2018 outlook Auto Market cycle to improve modestly after bottoming Young-ho Park +822-3774-1743 [email protected] Contents [Summary] Sales volume to recover modestly in 2018; new growth drivers to continue to attract attention 3 I. 2017 review 4 II. 2018 outlook 5 III. Long-term outlook 16 IV. Valuation 24 V. Investment strategy 27 VI. Top picks & stocks to watch 28 Hankook Tire (161390 KS/Buy) Hyundai Motor (005380 KS/Trading Buy) Kia Motors (000270 KS/Trading Buy) S&T Motiv (064960 KS/Buy) [Summary] Sales volume to recover modestly in 2018; new growth drivers to continue to attract attention Upgrade to Overweight: Sales volume to improve across EM; the conventional automotive market to display low growth; new growth drivers to continue to attract attention (1st. Jan. 2001 =100) HMC, Kia world market share (R) Korea automobile representative stock index (L) (%) 3,000 Domestic 12 Investment full operation Global investment expansion Global high-growth period Expansion congestion period Limited expansion cycle Growth High First China growth Fixed cost increase Abrupt drop China / US China / Emerging demand Limited recovery 11 factor export growth / raw materials in operation high growth emerging recession, rebounds, exchange in M/S, / won appreciation exchange rate rate instability → demand maturity, 2,400 deterioration, stable advanced eco-friendly/ growth of competitors market, intensifying smart car market 10 competition in China expansion 9 1,800 8 1,200 7 6 600 5 0 4 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 F17 F18 F19 Source: Thomson Reuters, Mirae Asset Daewoo Research 3| 2018 Outlook [Auto] Mirae Asset Daewoo Research I. 2017 review Earnings recovery has • In 2H17, demand from major emerging markets, including Russia and Brazil, recovered on higher oil prices been delayed, due to • Meanwhile, growth of Chinese demand slowed, while US demand declined weak earnings from key • Hyundai Motor Group’s (HMG) earnings recovery has been delayed due to: 1) the sharp fall in Chinese earnings; and 2) intense competition in the US market markets • Earnings deteriorations in key markets exceeded the pickup in earnings from emerging markets Auto sales volume growth by major region (from January to October in 2017) (%) 15 In 2H17, demand from major emerging markets recovered on higher oil 12 prices 9 Continued strong sales 6 Lower growth Lower growth due in sales to reduction in tax benefits 3 US demand decline (vs. previous peak) 0 Confusion after GST, Slight recovery in Lower growth in high growth in sales EMs' demand in -3 sales of 2nd-tier resumes 2H17 companies and imports -6 Brazil Eastern India Japan Other EMs Western Global China Korea North US Europe (including Europe America (including India) (including Russia) US) Source: LMC Automotive, Mirae Asset Daewoo Research 4| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: Global demand The “new normal” era: • During 2001-08, overall auto demand showed a CAGR at the 3% level on the back of zero interest rates in the US and motorization in China Overall auto demand • During 2010-16, demand CAGR reached the upper-4% level, driven by strong demand in emerging markets and growth to be limited recovery of demand in advanced economies amid market saturation • Growth is likely to slow to less than 3% going forward, due to Chinese market saturation/overall market maturation • On a positive note, global demand will likely be solid in 2H17, aided by: 1) an emerging market recovery; and 2) a pickup in demand ahead of the elimination of Chinese tax benefits for car purchase Long-term global auto demand (SAAR) Demand Global crisis stimulus in China US zero interest rate, QE effect, motorization in China demand recovery in DMs New normal, IT bubble, eurozone maturity growth cycle Strong auto demand growth in EMs Recovery in EMs, reduction in US Source: LMC Automotive, Mirae Asset Daewoo Research 5| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: Global demand Global auto demand to • Global auto demand is projected to grow 2.9% in 2018 (slower than in 2017) grow 2.9% in 2018; EM • Demand growth in key markets, including China, US, and Western European countries, is likely to remain weak turnaround vs. • Demand in Latin America (including Brazil) and Russia will likely recover markedly (+10% YoY) • The Indian market, which experienced a tax overhaul (arising from the introduction of GST), should continue to sluggishness in key grow rapidly markets • The emerging market turnaround is likely to continue amid inflationary conditions, including rising oil prices Auto demand growth projections by region Long-term outlook for global auto