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Balancing Worries of Earnings Peaking Out with Sustainable Growth

Despite concerns of a peak-out, HMC (Hyundai Motor Company) is expected to experience stable growth in the second half of 2023. This is attributed to global inventories remaining relatively low at around 1.3 months. Additionally, HMC's solid earnings and dividends are expected to provide support for the company's share price. Analysts predict that HMC's valuations will recover as positive business results are confirmed in the second half of 2023.

Analysts maintain a Buy rating and a target price of W280,000 on HMC. Rather than seeing a peak-out, they believe that HMC is on a path of strengthening sales volumes and operations. This is driven by improved product competitiveness and brand awareness. In the second half of 2023, operating profit margin (OPM) is expected to stabilize in the high 8% range. Increased profitability is anticipated to lead to future technology investment and greater shareholder return, enhancing the company's long-term earnings sustainability. HMC plans to distribute a quarterly dividend of W1,500 per share, and it is likely that the 2023 dividend per share will exceed W10,000, considering HMC's solid earnings and target payout ratio of 25%. The common stock dividend yield, based on W10,000 per share, is approximately 5%, while the preferred stock dividend yield is expected to reach 9.5-9.8%.

In the second quarter of 2023, HMC reported sales of W42.2tn, a year-on-year increase of 17.4%, and an operating profit (OP) of W4.2tn, a year-on-year increase of 42.2%. The operating profit margin reached 10.0%, surpassing expectations. Despite factors such as higher incentives and lower electric vehicle prices affecting costs, HMC benefited from a rise in global utilization rate, an improved product mix, and favorable foreign exchange rates. These factors contributed to a W682bn increase in operating profit from forex rates and a W702bn increase from volume increase and mix improvement. By business segment, the operating profit margin was 10.3% for the auto segment (adjusted), 7.4% for finance, and 12.4% for other businesses. Although profitability in the financial domain continues to decline, sales and profitability remain healthier than anticipated. Hyundai Rotem and Hyundai Kefico, in particular, showed significant earnings improvement in other business segments.


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