Korea Autos:August shipments,Low base effect

Hyundai’s domestic shipments rose 29.6% y-o-y to 54,560units in August, on theback of strong sales of its key volume models, Avante (+10.3% y-o-y) and Grandeur(167.3% y-o-y). We largely attribute this growth to a low base due to productiondisruptions caused by labour strikes last year (8hrs vs. 76hrs in Aug-16). HMC’s firstsubcompact SUV Kona sold 4,230units (+34.5% m-o-m), which offset the weakersales of Santa Fe (-20.9% y-o-y). Thus, the overall RV sales rose 32.1% y-o-y.However, Grandeur sales fell below 10k units for the first time after new model launch,and this may lower overall profitability if weaker volume continues in 2H17. Kia’sdomestic sales volume saw an increase of 9.7% y-o-y to 41,027units compared with2016. Weaker sales of PVs (-7.4% y-o-y, especially the K series with K3/K5/K9down16.9%/18.2/18.6% y-o-y), were made up by strong RVs (+31.1%), thanks to the solidsales of Sorento (+65.1%) and newly launched Stonic (23.3% m-o-m). However, wenote that relatively strong sales of Sorento were a result of aggressive promotion(KRW1mn discounts) in July.

    Recovery at overseas markets should take longer than expected: Both Hyundaiand Kia reported tepid overseas shipments, down 10.8% y-o-y and 0.8% y-o-y,respectively. We think it is unlikely for HMC and Kia to see a meaningful turnaroundin 2H17given the declining product competitiveness and lack of diverse model lineupsin the US and China amid sluggish demand. For US, we continue to expect arise in incentive spending and margin contraction until we see improved productcompetitiveness with powertrain upgrades; HMC is still offering increased incentiveson its key models including Sonata (~USD6,750), Santa Fe (~USD4,500) and newlylaunched Elantra (~USD3,750). For China, we remain cautious about volumerecovery, driven by: 1) rising inventory; 2) lack of product diversification; and 3)declining number of dealers. We continue to believe HMC/Kia faces more structuralheadwinds in China, leading to lower utilisation and inevitably putting downwardpressure on 2H17margins. The new model launches and facelifts of core SUVmodels planned for 2018should yield positive effects, but not be game changers.

    We reiterate our Hold ratings on Hyundai and Kia. In our view, their fundamentalsare unlikely to improve much under the current conditions of intensifying competitionand their product cycle. Our target prices for Hyundai and Kia remain unchanged atKRW142k and KRW38k, respectively.