Strong Earnings backed by Enhanced Marketability

The authors are analysts of Shinhan Investment Corp. They can be reached at yjjung86@shinhan.com and ik.jung@shinhan.com, respectively. — Ed.

4Q20OP of KRW1.28tr (+117.0%YoY) far exceeds expectations

Kia Motors reached a new quarterly high in operating profit at KRW1.28tr (+117.0% YoY) on sales of KRW16.9tr (+5.0% YoY) in 4Q20, exceeding the consensus estimate of KRW991.5bn by 29.3%.

In 4Q20, the company was challenged by: 1) labor strikes at domestic plants, which caused delays in the production of 50,000 units; and 2) unfavorable external factors, such as the sudden appreciation of the Korean won (USD/KRW rate dropped by KRW70.9 QoQ). Despite such negatives, Kia Motors was able to deliver stable earnings backed by clear improvement in marketability. Product mix improvement drove up operating profit by KRW493bn YoY and incentive cutbacks by KRW189bn YoY in 4Q20.

Valuations seen undemanding considering revised-up 2021F OP

Over the past two years, Kia Motors has seen a streak of success with new flagship models at home (sedans) and in the US (SUVs). The increase in ASP levels in the domestic market and cutbacks on incentive payments (promotion expenses) in the US market helped to improve quarterly operating margin to 7.6% in 4Q20. We also see several positives for 1Q21 earnings, including normalization of domestic production, launch of the new Carnival in North America, and stabilization of forex rates.

Oursole concern for earnings has been the current global shortage of automotive-use semiconductors. As in the case of supply issues seen in wiring harnesses last year, we expect chip shortages to end in the near term with foundries reportedly set to expand output. Earnings projections for 1Q21 are thus raised to sales of KRW15.3tr (+4.9% YoY) and operating profit of KRW1.23tr (+177.1% YoY). Current valuations at a market cap of KRW36tr no longer seem demanding with full-year operating profit forecasts for 2021 revised-up by 32.6% to KRW4.76tr (+130.4% YoY).

Retain BUY and raise target price to KRW110,000

We retain BUY for Kia Motors and raise our target price by 46.7% to KRW110,000, based on 2021FEPSand a target PER of 10.9x (PER average of 11 global automakers). The 20% discount previously applied to valuations in reflection of the company’s lack of high-end brands has been removed with Kia Motors now enjoying the strongest earnings momentum among global automakers.