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1、,Branch,Company report,IndustrialsAutosEquity Korea,abcGlobal Research,Hyundai Motor(005380 KS),Neutral,Downgrade to N:Pricing risk mounting,Target price(KRW)Share price(KRW)Forecast dividend yield(%),260,000226,0000.9,Due to an aging product cycle and better model line-ups bypeers,the pricing envir
2、onment is turning less favourable,Potential return(%)15.5Note:Potential return equals the percentagedifference between the current share price andthe target price,plus the forecast dividend yield,We cut our operating profit estimate by 6.4%(10.3%OPmargin),which is 7.8%below consensus at 11.2%,Dec,20
3、11 a 2012 e28196.1 32199.2,2013 e,Downgrade to Neutral from Overweight(V)and lower our TP,HSBC EPSHSBC PE,38.1,2 33142.847.1 6.9,to KRW260,000 from KRW330,000;a non-consensus call,PerformanceAbsolute(%),1M-6.2,3M1.3,12M4.4,Relative(%),-2.5,-4.1,-0.4,Weaker pricing environment to come.We are becoming
4、 more concerned about a,Note:(V)=volatile(please see disclosure appendix)24 October 2012Paul Choi*AnalystThe Hongkong and Shanghai BankingCorporation Limited,Seoul Securities+822 3706 View HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qu
5、alified pursuant to FINRAregulationsIssuer The Hongkong and Shanghaiof Banking Corporation Limited,report:Seoul Securities BranchDisclaimer&DisclosuresThis report must be readwith the disclosures and,negative pricing trend(i.e.,higher incentives/discounts)in 2013,mainly driven by 1)anaging model cyc
6、le,2)lack of new models,3)better model line-ups by peers,and 4)declining used-car pricing potentially causing higher incentives.We believe the pricingenvironment is turning much less favourable despite the fact that incentive levels remainwell below the industry average.HMC stock has outperformed by
7、 a massive 100%and128%against KOSPI and its Japanese peers respectively since 2009,but we think it is timeto take a break as indicators(e.g.,valuation and growth)look less attractive than peers.Cutting OP margin to 10.3%in 2013 vs.consensus at 11.2%;expectations are toohigh.We now expect to see down
8、ward earnings revisions by the Street.We estimate HMCto post 10.3%OP margin in 2013 reflecting negative pricing risk(2012e:11.0%OPM).We assume 2%pricing risk but ongoing platform integration and pricing pressure onsuppliers will partially offset a decline.The double-digit OP margin is very strongcom
9、pared to global peers;however,we think Street expectations are still high.In addition,FX could be another negative risk as the HSBC Currency team forecasts KRWappreciation against JPY and USD of 1.1%and 3.6%respectively in 2013.Still solid but not as exciting as before:downgrade to N.We continue to
10、value HMCbased on a Gordon growth model.Reflecting our cut in 2013 earnings and ROE,we lowerour target price to KRW260,000 from KRW330,000.At our new target price,HMC wouldtrade at 7.8x 2013e PE vs.its historical five-year average of 7.8x and the industry averageof 5.7x.With declining ROE and a nega
