[This Week's Kwan.Jong] Kia Hits Record High, Engine Warming Up... "Competing on Profitability"

Steady US Sales Expected to Benefit from IRA
Increasing High-Value Sales Share Improves ASP
Intensified Competition with Chinese Cars... "Cost Competitiveness is Key"

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you invest in with your own money? In the unrefined and chaotic online environment filled with all kinds of information, Asia Economy aims to be your hands, feet, eyes, and ears by delivering accurate information about companies. Each week, we focus on companies that rank high in stock inquiries from the financial information provider FnGuide, providing basic information as well as analysis of related companies such as partners, customers, and investors. We will explain the financial status, performance, and future value of companies in an easy-to-understand manner. We come to you every week under the name of "This Week's Watchlist," highlighting stocks of interest for the week.

Kia, a leading domestic automobile manufacturer, has been one of the stocks that troubled investors due to a prolonged decline in its stock price. After the 'ChaHwaJeong (Automobile·Chemicals·Petroleum)' market phase in 2011, the stock price declined for about 10 years. Although the liquidity rally following the sharp drop caused by COVID-19 in 2020 seemed to shake off the stagnation, the stock price remained sideways for another three years.

However, Kia is now preparing for a breakout to new highs. A meaningful stock price rise began last January, driven by expectations that it would benefit from the government's announced 'Corporate Value-Up Program.' As a result, the stock price has risen 53% from its low this year, reaching an intraday 52-week high of 131,700 KRW in March. The outlook from securities firms for the second half of the year is favorable. Over the past three months, there have been 23 upward revisions of Kia's target price. The highest target price was set by Daol Investment & Securities at 177,000 KRW, while the average target price across securities firms is 150,000 KRW. This implies an additional upside potential of 23% compared to the current stock price (based on the closing price on the 10th).

Although the recent stock price appears to be taking a brief pause, investors expect the stock to break past its previous high in the second half of the year. Kia is undervalued compared to its global competitors and operates its business efficiently. Kia's operating profit margin has steadily increased over the past three years: 7.25% in 2021, 8.36% in 2022, and 11.63% last year. The most recent figure for Q1 this year is an impressive 13.1%, the highest among global automobile manufacturers.

Strong U.S. Sales... Expected Benefits from IRA

Looking at the most recent global sales trends, sales in the United States have notably increased. Last month, U.S. retail sales rose 5.1% year-over-year to 75,156 units. The share of sports utility vehicles (SUVs), which have a high average selling price (ASP), reached 80%. Specifically, the Sportage sold 15,512 units, the Seltos 6,460 units, and the Carnival 4,151 units. Sales volumes for most models increased evenly. Particularly, electric vehicle sales surged 127% during the same period, reaching 7,197 units. Sales of the EV6 and EV9 increased by 19% and 39% year-over-year, totaling 2,660 and 2,187 units, respectively. This is the highest monthly electric vehicle sales volume ever recorded.

Especially for the EV9, which is popular in the U.S., local production began on the 30th of last month at the Georgia West Point plant. The industry expects Kia to gain price competitiveness by benefiting from subsidies under the Inflation Reduction Act (IRA). Vehicle buyers can receive a tax credit of up to $7,500 (approximately 10 million KRW) for products assembled and equipped with parts locally. Lee Byung-geun, a researcher at LS Securities, said, "As local production expands, IRA tax benefits become available, and profitability is expected to improve over time."

Meanwhile, former U.S. President Trump, a leading candidate in the U.S. presidential race, has repeatedly threatened to repeal the IRA. Jo Hee-seung, a researcher at Hi Investment & Securities, said, "Due to Kia's aggressive policies focusing on eco-friendly vehicles such as hybrid electric vehicles (HEV) and battery electric vehicles (BEV), the stock price may be influenced by Trump's approval ratings in the future," adding, "This is a buying opportunity from a long-term perspective." He further noted, "Kia is steadily leading a profit growth phase despite concerns about a peak-out this year, and the company's value is expected to be re-evaluated once more around the electric vehicle expansion cycle by 2026."

