Moody's: Hyundai Motor's rating unaffected by weaker 3Q 2016 results

Moody's Investors Service says that the year-on-year weakening in Hyundai Motor Company's operating results for 3Q 2016 will not impact the automaker's Baa1 issuer rating and stable outlook.

"Hyundai Motor's weaker operating performance in 3Q 2016 was mainly because of a prolonged strike by its labor union in Korea, as well as continued intense competition in the global auto market," says Wan Hee Yoo, a Moody's Vice President and Senior Analyst.

According to the company's announcement on 26 October 2016, Hyundai Motor's unadjusted operating margin (ex-finance) fell to 5.0% in 3Q 2016 from 6.4% in 3Q 2015.

The strike by Hyundai Motor's labor union in Korea during 3Q 2016 led to a significantly lower utilization rate of its domestic plants, which pressured in turn its profitability. The year-on-year appreciation of the Korean won against US dollar in 3Q 2016 also negatively affected the company's earnings.

 

These factors more than offset the sales recovery in emerging markets such as China (Aa3 negative), Russia (Ba1 negative) and Brazil (Ba2 negative).

Year-on-year unit shipment growth in 3Q 2016 including sales from its joint venture in China registered negative 3.3%, while global retail sales grew about 1.9% during the same period. These results indicate that the company's inventory levels fell, which has a positive impact on its cash flow.

The growth in retail sales in 3Q 2016 was mainly a result of robust sales in China, India (Baa3 positive) and Western Europe, despite weak performance in the domestic market.

Moody's anticipates that Hyundai Motor's auto shipments will rebound in 4Q 2016 to make up for the production loss in 3Q 2016. However, the company's auto shipments should fall by about 1.5% year-on-year for the whole of 2016, owing to weak sales growth in the domestic market, as well as some emerging countries.

The company's reported operating margin (ex-finance) will likely weaken moderately year-on-year to about 6.3% in 2016 from 6.8% in 2015, because of a decline in auto shipments, as well as continued intense price competition. This level of profitability remains consistent with its Baa1 rating category.

Moody's expects Hyundai Motor's profitability in 2017 to remain similar to the level seen in 2016, given the persistently challenging operating environment in the global auto industry, and an increase in R&D expenses.

Moody's estimates that Hyundai Motor's reported net liquidity holdings (ex-finance) at end-September 2016 are at levels largely similar to the KRW11.4 trillion at end-2015. Such large liquidity holdings continue to provide a key support to its Baa1 rating.

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