11、tive pricing environment,we do not expect asignificant rerating of the shares until HMCs new product cycle begins in 2014.Key risksto our downgrade could be better than expected demand,translating into lower incentivesand improved macro boosting overall sector valuation multiples.We prefer Kia Motor
12、(000270 KS,OW,KRW66,200)over HMC,given its better new model pipeline next yearand stronger momentum from the volume models(i.e.K3).,the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,IndexIndex levelRICBloombergSource:HSBC,KOSPI INDEX1,944005380.KS005
13、380 KS,Enterprise value(KRWbn)Free float(%)Market cap(USDm)Market cap(KRWbn)Source:HSBC,563346945,50850,223,Hyundai Motor(005380 KS)Autos24 October 2012Financials&valuationFinancial statements,Valuation data,abc,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Year to,12/2011a,12/2012e,12/2013e,12/2014e,
14、Profit&loss summary(KRWb),EV/sales,0.8,0.7,0.6,0.4,RevenueEBITDADepreciation&amortisationOperating profit/EBITNet interestPBT,77,79810,410-2,3358,075-3610,447,85,65212,011-2,5849,4279512,210,90,27911,910-2,6039,30720112,568,96,40912,423-2,6269,79731113,563,EV/EBITDAEV/ICPE*P/Book valueFCF yield(%)Di
15、vidend yield(%),6.11.78.01.7-11.80.8,4.71.57.01.414.40.9,4.21.36.81.112.70.9,3.41.06.31.015.70.9,HSBC PBTTaxationNet profitHSBC net profit,10,447-2,3427,6568,105,12,210-2,9558,7439,256,12,568-3,0428,9999,527,13,563-3,2829,71110,281,Note:*=Based on HSBC EPS(fully diluted)Price relative,Cash flow summ
16、ary(KRWb),279859,279859,Cash flow from operationsCapexCash flow from investmentDividendsChange in net debtFCF equity,3,828-3,662-7,116-4752,735-4,227,5,204-3,500-3,595-570-4,1794,753,4,048-3,500-3,596-570-3,5143,790,4,030-3,500-3,597-570-4,0374,123,229859179859129859,229859179859129859,Balance sheet
17、 summary(KRWb),79859,79859,2010,2011,2012,2013,Intangible fixed assetsTangible fixed assetsCurrent assetsCash&others,2,66019,54848,92615,771,2,54320,15654,13119,285,2,45920,71359,25322,561,2,39821,22365,24326,384,Hyundai MotorSource:HSBC,Rel to KOSPI INDEX,Total assetsOperating liabilitiesGross debt
18、Net debtShareholders fundsInvested capital,109,48018,73043,33927,56837,11336,634,119,42419,93342,67423,38945,37637,612,129,42020,76442,43619,87553,80039,098,140,82622,10142,22215,83862,93640,379,Note:price at close of 22 Oct 2012,Ratio,growth and per share analysis,Year to,12/2011a,12/2012e,12/2013e
19、,12/2014e,Y-o-y%change,RevenueEBITDAOperating profitPBTHSBC EPS,16.128.936.439.530.3,10.115.416.716.914.2,5.4-0.8-1.32.92.9,6.84.35.37.97.9,Ratios(%),Revenue/IC(x)ROICROEROAEBITDA marginOperating profit margin,2.219.524.18.313.410.4,2.321.022.48.414.011.0,2.420.019.28.013.210.3,2.420.217.67.912.910.
20、2,EBITDA/net interest(x),289.3,Net debt/equityNet debt/EBITDA(x)CF from operations/net debt,81.32.613.9,56.21.922.2,40.11.720.4,27.31.325.4,Per share data(KRW),EPS reported(fully diluted)HSBC EPS(fully diluted)DPSBook value,27521.4328196.131750.00136685.17,31441.0532199.222100.00167116.15,32299.9733
21、142.842100.00198140.75,34923.1135765.982100.00231788.49,2,Hyundai Motor(005380 KS)Autos24 October 2012Excitement is witheringaway with pricing risk With a higher average age of its fleet,we see increasing pricingrisk on HMC for 2013 compared to Japanese peers Street expectation remains high with 11.
