January 25, 2007 / 4:49 AM / 13 years ago

Hyundai operating profit drops; competition's tough

SEOUL (Reuters) - Hyundai Motor Co., South Korea’s top auto maker, posted a surprise 8.6 percent drop in quarterly operating profit on Thursday, hit by a stronger won and weaker sales in a fiercely competitive global market.

But the world’s No.6 auto maker along with its affiliate Kia Motors Corp. (000270.KS) is expected to do better this year as raw material costs soften, car prices rise and overseas sales improve. The won is forecast to keep firming, but not at last year’s breakneck pace.

“It’s near the end of a bumpy road for Hyundai Motor,” said Lim Chang-gue, fund manager at Samsung Investment Trust Management. “We’re going to see a turnaround in negative factors such as the won’s rise, labor strikes, sluggish momentum in Chinese markets or falling market share in the U.S.”

Still, possible labor disputes could dent Hyundai’s 2007 target to raise sales 14 percent to 31.13 trillion won ($33.27 billion). It aims to increase unit sales from local plants by 6.5 percent to 1.715 million vehicles.

Hyundai reported October-December operating profit of 306.7 billion won ($327.7 million), down from 336 billion won a year ago and well below a 386.7 billion won forecast in a Reuters poll. The previous quarter’s profit was 183 billion won.

“Operating profit came out weaker than expected because the overseas operations had a difficult year as competition was more fierce,” said Kim Hag-ju, analyst at Samsung Securities.

“That also applies this year as the auto market in Asia’s big players such as China will see tougher competition in 2007.”

Net profit at Hyundai, which controls almost half its home market, fell to 537 billion won from 691 billion won a year ago, but beat a 482.6 billion won forecast by 10 analysts polled by Reuters. The previous quarter’s net profit was 283 billion won.

Hyundai lost 42.6 billion won from derivatives related to Kia shares that fell 12.4 percent in the fourth quarter. A year earlier, Hyundai booked a 138.5 billion won gain from these.

Hyundai booked a 70 billion won quarterly gain related to a corporate tax refund, more than twice that of a year earlier.

Shares in Hyundai, valued at just over $15 billion, ended down 0.8 percent at 66,500 won, while the broader market .KS11 closed 0.05 percent lower.

The stock, which fell 16.8 percent in October-December, underperforming the KOSPI’s 4.6 percent rise, trades at below 12 times forecast earnings, against Toyota Motor Corp’s (7203.T) 16.3 times and Honda Motor Co. Ltd.’s (7267.T) 15.6 times, according to Reuters data.

The won's value KRW= on average rose 8.4 percent in the fourth quarter from a year earlier, hurting earnings of Hyundai, which sells more than three quarters of it products abroad. Japanese rivals such as Toyota were helped by a weaker yen as they fought for market share in the United States.

Sales were 7.58 trillion won, in line with market forecasts but down from 8.12 trillion won a year earlier, when domestic buyers rushed to showrooms before a tax benefit ended.

TOUGH SALES TARGET

Analysts say Hyundai 31.14 trillion won 2007 sales target is too aggressive given recent labor disputes, weak consumer sentiment in Asia’s third-largest economy, fierce competition in and the company’s shortage of new models.

“Hyundai must undertake a bold restructuring move in labor relations and strategy, and cut costs,” said Kim Seong-ki, chief investment officer at SH Asset Management. “They face challenges from every corner.”

Unionised workers took strike action and refused overtime work from December 28 in a row over bonuses that Hyundai said cost it 21,682 units in lost output. The dispute was settled last week.

Additional reporting by Lee Jin-joo, Rhee So-eui and Rafael Nam

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