Hyundai Q4 Profit Up 12.5% Though Full-Year Revenue Growth Underperformed Significantly Amid Stronger Won

Hyundai’s full-year revenue growth underperformed significantly when seen alongside the volume growth of 7.3% and adverse currency movements are to be blamed for the disappointing trend. The 3.4% growth in revenues was largely driven by higher finance and other income while automotive revenue grew just 0.3%. This under-performance continued in the fourth quarter as well during which sales grew 0.4% but revenues declined 3.4% y/y. The Korean currency gained 3% against the US dollar during the quarter compared to the fourth quarter of 2012. The currency also strengthened 27% against the Japanese yen during the period. This had a double impact on Hyundai as the value of its overseas revenues declined in local currency while reducing price competitiveness of the automaker’s models in key overseas markets where its Japanese peers scored well. This is in sharp contrast to the situation in 2011 when Hyundai was the frontrunner in winning market share from Japanese automakers which witnessed their fortunes falling due to a spate of recalls and natural disasters. In addition to adverse currency movement, increase in incentive spending also affected Hyundai’s sales revenues.

Hyundai’s sales from global plants still grew an impressive 16.5% y/y; however sales from its domestic plants fell 4.8% y/y during the year. Hyundai’s Korean sales shrank 4% in 2013 to 640,865 units as the automaker ceded market share to foreign import brands including BMW, Volkswagen (VW), and Mercedes-Benz. Affluent Korean buyers are increasingly seen shifting to foreign premium brands which have become affordable following trade agreements with the US and Europe in recent years.

Meanwhile, Hyundai’s net income performance was largely driven by previous year’s low base when earnings were depressed on account of financial provisions to settle lawsuits related to overstated fuel-efficiency claims in the US. However, net profits fell short of analysts’ projections which were expecting the automaker to report KRW2.23 trillion in fourth quarter earnings. Overall, Hyundai’s results represent an eventful year which saw abrupt departure of its US chief while research and development boss left following record recalls. On the positive side, the automaker saw moderate labour leadership taking helm – boding well for its domestic operations. Among other positives is additional production capacity at its Brazil and Turkey plants.

Outlook & Implications:

Going forward, Hyundai hopes to sell 4.9 million vehicles globally, representing a rather anaemic 3.6% growth which would be weakest for the automaker in many years. The automaker is banking on a product offensive which includes the recently revamped Genesis sedan and an overhauled Sonata mid-size sedan. However, increased competition from Japanese automakers backed by the weak yen, the anticipated recovery of European rivals after restructuring, and the impact of the tapering of stimulus measures by the US Federal Reserve on currency rates will prove major challenges to its growth. Meanwhile, it is expected to continue to face a multitude of challenges in three of its largest markets including the US, South Korea and India, although growth in China and Brazil will likely offer some respite.

In view of these headwinds, IHS Automotive expects Hyundai’s light vehicle sales will remain flat this year compared to 2013.