[Click eStock] Paradoxical Investment Opportunity in Automobiles Arrives... Kia > Hyundai > Mando, etc.

[Asia Economy Reporter Lee Seon-ae] Heungkuk Securities stated on the 18th that the semiconductor shortage has paradoxically created an investment opportunity in the automobile and auto parts sectors.

Third-quarter earnings for the automobile sector are expected to underperform market consensus due to reduced operating rates caused by semiconductor supply disruptions and increased cost burdens (freight/raw materials). Since the semiconductor shortage issue began in the second quarter, domestic automobile sector stock prices have fallen by -17.4% from the yearly high and -3.9% since the second quarter.

Researcher Kim Gwi-yeon of Heungkuk Securities said, "Although uncertainty persists, from a stock investment perspective, it is a time to consider bottom-fishing and investment strategies based on 2022 earnings and profits." He explained, "The semiconductor shortage volume will return as deferred demand in the future, global demand will increase due to expanded COVID-19 vaccination rates, finished car ASP will rise and profitability will expand due to low inventory and incentives, and a hedging effect against rising raw material prices is expected." He added, "As production shortfalls caused by semiconductor shortages eventually lead to deferred demand/earnings, stock prices are expected to rise." He further noted, "In particular, the 2022 price-to-earnings ratios (PER) of finished car manufacturers are 6.5 times for Hyundai Motor and 5.6 times for Kia, representing a paradoxical investment opportunity brought by the semiconductor shortage."

Heungkuk coverage of 8 companies forecasts combined third-quarter sales of 59.3 trillion KRW (YoY -1.5%/QoQ -9.0%), operating profit of 3.7 trillion KRW (YoY +292.7%/QoQ -14.7%), and an OPM of 6.2%. Sales and operating profit are expected to fall short of consensus by -5.9% and -8.6%, respectively. The weaker-than-expected results compared to previous forecasts are attributed to seasonal low demand in the third quarter, disruptions in wholesale sales due to global finished car operating rate declines, and profitability contraction caused by rising freight and raw material costs.

Investment points for the automobile sector through next year are expected to be the expanded stock price decline due to short-term production disruptions and the possibility of securing mid- to long-term profitability.

Researcher Kim said, "At this point, I suggest a selective investment strategy in the order of 1) stocks with expanded price declines due to semiconductor shortages, 2) stocks that can secure profitability despite production disruptions, and 3) stocks that can rebound earnings due to rising global finished car operating rates." He added, "Investment preference is [sector] finished cars > parts companies >> tires, and [stocks] Kia > Hyundai Motor > Mando > Mobis > Hanon Systems >> the three tire companies in order."