The author is an analyst at KB Securities. He can be contacted at [email protected] — Ed.
Internal/External Catalysts Driving the Earnings Surprise; operating conditions could deteriorate in 2H22
– 2Q22 OP is well above market consensus as production normalized rapidly despite chip shortages while external factors, especially FX, were supportive. That said, we believe that operating conditions could deteriorate in 2H22.
2Q22 OP of KRW2.98tn beats consensus 32.6% on favorable FX, chip shortage fades
– HMC posted a 2Q22 OP of 2.98 tn KRW (+58.0% YoY, +54.5% QQ), beating consensus estimate/KB by 32.6%/9, 9%. OP jumped KRW 1.16 billion year-on-year, largely due to a slight increase in contribution margin per unit (+KRW 914.9 billion from the increase in ASP; +641.0 billion KRW of the exchange rate).
— We estimate the contribution margin per unit (ASP – variable cost per unit) at KRW 8.06 million (+KRW 1.57 million YoY/KRW +0.35 million Q3). ASP (auto sales ÷ wholesale unit sales excluding China) reached 30.36mn KRW (+3.92mn KRW YoY/+1.84mn KRW QoQ). Variable cost per unit amounted to KRW 223.0 million (+KRW 2.36 million YoY/KRW +1.49 million Q3). Costs seem to have increased due to the overall rise in raw material prices and the continued shortage of chips.
– In terms of KRW 1.57 million year-on-year increase in contribution margin per unit, KRW 0.68 million appears to come from exchange rates. In fact, favorable exchange rates led to an improvement in OP of KRW 641.0 billion year-over-year. The appreciation of the USD and the CAD as well as the depreciation of the TRY seem to have benefited HMC. The remaining increase of KRW 088 million in contribution margin per unit appears to come from reduced buying incentives (due to weaker competition) and increased unit sales weighting for SUVs (+5.1 pp yoy) and Genesis vehicles (+0.1 pp yoy).
— The normalization of unit sales also contributed to the robustness of earnings. Since the start of the chip shortage in 3Q21, fluctuations in unit sales have caused OPs to erode. In 2Q22, however, global unit sales (excluding China) edged up 0.3% year-on-year. We attribute this to a flexible allocation of production capacity between automotive segments and active communication with chip suppliers and automotive dealers.
— Overall, the 2Q22 earnings surprise was the result of internal competitiveness (eg, normalized production amid chip shortages) and favorable external conditions (eg, exchange rates).
The setbacks caused by the shortage of chips are mainly dealt with; Decline in typical QoQ unit sales in the 3Ts; macro changes should be closely monitored
— Operating conditions could deteriorate in 2H22 compared to 2Q22.
– Unit sales could deteriorate quarter-on-quarter in 3Q22, although unit sales in 2Q22 were flat year-on-year and setbacks caused by chip shortages have mostly been resolved. We expect seasonal factors to cause unit sales to fluctuate as Q3 ex-factory shipments and wholesale unit sales generally decline quarter over quarter due to the summer holidays.
— Macro changes should be closely monitored. Any residual cost pressures from 1H22 will likely factor into 2H22, while the Russian-Ukrainian war and COVID-related measures remain threats to supply chains. In addition, potential inflation and a slowing economy can hamper consumer spending, while rising interest rates can undermine unit sales and increase the Department of Finance’s loss provisions.