(The following statement was released by the rating agency)
Oct 22 -
Summary analysis -- Kia Motors Corp. ------------------------------ 22-Oct-2012
CREDIT RATING: BBB+/Stable/-- Country: Korea, Republic
Primary SIC: Motor Vehicles
Mult. CUSIP6: 493738
Credit Rating History:
Local currency Foreign currency
20-Mar-2012 BBB+/-- BBB+/--
04-Nov-2010 BBB/-- BBB/--
The ratings on Korea-based automaker Kia Motors Corp. (Kia; BBB+/Stable/--) reflect the company’s close relationship with, and expected strong support from, parent company Hyundai Motor Co. (HMC; BBB+/Stable/--). Standard & Poor’s Ratings Services assesses Kia’s stand-alone credit profile to be ‘bbb’. However, we have equalized the ratings on Kia with the ratings on HMC, based on the following factors:
-- HMC has held 34% of Kia’s stock since 1999. A network of shareholdings links Kia, HMC, and a number of mostly auto-related companies into the highly cohesive Hyundai Motor Group;
-- Management has strong ties to Hyundai Motor Group;
-- We expect Kia to continue to play an important role in helping Hyundai Motor Group realize its ambitious goals for growth; and
-- Operating ties between Kia and HMC are close and include combined research and development (R&D) and procurement as well as a strategy to completely integrate platforms and production.
The ratings also reflect Kia’s good position in the global auto market resulting in strong profitability and robust free operating cash flow. Constraints on the ratings include Kia’s exposure to rising competition in the global auto industry, which could undermine its market position and profitability, highly cyclical demand for passenger vehicles, the weak reputation of its brand, weak corporate governance as a result of HMG’s circular and complex ownership structure, and growing demands from its labor force for improved work conditions.
We expect Kia’s fundamental enhancements to factors such as product quality, brand, design, model updates, and its dealer network to continue to help it maintain its good positions in both domestic and global markets and profitability over the next one to two years, though we expect some gradual erosion during the period. In our view, Kia’s share of domestic and overseas markets and its sales have grown at a somewhat faster pace than those of HMC. Also, we believe that to maintain its profitability, Kia will avoid an aggressive pursuit of market share, as evidenced in its modest target for sales growth in 2012. Still, in our view, meeting its global sales target of 2.7 million units this year, about a 10% increase on last year’s results, would likely help Kia maintain its global market share of close to 3.5%.
Based on our view that Kia will continue to maintain both its good positions in global markets and profitability, we expect robust free operating cash flow to continue this year. As a result, we believe the company’s debt to EBITDA will remain under 1.5x this year.
In our view, Kia is highly exposed to rising competition in the global auto industry and high cyclicality in demand for passenger vehicles, which is dependent on the health of the global economy. The company generates most of its revenue from auto sales. We believe the uncertainty in the global economy could cut global demand for passenger vehicles and expose Kia to more competition that could weaken its market position and profitability.
We also believe Kia’s weak brand and its employees’ calls for better working conditions challenge its ability to maintain improvements it has made to its market positions and profitability. We believe labor demands will remain of particular importance for the next two years, and changes that benefit labor, such as a more favorable shiftwork system, would pose a considerable challenge to Kia’s ability to improve operating efficiency. Furthermore, any major disagreement between unions and management could cause HMC and Kia significant problems in domestic production, sales, profit, market share, and brand reputation--all of which have improved significantly over the past two years.
Weak corporate governance is another possible constraint on the ratings. We think Kia demonstrated poor corporate governance in last year’s roughly Korean won (KRW) 5 trillion acquisition of Hyundai E&C (not rated)--which Kia made with HMC and Hyundai Mobis Co. Ltd. (Mobis; BBB+/Stable/--), a captive auto parts supplier of HMC and Kia. In our view, the acquisition demonstrated HMG’s weak corporate governance because it 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 structure.
Kia has adequate liquidity. We expect the company’s sources of liquidity to exceed 1.2x uses this year.
We assume Kia’s sources of liquidity this year will be as follows:
-- KRW3.9 trillion in cash and short-term investments as of Dec. 31, 2011;
-- KRW3.7 trillion in cash flow from operations; and
-- KRW0.5 trillion in lines of credit as of Dec. 31, 2011.
We assume Kia’s uses of liquidity this year will be as follows:
-- KRW2.4 trillion in capital expenditure and equity investments;
-- KRW3.1 trillion in debt due to mature within a year of Dec. 31, 2011; and
-- Modest dividend distributions.
The stable outlooks on the ratings on Kia and HMC reflect our expectation that the companies will 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 Kia and HMC, we may lower our ratings on the two companies if HMC’s adjusted debt to EBITDA (after consolidating Kia) exceeds 1.5x for a protracted period. In addition to a significant erosion in Kia’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 a lack of stability in labor relations.
Though the potential to upgrade Kia and HMC is limited in the next year, we could raise the ratings on the companies if both improve their profitability significantly by further enhancing their brands and global market positions without significantly undermining their financial risk profiles. If Kia 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.