Increasing SUV and Premium Option Ratios... Steady ASP Improvement

Kia recorded an ASP growth rate exceeding 12% year-over-year in Q1. This was due to expanding the share of SUVs, which have higher selling prices and are preferred by customers in the U.S. and Europe. At the same time, the sales proportion of high value-added options such as advanced driver-assistance systems (ADAS) was high. The combined highest trim selection rate for SUVs sold in the U.S., including the Sportage, Sorento, and Telluride, reached 41%. Profitability improvements from premium option-focused SUV sales are expected to continue into the second half of the year.

Kim Sung-rae, a researcher at Hanwha Investment & Securities, said, "In the second half, profitability effects from the product mix will be complemented by an increase in HEV volume," adding, "Strong global sales of key models such as the facelifted Sportage and Sorento are expected." He also noted, "The price of the Carnival HEV, which is expected to expand sales in the U.S., is about $40,000, which is high compared to the overall ASP." Nam Joo-shin, a researcher at Kyobo Securities, also said, "The continued ASP growth and results from new model launches in the second half will play an important role in the stock price."

Favorable Cost Structure and Exchange Rate

The stable cost structure is also positive. Prices of key raw materials such as non-ferrous metals and plastics needed for vehicle production surged in 2021 but have since stabilized and declined. Prices of core secondary battery materials like lithium and nickel, which affect battery and electrification component costs, also stabilized after surging in 2022, starting from the second half of last year. Although rubber prices, a key tire material, have recently been rising, they remain lower compared to the COVID-19 period. Regarding logistics costs, concerns about increased sea freight due to geopolitical issues in the Middle East exist, but long-term contract rates already in place are expected to maintain stability until the end of this year.

The exchange rate is also favorable. Considering that the won-dollar exchange rate, which hovered in the low 1,300 KRW range in the second half of last year, is currently maintaining around 1,350 KRW, securities firms expect the exchange rate effect to contribute to performance improvements for the time being. Shin Seung-jin, a researcher at Samsung Securities, said, "Record-high earnings are expected due to cost reductions and exchange rate effects," adding, "Kia's operating profit may even surpass Hyundai Motor's automobile division operating profit."

Threat from China's Domestic Market... "Ultimately, Profitable Business is Key"

Kia plans to begin full-scale sales of the mid-priced compact SUV EV3 domestically from next month. It is Kia's core model aimed at opening the era of electric vehicle popularization. The price with subsidies applied is around 30 million KRW, and it offers a driving range of about 500 km. It is scheduled to be sold in the U.S. starting in 2025.

In line with Kia's EV3 launch, China's electric vehicle manufacturer BYD has begun certification procedures to enter the domestic market. Industry voices warn that if BYD's vehicles pass certification, a price war could erupt in the domestic affordable electric vehicle market. The reason is price competitiveness. BYD's vehicles have superior price competitiveness compared to Kia's EV3. The lowest selling prices in China for BYD's compact hatchback 'Dolphin' and mid-size sedan 'Seal,' currently under certification review, are approximately 19 million KRW and 39 million KRW, respectively. Notably, the Dolphin is even cheaper than the Ray EV, currently the cheapest electric vehicle in Korea (27.75 million KRW before tax benefits).

Securities firms analyze that it is important whether Kia can maintain high profitability despite such competitive conditions. Even if Kia sells fewer units than competitors, profitability ensures a profitable business. Researcher Jo said, "The key is whether EV3's profitability can be maintained despite the fixed cost burden of initial operations and lowered electric vehicle prices," adding, "Due to recently reduced material costs, profitability deterioration is expected to be limited compared to market concerns." Samsung Securities researcher Lim Eun-young said, "Kia's cost of sales per vehicle in Q1 was $20,050, lower than BYD's $21,700," adding, "Kia can manufacture cars cheaper than Chinese companies, giving it an advantage in cost competitiveness."