Korea Autos:Better sentiment not improving fundamentals yet

Production of Japanese automakers halted: Toyota Motor (7203 JP, Not rated)said on 17 April 2016 that it would suspend most of its production across Japan aftera second earthquake struck the Kumamoto prefecture. Production shifts stopped latelast week at Toyota’s Kyushu factories and will extend to other Japan assembly linesin stages throughout this week. Toyota is halting production not only because it hasassembly plants in the area, but also because of the disruption in its supply chain.

    The earthquake halted engine and parts production for Aisin Seiki (7259 JP, Notrated), and chip manufacturing for Renesas Electronics (6723 JP, Not rated) andMitsubishi Electric (6503 JP, Not rated). Other Japanese automakers such as Honda(7267 JP, Not rated) and Nissan (7201 JP, Not rated) also halted operations at theirfactories. According to IHS data, domestic production accounted 37.2%, 27.1% and24.7% for Toyota, Honda and Nissan, respectively, as of CY2015.

    Korean OEMs face the same risks if the disruption lasts longer: Investorsentiment seems to have improved somewhat in anticipation of issues for theJapanese OEMs: Hyundai Motor and Kia Motors shares have gained 3.7% and 5.6%,respectively, since 14 April 2016, when the first earthquake. However, we believe theimprovement in investment sentiment will be short-lived as HMC and Kia are alsoexposed to the Japanese parts supply chain. Both HMC and Kia receive most of thesemiconductor (automotive microcontrollers, the chips that manage most of avehicle's basic functions) supplies from Renesas Electronics. As inventory levels forchips last only two months, HMC and Kia will also face difficulties in production ifproduction problems stemming from the earthquake last longer. In addition, theToyota brand as a whole has a regional production base in Japan, with the Lexusbrand experiencing more near-term production issues.

    We maintain our neutral outlook on Korean automakers: We believe that thefundamentals of Korean automakers have not changed and are not likely to improvemeaningfully under current industry conditions, with intensifying competition andadverse FX movements. In addition, we expect a tough 1Q16 due to weaker-thanexpectedsales volume growth year to date. Therefore, we expect the recentimprovement in investment sentiment to be short-lived and reiterate our Hold ratingson both Hyundai Motor and Kia Motors with unchanged target prices of KRW150,000and KRW50,000, respectively.