and Kia are expected to achieve results in the second quarter of this year that exceed market expectations. It is analyzed that they will break away from the current undervaluation amid rapid technological development in various fields such as autonomous driving and electric vehicles.

On the 5th, Meritz Securities presented an 'Overweight' investment rating for the automobile sector based on this background. They judged that Hyundai Motor and Kia are currently undervalued as recent technological advancements and sales recovery have not yet been reflected.

Sales performance is expected to improve starting from the second quarter. It is forecasted that Hyundai Motor and Kia's consolidated wholesale sales will reach 940,000 units and 680,000 units respectively in Q2, representing about a 5% increase compared to the previous quarter. Operating profits are expected to reach 1.92 trillion KRW and 1.32 trillion KRW respectively.

Researcher Junseong Kim of Meritz Securities explained, "In Q1, due to a sharp rise in the year-end exchange rate, foreign currency translation losses of approximately 150 billion KRW and 130 billion KRW were reflected as operating expenses for Hyundai Motor and Kia respectively, but the possibility of such exchange rate fluctuations is low in Q2. Considering revenue growth and fixed cost reduction leading to profitability improvement, Hyundai Motor and Kia can exceed the market consensus operating profit forecasts of 1.79 trillion KRW and 1.26 trillion KRW in Q2."

Additionally, Meritz Securities viewed the changing valuation perspective on the automobile sector positively. Based on this year's expected performance, the price-to-earnings ratios (PER) for the two companies are 7.9 times and 7.2 times respectively. Considering that the 15-year average 12-month forward PER was 8.3 times, there is room for stock price appreciation even from the traditional valuation perspective.

Meanwhile, market attention is focused not on existing businesses but on technology advancement companies that can enjoy growth in the mobility market. A representative example is the sharp rise in Hyundai Motor and Kia's stock prices following early-year rumors of collaboration with Apple on autonomous electric vehicles. Similar cases include General Motors (GM), which announced a stake investment from Microsoft (MS) in February, and Volkswagen (VW), which held a Power Day related to secondary batteries in March. Researcher Kim predicted, "A gradual shift in valuation perspective is expected for Hyundai Motor and Kia, which are proving leading capabilities among existing original equipment manufacturers (OEMs)."

Hyundai Motor Company's new electric vehicle model Ioniq 5 (Provided by Hyundai Motor Company)

In fact, Hyundai Motor and Kia have already planned to unveil a pure electric vehicle (BEV) platform with high energy supply efficiency in the first half of this year, introduce a concentrated architecture and wireless firmware update (FOTA) in the second half, equip vehicle application processors (AP) in 2022, and realize cloud-based machine learning in 2023-2024. This is considered one of the fastest developments alongside Volkswagen among competitors.

Researcher Kim emphasized, "Big tech companies and vehicle-sharing service providers, which are the fastest to commercialize robotaxis, require devices equipped with such technologies. Hyundai Motor has already signed supply contracts with Uber and Lyft, which gave up on autonomous driving self-development in March and April respectively."