22、3%OP margin vs.ournew assumption of 10.3%Still delivering relatively solid earnings,but less attractive in termsof growth profile and valuation,abc,Downgrade to N from OW(V)with increasing pricing riskHMC has enjoyed strong growth since 2009thanks to:1)improved brand and product quality;2)solid mark
23、et positioning;and 3)increased ASPfrom a new product cycle.A higher ROIC has ledto a“virtuous cycle”of growth,but the industryenvironment now suggests that it is time to checkon the sustainability of past growth and whystocks have been range-trading in 2012.Webelieve HMC now faces risks stemming fro
24、m:1)HMC:Share price performance(KRW),pricing pressure;2)an aging product cycle;and 3)intensifying competition,all of which should slowthe momentum into next year.In this note,weprovide an analysis of the weaker pricingenvironment by market in 2013 along with acomparison between HMC and its competito
25、rs interms of product cycle.Under the current industrycircumstances,the valuation trend for HMCshould remain depressed until investors witnessstrong industry or company-specific catalysts in2013,in our view.HMC:Blended ASP could trend lower in 2013(KRWmn),300,000,Now w hat?,21.0,250,000200,000150,00
26、0100,00050,0000,Virtuous cycle theme,20.019.018.017.016.0,New models cycle began,2008,2009,2010,2011,2012,2008,2009,2010,2011,2012e,2013e,Source:Company data,Autodata,Source:HSBC estimates,Company data*Note:Net pricing includes incentivesand discounts,3,(USD),3,500,3,000,2,500,2,000,US,Hyundai Motor
27、(005380 KS)Autos24 October 2012Rising pricing pressurespottedWe believe the favourable pricing environmentobserved in 2010-11 is coming to an end as theuncertainties behind the auto industry are growing.Although we are not concerned about salesvolume,in order for automakers to sustain growth,they wo
28、uld have to enter into more intensifiedcompetition and commit to higher price rebates.Therefore,profitability in both developed andemerging markets will likely come under furtherpressure,including the US,China and Korea,which are HMCs three most profitable markets.HMC:Sales breakdown by region as of
29、 FY11,better product cycle with more fuel efficientmodels than its competitors and 2)productiondisruptions at Japanese makers after theearthquake last year.While HMCs attractivefinancing programs such as“zero down-payment”should sustain its volume,it may have to offermore incentives to compete again
30、st new andimproved models by Japanese and US peers inorder to improve its market share.US:Incentive trend,abc,OthersLATAM 10%8%,Korea17%,1,5001,000500,India,Jan-11,Jul-11Industry,Jan-12HMC,Jul-12KIA,10%ME/Africa,China18%,Source:Autodata,Toyota,Nissan,Honda,12%,Source:Company data,W.Europe10%,US15%,F
31、alling used-car index a sign of pricingpressure?The used-car index is an important indicator ofnew car demand,in our view,and its recentdownward trend could see the automakersprofitability come under pressure.When the used-,Incentives start to trend upWe previously highlighted pricing risk in the US
32、market in Korean Autos:US dealers check:pricing risk has been spotted(8 October).Looking at the recent incentive trend in the US,despite the smaller portion of the pre-redesignedSanta Fe sales,HMCs incentives rose for asecond consecutive month in September reachingUSD1,131 mainly due to the aging So
33、nata.Dealers are expanding incentives on the Sonata asits competing models,such as Altima(Nissan)and Accord(Honda),have recently been launchedas an all-new model.This could be an inflectionpoint for HMCs strong incentive trend over thepast 18 months,which had been supported by 1)a4,car value depreci
34、ates,it is likely to demotivateprospective buyers given higher depreciationcosts/higher lease payments(i.e.,higher totalownership costs)or put a higher burden onautomakers through higher incentives(financingas well).The monthly lease payment is calculatedbased on the difference between the new car p
35、riceand the used car price expected at the end of thecontract,and a fall in the used-car value wouldwiden the gap,resulting in a higher monthlypayment.Here,automakers which run their ownfinancial subsidiary such as HMC(i.e.,HyundaiCapital America)would either raise incentives orvoluntarily cut month
