[Into the Stocks] Hyundai Motor and Kia Hit by Fallout from US Auto Cell... Why Korea's 'Oversold and Undervalued' Stocks Are All Being Bought

[Asia Economy Reporter Lee Seon-ae] 'U.S. automaker Ford stock is Sell, GM is Hold.' The stock prices of Hyundai Motor and Kia wavered following a report from the foreign investment bank UBS. Although they had been highlighted as beneficiaries of a strong earnings outlook and high exchange rates, they faltered amid forecasts of shrinking automobile demand. However, Korean securities firms unanimously emphasized a 'Buy' investment opinion, judging that earnings remain solid and current stock prices are excessively undervalued. While concerns that Hyundai Motor and Kia cannot escape the global automotive industry's downturn, as analyzed in the foreign report, have cooled investor sentiment, attention is focused on whether these worries are excessive, as per Korean securities firms' analysis.

According to the Korea Exchange on the 13th, Hyundai Motor closed at 168,000 KRW on the 11th, down 4.27% from the previous trading day. Kia ended trading at 67,400 KRW, down 5.07%, hitting a new 52-week low of 66,000 KRW during the session. On the 12th, Hyundai Motor's closing price remained steady at 168,000 KRW, while Kia slightly rose by 1.19% to close at 68,200 KRW. Considering the previous day's decline, it is still evident that investor sentiment remains sharply chilled.

The UBS report triggered the sharp stock price drop. On the 10th (local time), UBS issued a bleak forecast anticipating a demand slump in the automotive industry. It changed its investment ratings for global automakers Ford Motor and General Motors (GM) from 'Neutral to Sell' and 'Buy to Neutral,' respectively, and lowered their target prices. Although the report did not include analysis of Hyundai Motor and Kia, investors' outlook was filled with fear. The expectation that the automotive industry will shift paradigms due to oversupply led to concerns that Hyundai Motor and Kia would also be affected, driving sell-offs. The main sellers of Hyundai Motor and Kia stocks were foreign securities firms. Morgan Stanley and JP Morgan were major sellers of Hyundai Motor, while Morgan Stanley, Citigroup Global, JP Morgan, and Goldman Sachs were among the large sellers of Kia.

However, the noteworthy point is the analysis from Korean securities firms. They still maintain a positive view on Hyundai Motor and Kia. All maintain a 'Buy' rating, with no downgrades.

As representative export stocks, they are considered beneficiaries of high exchange rates and attractively undervalued relative to earnings. Yoo Ji-woong, a researcher at Daol Investment & Securities, said, "As of 2022, the average price-to-earnings ratio (PER) of both companies is 4.5 times, which is a high valuation merit compared to parts suppliers."

There are no downward revisions to third-quarter earnings either. According to financial information provider FnGuide, the consensus operating profit for Hyundai Motor in the third quarter is 2.9482 trillion KRW, and for Kia, 2.2478 trillion KRW. Hyundai Motor is expected to post sales of 137 trillion KRW this year, up 16.8% year-on-year, and operating profit of 10.5 trillion KRW, a sharp increase of 58.6%. Kia is also forecasted to achieve sales of 84 trillion KRW (21.3%) and operating profit of 8.2 trillion KRW (61.9%).

Lee Jae-il, a researcher at Eugene Investment & Securities, analyzed Hyundai Motor, saying, "Due to the weak Korean won, there could be a positive exchange rate effect of about 450 billion KRW compared to the previous quarter," and added, "Although the global economic outlook is slowing, Hyundai Motor is attractive because it has the financial capacity to continue future investments." Jang Moon-soo, a researcher at Hyundai Motor Securities, emphasized, "Hyundai Motor is an excessively undervalued stock with upward earnings revisions," adding, "Despite macroeconomic uncertainties and concerns about economic recessions in major regions such as Europe, demand slowdown has not been confirmed by indicators. Rather, low inventory and slower-than-expected supply chain recovery, along with the simultaneous continuation of pent-up demand consumption and price increase effects, and stabilization of raw materials improve the profit structure, expanding the undervaluation appeal."

The analysis of Kia is even more positive, which explains the slight rise in Kia's stock price the previous day. Jung Yong-jin, a research fellow at Shinhan Investment Corp., said, "Kia's current stock price has a 2023 price-to-earnings ratio (PER) of only 4 times, which is excessively undervalued even considering concerns about economic recession and earnings visibility deterioration," and added, "The peak operating profit from 2009 to 2012 was 3.5 trillion KRW. During the subsequent three-year earnings decline cycle (2013?2015), operating profit decreased by 33%, recording 2.4 trillion KRW in 2015. Even assuming a conservative 33% earnings decline next year, the PER would be only 6 times." He further noted, "It is still too early to worry about demand declines in advanced countries due to economic slowdown," adding, "Sales of non-core models (compact sedans) remain solid without increased promotional costs, and if new car demand slowdown becomes serious, signals such as expanded promotional costs, price reductions, or inventory increases would be detected first."

This content was produced with the assistance of AI translation services.