[Click eStock] "Automobile Stocks Should Be Approached Based on Intrinsic Value Rather Than Exchange Rates"

Hana Securities analyzed on the 26th that regarding automobile stocks such as Hyundai Motor and Kia, "The recent rise in the KRW-USD exchange rate will provide short-term benefits to corporate earnings, but it is more important to approach from the perspective of intrinsic value, such as stable earnings, low valuation (stock price level relative to corporate value), and high shareholder returns."

On the same day, Seonjae Song, a researcher at Hana Securities, stated, "The price-to-earnings ratio (PER) of Hyundai Motor and Kia for next year is low at around 4 times, the expected dividend yield is in the high 5% to mid-6% range, and the total shareholder return yield is high at 8% to 10%." He maintained a buy investment opinion on Hyundai Motor and Kia, with target prices of 310,000 KRW and 140,000 KRW respectively.

Assuming no adjustment in sales volume and reflecting the recent exchange rate, the combined operating profit of Hyundai Motor and Kia is expected to increase by 7%, from 28.1 trillion KRW this year to 30 trillion KRW next year. The assumptions for the average and year-end exchange rates for next year were revised from the previous 1,340 KRW and 1,280 KRW to the new 1,395 KRW and 1,360 KRW, respectively. Consequently, the operating profit estimates for Hyundai Motor and Kia next year increased from the previous 15.1 trillion KRW and 13 trillion KRW to the new 16.2 trillion KRW and 13.8 trillion KRW, respectively.

The current KRW-USD exchange rate stood at 1,456 KRW as of the 24th. This is a 10% increase from 1,320 KRW on September 30. The average exchange rate for the fourth quarter is also 1,400 KRW, which is more than 3% higher than the third quarter average of 1,358 KRW. Researcher Song noted, "Based on the combined figures for Hyundai Motor and Kia, more than 31% of global production volume and over 45% of sales revenue are exposed to the dollar," adding, "Due to this characteristic, the rise in the exchange rate will have a positive impact on the profits of finished car manufacturers."

He further explained, "The operating profits of Hyundai Motor and Kia fluctuate by approximately 280 billion KRW and 220 billion KRW, respectively, for every 10 KRW change in the KRW-USD exchange rate. This corresponds to a combined fluctuation of 1.8% (1.9% and 1.7%, respectively) relative to the expected operating profits for next year." He added, "Although a sudden sharp change in the exchange rate temporarily increases the sales warranty provision costs, which vary depending on the year-end exchange rate, excluding actual cash payments, the impact on cash flow is limited."

However, automobile stocks have not fully reflected this rise in the exchange rate. Researcher Song said, "Recently, the exchange rate has reflected concerns about the domestic economy rather than simple fluctuations, raising worries about sales volume." He explained, "The Japanese yen-dollar exchange rate, competing overseas, has also risen by a similar margin (10%) over the past three months. Recently, automobile profits have been attributed more to exchange rate fluctuations than volume and price, which is reflected as a valuation discount on the sustainability of profits."