Stronger Won Hurts Hyundai Earnings - Analyst Blog

By Zacks | January 24, 2013 AAA

Earnings of South Korean automaker Hyundai Motor Co. (HYMLF) dipped to nearly two-year low of 1.89 trillion won ($1.77 billion) in the fourth quarter of 2012, down 5.5% from 2 trillion won a year ago. The decline in profits was the first since 2011.

The fall was mainly attributable to strong Korean won that reduced the value of the company's overseas revenues in local currency as well as disappointing car sales in the domestic market. The company's profit was also affected by 240 billion won ($225.10 million) in costs to compensate customers in the U.S. and Canada for overstating fuel economy.

The won has been appreciating against both the U.S. dollar and the Japanese yen as both the countries have implemented easy monetary policy to revive their economies. The won gained roughly 8% (biggest since 2009) against the dollar in 2012.

Meanwhile, the yen fell 11% against the dollar. This is bad news for Hyundai, as it will give a way to its Japanese competitors, including Toyota Motor Corp. (TM), Honda Motor Co. (HMC) and Nissan Motor Co. (NSANY), to win market share. Japanese automakers mainly sell imported cars in South Korea, which are manufactured in the U.S., to benefit from the free trade agreement between Seoul and Washington. Revenues in the quarter rose 11% to 22.72 trillion won ($21.28 billion) on sales of 1.23 million vehicles. Meanwhile operating profit fell 12% to 1.83 trillion won ($1.71 billion).

Outlook

Hyundai Motor's chief financial officer Lee Won is worried about the appreciating won. He believes the currency would continue to gain (sadly, at a faster pace) in the second half of the year, further hurting the company's earnings.

On the flip side, weaker yen could strengthen competition from Japanese companies, particularly in Australia and Russia. However, Won pacified investors by stating that the company intends to shift more production overseas in order to counter the effect of appreciating won.

In 2013, Hyundai expects vehicle shipments to rise 6% to 4.66 million units, driven by new facilities in China and Brazil. The company foresees sales in the U.S. to rise 4.4% but the same in Europe to slid 6.5% due to a sluggish economy.

The company also expects sales in China to gain 13.3% in the year compared with a rise of 12% in 2012. Thanks to the company's competitive edge in the country compared to its Japanese peers as the latter struggles to cope up with waning sales due to a negative sentiment among Chinese buyers on the back of a territorial dispute.

Currently, shares of Hyundai Motor retain a Zacks Rank #3 (Hold).

 

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