TEXT-S&P summary: Hyundai Mobis Co. Ltd.
We expect Mobis to continue to benefit from close operational and ownership ties to Hyundai Motor Group. Mobis supplies key parts for platform integration between HMC and Kia. It is also a strategically important element of the group's circular ownership structure: Mobis owns 21% of HMC, HMC owns 34% of Kia, and Kia owns 17% of Mobis. In our view, Mobis' sales are likely to continue to grow in line with the global sales of HMC and Kia. For example, Mobis' sales increased 18% year on year in the first half of 2012 as a consequence of HMC and Kia lifting their global unit sales 12% year on year in the same period. Given that we expect HMC and Kia to expand global unit sales about 7% this year, we believe Mobis will increase its sales at a solid pace in the same period.
In our view, ongoing benefits that Mobis obtains from Hyundai Motor Group enhance its two main businesses: auto parts modules and service parts. We believe HMC and Kia's good positions in the global auto market have contributed to maintaining Mobis' position in the global market for auto parts modules. Mobis was the 10th largest global original equipment manufacturer (OEM) automotive parts supplier in terms of revenue in 2011, according to industry newspaper Automotive News. Also, we believe HMC and Kia's dominant positions in the domestic market allow Mobis to maintain stable and solid profitability in its service parts business, which generates most of its revenues in the domestic market. Its service parts business generated an operating profit margin of 19.9% in the first half of 2012 and 22.7% in 2011, much higher than the 5.5% and 6.9% margins it achieved in its auto parts module business in the same periods.
Mobis has a modest financial risk profile, in our view. The company's strong cash flow and low debt are critical to its survival through industry cycles. Although Mobis plans to expand globally, relatively low capital investment needs to build additional plants in the auto parts module business make it unlikely that its financial standing will deteriorate significantly. Thus, we expect the company to generate solid free operating cash flow over the next two years.
We believe Mobis' module business remains highly exposed to market risks such as uncertain and cyclical automotive demand and growing pressure from automakers to cut costs. In particular, the profit margin in the company's auto parts module business could deteriorate significantly if HMC and Kia lose market share and their profitability declines because of slow demand for automobiles, intense competition between automakers, or a deterioration in HMC or Kia's competitiveness in terms of product, cost, brand, design, or distribution networks.
Weak corporate governance is another possible constraint on the ratings in the future. In our view, Mobis demonstrated weak corporate governance with last year's roughly Korean won (KRW) 5 trillion acquisition of Hyundai E&C (not rated), which it made with HMC and Kia. We believe the acquisition demonstrated weak corporate governance because it lacked a clear rationale and it is unclear how it fits into the companies' future plans or affects financial policies on use of free cash flow, which we believe will be robust for the next two years. Also, we see the prospect of several corporate governance-related transactions that could streamline HMG's complex and circular ownership structure.
Mobis has adequate liquidity. We expect the company's sources of liquidity to exceed 1.2x uses this year.
We assume Mobis' sources of liquidity this year will be as follows:
-- KRW3.3 trillion in cash and short-term investments as of Dec. 31, 2011; and
-- KRW2.3 trillion in cash flow from operations.
We assume the company's uses of liquidity this year will be as follows:
-- KRW1.6 trillion in capital expenditure and equity investments;
-- KRW2.5 trillion in debt due to mature within a year of Dec. 31, 2011; and
-- Modest dividend distributions.
The stable outlook on Mobis reflects our expectation that the company will benefit from its strong operational ties with HMC and Kia.
We may lower our ratings on Mobis if the company's operational ties with Hyundai Motor Group weaken, or its adjusted debt to EBITDA exceeds 1.5x for a protracted period, which would likely come as a result of a significant erosion in profitability. Though the potential for an upgrade of Mobis is limited over the next 12 months, in our view, we could raise the ratings on the company in the longer term if the company successfully diversifies revenue sources through significant gains in noncaptive orders. If the company were to meet the above trigger, we would also need to consider whether the group had improved its corporate governance or streamlined its circular and complex ownership structure.
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