36、ly payments for leases inorder to lure consumers.,Hyundai Motor(005380 KS)Autos24 October 2012US incentives vs.Used-car index trend,preference which is shifting towards non-Asian,abc,$3,200$3,000$2,800$2,600$2,400$2,200,13512511510595,foreign brands,we expect Korean/Japanesebrands to provide more in
37、centives to maintainmarket share.Anti-Japanese sentiment:Positive or negative?While the current anti-Japanese sentiment couldbe a short-term positive for HMC,we think this,2008,2009,2010,2011,2012,2013,poses a higher incentive risk for HMC in the,US incentiv es(LHS)Used-car index(RHS)Source:Bloomber
38、g,HSBCChinaPotential supply glut could lead to higherdiscount levelSlowing sales in China are raising concerns over apotential decline in the utilisation rate,whichcould be a significant problem for foreign OEMs,including HMC.The total capacity in China isexpected to reach 31.2m units in 2015,while
39、weforecast light vehicle sales to be lower at 24munits in the same year,which would result in asupply glut and a higher discount level.Inaddition,since the list of subsidised models wasannounced by the Chinese government in August(which includes more local brands than foreignbrands at 104 vs.45),thi
40、s could also lead to a risein the discount level given by foreign OEMs.AsUS and EU brands are becoming particularlystrong in China,benefiting from a consumerChina:The local portion of subsidised models has expanded,longer term.Even if we assume that HMCs salesvolume grows 10%in China on the back of
41、thisJapan-China conflict,the overall volume shouldonly increase by 1.8%given its exposure to Chinais 18%.On the other hand,Japanese autocompanies recently slowed production amidplummeting sales,but we do not believe that theJapanese will leave their plants idle forever.Theyare likely to resort to mo
42、re aggressive measures,such as offering greater discounts to win backmarket share,which could eventually triggerintensified price competition with HMC,whoseproducts are often in direct competition with thoseof the Japanese.In September,HMC saw a slightfall in the discount level at 11.4%,down 0.5pptf
43、rom the previous month,but this could climbback up soon as the Japanese operations in Chinaare becoming more normalised as the sentimentgradually improves.China:Toyota vs.HMC discount level trend,1201008060,104,45,14.0%12.0%10.0%8.0%,40200,27,22,6.0%4.0%2.0%0.0%,7th List(2011),8th List(2012),Sep-11,
44、Dec-11,Mar-12,Jun-12,Sep-12,Local brands,Foreign brands,Toy ota,HMC,Source:CAAM,Source:CAAM,5,i30,i40,Hyundai Motor(005380 KS)Autos24 October 2012KoreaOn the domestic front,ytd auto demand is down7.8%y-o-y due to an ongoing recession and wedo not expect to see a turnaround in the near term.KARI fore
45、casts industry demand to retreat-1%in2013 to 1.53m units vs.1.55m units in 2012.Wehave a more conservative view towards nextyears demand at 1.42m units,mainly due toweakening consumption resulting from risinghousehold debt and weak property markets.Despite the individual consumption tax cut onautomo
46、biles announced by the government in,more conservative 1.42m units next year.Also,with the narrower pricing gap between localbrands and foreign imports,we expect to seeforeign brands take further market share.By looking at the replacement cycle(i.e.calculated by dividing UIO(units in operation)byann
47、ual new car sales),the average came in at 8.72years.In this regard,with weaker replacementdemand from 2004,we do not expect to seevolume pick up in 2013.Auto demand trend in Korea,abc,September,we do not think it is appealing enoughto revive sentiment,while HMC would have tocontinue to offer better
48、prices to break through thecurrent recession.In fact,HMCs incentive hasbeen increasing since June.Hybrid versions ofAvante and Sonata are being strongly pushed bythe company to reverse sluggish sales,and thus,(mn unit)2.001.501.000.500.00,(#of y ear)12.010.08.06.04.02.00.0,their incentives soared to
49、 as high as KRW1m and,1998,2001,2004,2007,2010,KRW2.5m respectively,taking the lead in an,Unit sold,UIO/Unit sold,upward trend of the overall incentive level.Auto demand cycleIn light of the past trend,domestic auto demandexperienced a severe downturn when Korea had acredit card crisis in 2004 with
50、1.1m units ofdemand(-17%y-o-y).We do not expect a similarsharp drop in domestic auto demand in 2013;however,our expectation is for an 8%decline to aHMC:Incentive trend in Korea,2012,Source:HSBC,KAMAMounting household debtRonald Man,our Korea economist,hashighlighted that rising household debt trigge
