HMC has a dominant share of the domestic auto market both as a company and a
core component of Hyundai Motor Group. The company's share of the domestic
market hovered around 50% before 2010 but fell to 45%-47% in 2010-2012, mainly
due to gains by subsidiary Kia Motors Corp. (Kia; BBB+/Stable/--). Hyundai
Motor Group, including HMC and Kia, has a combined share of around 80% of the
Standard & Poor's Ratings Services expects HMC to continue to maintain its
position in the global market along with its good profitability over the next
two years, though we expect some gradual erosion during the period. The
company has fundamentally enhanced product quality and brand, reducing costs
through platform integration, and advancing its global marketing capability.
We believe that to maintain its profitability, HMC will avoid an aggressive
pursuit of market share, as evidenced in its modest target for sales growth in
2012. Still, in our view, the combined global sales target for HMC and Kia of
7.0 million units, about a 7% increase on last year's results, would likely
see it maintain a global market share of around 8.8%.
Based on our view that the company will maintain both its solid position in
the global market and its profitability, we expect robust free operating cash
flow to enable HMC to maintain its modest financial profile. We expect the
company to generate strong operating cash flow in 2012. As a result, we
believe its debt to EBITDA will remain below 1.5x, our current downgrade
trigger, over the next one to two years.
In our view, HMC faces rising competition in the global auto industry amid
high cyclicality in demand for passenger vehicles, which is dependent on the
health of the global economy. The company generates more than 90% of its
revenue from auto sales. We believe the uncertainty in the global economy
could cut global demand for passenger vehicles and expose HMC to more
competition that could undermine its market position and profitability.
In addition to macro-economic factors, we believe HMC is likely to face more
challenges in trying to improve its market position and profitability than it
has in the past. We see high likelihood of gradual decline in its market share
over the next one to two years from a recent peak. In our view, this decline
will be due to its strategy of having focused on profitability by responding
to its competitors', particularly Japanese major automakers', significant
recovery in production and capacity addition. We expect HMC and Kia's combined
market share to be flat at 8.8% in 2012 and 2013 and to decline to 8.4% in
Also, in our view, we see several obstacles to HMC's ability to continue the
profitability improvements it has made in the past three years. Profitability
could be somewhat weaker over the next one to two years than the historical
highs it achieved in the first half of this year, owing to rising costs,
including for labor and utilities; weak domestic demand for vehicles; rising
sales of imported cars in Korea's market; a slower improvement in product
quality; and a peak in its launch cycle for new models, which could leave the
company vulnerable to increasing competition.
Weak corporate governance is another possible constraint on the rating. HMC
demonstrated poor corporate governance in last year's roughly Korean won (KRW)
5 trillion acquisition of Hyundai E&C (not rated)--which it made with Kia and
Hyundai Mobis Co. Ltd. (Mobis; BBB+/Stable/--), a captive auto parts supplier
of HMC and Kia. In our view, the acquisition demonstrated weak corporate
governance because HMC lacked a clear rationale and it is uncertain how the
purchase fits into the companies' future plans or affects financial policies
on how to use free cash flow, which we expect to be robust over the next 24
months. Also, we see the prospect of several corporate governance-related
transactions that could streamline HMG's complex and circular ownership
HMC's liquidity is strong. We expect the company's sources of liquidity to
exceed 1.5x uses this year. In our view, the company's relatively large
cushion of liquidity can help it weather high cyclicality and competitiveness
in the auto industry, which can feature volatile operating cash flow and heavy
We assume HMC's sources of liquidity this year will be as follows:
-- KRW16.0 trillion in cash and short-term investments as of Dec. 31,
-- KRW7.9 trillion in cash flow from operations.
We assume HMC's uses of liquidity this year will be as follows:
-- KRW3.5 trillion in capital expenditure and equity investments;
-- KRW3.6 trillion in debt due to mature within a year of Dec. 31, 2011;
-- Modest dividend distributions.
The stable outlooks on the ratings on HMC and Kia reflect our expectation that
the companies will continue to maintain their market positions and
profitability despite increasing competition in the global auto industry.
Also, their solid financial risk profiles and strong liquidity will likely
enable the companies to weather any negative developments.
Given our equalization of the ratings on HMC and Kia, we may lower our ratings
on the two companies if HMC's adjusted debt to EBITDA exceeds 1.5x for a
protracted period. In addition to a significant erosion in HMC's profitability
or its global market position, negative rating factors include major
additional investments as a result of weak corporate governance and
deterioration in operating efficiency due to lack of stability in labor
Though the potential to upgrade HMC and Kia is limited in the next year, we
could raise the ratings on the companies after that if both companies improve
profitability by further enhancing their brands as well as their global market
positions without significantly undermining their financial risk profiles. If
the company were to fully meet these triggers, we would also need to consider
whether HMG had improved its corporate governance or streamlined its circular
and complex ownership structure.