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Sept 13 (The following statement was released by the rating agency)
Fitch Ratings has affirmed South Korea-based Hyundai Motor's (HMC) and subsidiary Kia Motors' (Kia) Long-Term Foreign Currency Issuer Default Ratings (IDR) and senior unsecured ratings at 'BBB+' and their Short-Term Foreign Currency IDRs at 'F2' respectively. The Outlooks on the Long-term IDRs are Stable.
HMC's and Kia's ratings and Stable Outlook are supported by their strong financial position and continued free cash flow-generating capability, despite slowing sales momentum and profitability in the near-term.
Key Rating Drivers
Slowing sales momentum: After years of rapid growth, HMC's and Kia's performance has been slowing so far this year. Excluding sales from China, which are not consolidated into their accounts, both companies posted near-flat sales in key markets in H113 as they were affected by lack of new models in the US, and sluggish markets in Korea and Europe. On the other hand, China remained a bright spot for both companies, with sales growing 34% yoy for HMC and 25% for Kia. Profitability decline in H113: Sluggish sales, lower utilisation and slight KRW appreciation had a negative impact on both HMC's and Kia's profitability in H113. HMC posted consolidated EBITDA of KRW5.6trn, down 5% yoy and Kia posted EBITDA of KRW2.4trn, down 15% yoy. Fitch expects both companies' profit margins to remain below 2011-2012 peak levels in the near term, reflecting slower growth and KRW appreciation. However, overall profit levels should remain robust, supported by high capacity utilisation.
Stronger financial position: HMC's and Kia's ratings are supported by their strong financial position, which continued to strengthen in 2012 and H113. Despite slower growth and lower profitability, the companies continued to generate strong positive free cash flow as plants continued to operate at near-full capacity. As a result, the combined net cash position of the two companies (HMC's non-financial and Kia) was KRW15.2trn at end-H113, up from KRW9.5trn at end-2012 and KRW3trn at end-2011. Fitch expects the companies to continue to generate sizable positive free cash flow over the next two to three years based on moderate sales growth and high capacity utilisation.
Benign industry environment: Globally, Fitch expects auto sales and production to rise in the low- to mid-single digits in 2013, propelled by ongoing demand strength in the U.S. and, to a lesser extent, in emerging markets. YTD July US auto sales are up 8% yoy and Fitch expects full-year light vehicle sales to reach 15.5 million units, an 8% increase from 2012. Europe's auto market is likely to remain weak, but could stabilise if economic conditions in the region stop deteriorating. Meanwhile, growth in the larger emerging markets, such as China, India, and Brazil, is expected to be modest.
Rising competition in US: Despite the robust market, HMC's and Kia's market share in the US has fallen recently, with a YTD July market share of 8.2%, down from 8.9% in 2012. This is attributable to several factors, including weaker new product momentum relative to Japanese automakers' renewed model line-up in key competing segments, and more recently, rising demand for large SUVs and pickup trucks, which is benefitting US automakers.
Fitch, however, expects HMC's and Kia's performance to pick up from 2014 onwards as HMC in particular will begin to replace bestselling models such as the mid-sized sedan Sonata. Nevertheless, competition in the US market is likely to remain keen. Furthermore Japanese automakers are now benefitting from a weaker JPY, which may result in higher marketing spend particularly if demand should soften.
FX risks mitigated: As both HMC and Kia derive a substantial portion of revenue from overseas markets, both companies are vulnerable to the impact of a strong KRW on profitability and competitiveness, Nevertheless, both HMC and Kia managed to post significant gains in profitability even as KRW strengthened to below KRW1,100/USD in mid-2011 from KRW1,256/USD in 2009, with volume and average selling price (ASP) growth more than offsetting the negative impact of KRW appreciation. Both companies have also been increasing the proportion of overseas production, which mitigates FX exposure.
Kia's rating linked to HMC's: Kia's credit rating is linked to HMC's due to strong strategic and operational ties between the two. These include platform integration, shared R&D and procurement, and the same senior management team led by Hyundai Group Chairman, Chung Mong Koo. While Kia's financial statements are no longer consolidated into HMC's, Fitch sees no change in the strong linkages between the two companies. Fitch believes that Kia continues to be integral to HMC's long-term growth strategy as a global automaker, as well as to its group structure. As such Kia's ratings are equalised with HMC's ratings.
Negative: Future developments that may, individually or collectively, lead to negative rating action include-
- HMC's and Kia's combined adjusted net debt/EBITDA (industrial operations) is sustained above 0.5x
-Sustained negative free cash flow
-Major reversal of market recovery or sustained market share erosion in key markets
-Downgrade in HMC's rating
-Weakening of linkages between HMC and Kia
Positive: Future developments that may, individually or collectively, lead to positive rating action include-
Hyundai Motor and Kia Motors
-Positive rating action is not envisaged over the current rating horizon given the companies' product concentration on the volume segment.