demand (%) (mn units) 20 EM turnaround likely to 120 Global continue to lift oil prices 16 17F 18F EMs Developed countries 15 100 10.7 10 9.3 9.1 80 5 3.9 2.9 2.6 1.8 0.7 0 60 Sluggishness in key markets, -1.9 -5 including Western Europe and China 40 Normalization of Renewed growth in EMs -10 - Despite Chinese market developed maturization, other EMs Strong growth countries 20 in EMs return to positive growth, -15 India's rapid growth South Eastern Other Japan Global Western Korea US China continues America Europe EMs Europe (included (including (including (including in others) 0 Brazil) Russia) India) 05 07 09 11 13 15 17F 19F 21F 23F Source: IHS Automotive, industry data, Mirae Asset Daewoo Research Source: IHS Automotive, Mirae Asset Daewoo Research 6| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook : US Demand turned downward in 2017, as we had projected; in 2018, demand will likely weaken markedly, due to: 1) rate hikes; and 2) the end of the rapid light-truck growth period US light vehicle SAAR US SAAR by vehicle type (pt) (mn units) (mn units) (US$/gallon) 160 25 Consumer confidence index (L) 15 Cars (L) -Gasoline price should rise 6 140 SAAR (R) Light trucks (L) -Demand for light trucks has peaked 20 5 120 12 Gasoline price (R) 100 4 15 9 80 3 60 10 6 2 40 Aggregate demand growth 5 3 20 1 to slow in medium term 0 0 0 0 95 98 01 04 07 10 13 16 95 98 01 04 07 10 13 16 Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research US auto financing rates (48-month) US light vehicle demand forecasts (%) (mn units) 12 20 10 18 8 16 Demand peaked in 2016; 14 6 interest rates 12 should rise from 4 end-2017 → Downturn in 2 10 demand in 2017 0 8 95 98 01 04 07 10 13 16 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F 19F Source: Bloomberg, Mirae Asset Daewoo Research Source: Automotive News, IHS Automotive, Mirae Asset Daewoo Research 7| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: China Aggregate demand • From January to October in 2017, China’s auto demand growth slowed to 4% YoY (based on CAAM’s light vehicle data) growth to decline in • Key culprits include: 1) a reduction in the scope of the government’s temporary purchase tax cut (10% 5% 7.5% in 2017); and 2) a high base of comparison, resulting from increased demand in 4Q16 2017; low growth to • In 2018, China’s auto demand is expected to fall by around 2% YoY, given that the temporary purchase tax cut is set continue in medium- to to be abolished long-term • Demand growth is likely to remain low from 2017 onwards • Tighter environmental regulations and registration restrictions in large cities should continue, while inland cities should remain the primary source of demand China’s monthly light vehicle sales China’s light vehicle demand forecasts ('000 units) (%) (mn units) 3,500 2016 (L) 35 35 2017 (L) Previous outlook YoY (R) 3,000 30 30 25 Revised outlook 2,500 25 20 2,000 15 20 - Reduction in acquisition 1,500 tax cut or elimination 10 of exemption 15 - Strengthening of 1,000 environmental regulations 5 and limits to registration of vehicles in large cities 10 - Inland demand growth 500 0 0 -5 5 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. 05 07 09 11 13 15 17F 19F 21F 23F Source: CAAM, industry data, Mirae Asset Daewoo Research Source: IHS Automotive, industry data, Mirae Asset Daewoo Research 8| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2017 outlook: China THAAD deployment issue • Amid strained Korea-China relations over the THAAD deployment issue, Chinese sales of HMC and Kia Motors have declined by 50% YoY since March 2017 is dissipating, leading to • Japanese automakers’ Chinese sales also showed a marked decline for six-eight months following 2H12, when the the recovery in Chinese territorial dispute over the Diaoyu (Senkaku) Islands peaked sales of HMC and Kia • Korean automakers have seen their Chinese sales recovering gradually since 2H17 onwards, backed by new SUV model launches and improving Korea-China relations • HMC is likely to show a faster-paced earnings recovery, compared with Kia (which is posting weak sales, due mainly to sluggish sales of existing models and the restructuring of its dealer channels) YoY change in Chinese sales of Korean and Japanese automakers during political conflicts with China: Japan experienced a sharp drop in sales for eight-month period (%) 80 Japanese companies HMC Drop in Japanese auto Kia 60 sales, due to intensification in territorial dispute between China and Japan from Jul. 40 2012~Feb.2013 20 0 -20 -40 Kia Motors' YoY sales After Mar. 2017, THAAD deployment decrease sharply, due depressed Chinese purchases of to robust sales in Oct.