Hyundai's Turning the Corner After Three Years in Second Gear

(Bloomberg Gadfly) -- Hyundai Motor Co. has been stuck in second gear for so long that it's easy to forget it can go any faster.

Its stock fell by almost a third in the space of three months in late 2014 in the face of wage pressures, a stronger South Korean won and concerns surrounding the $10 billion purchase of a site for its new headquarters in Seoul's upscale Gangnam district. Since then, it's bounced around between about 140,000 won and 160,000 won, without any real sign of improvement.

Such lackluster performance is bad enough if it's due to investors losing faith in a company's earnings potential. In Hyundai's case, it's worse: Earnings-based valuations have actually been going up, with the blended forward 12-month price-earnings ratio touching its highest level in six-and-a-half-years last week. The stability of Hyundai's share price is an indication that shareholders' views are getting rosier and rosier, even as actual earnings prospects deteriorate. 

At the same time, there are signs that the worst for Hyundai and its chaebol affiliate Kia Motors Corp. could be in the past. Hyundai's fourth-quarter net income of 1.29 trillion won ($1.2 billion) reported Thursday was its first year-on-year increase since 2013 -- helped along, admittedly, by a giant tax benefit.

One major weakness of Hyundai in recent years has been its miserable lineup of SUVs in a market that's being eaten by them. That could change in 2018, with new versions of its venerable Santa Fe and Tucson models, as well as the all-new Kona, a subcompact design meant to capture China's vogue for diminutive urban SUVs. The luxury Genesis G70 sedan, Kia's sporty Stinger and a remix of the funky Veloster coupe could help, as well.

There's evidence of improvement in other areas, too. The China-Korea tensions that smashed Hyundai and Kia's takings in the world's biggest car market last year have been easing, bringing better sales in their wake. Relative to 12-month moving averages, October's result for Hyundai was the first bright spot all year in China. In Thursday's update, the company forecast a 15 percent improvement in sales volumes over the year ahead.

For all those positive glimmers, macro factors aren't helping much at present. The won Thursday reached its strongest level against the U.S. dollar since 2014, amid signs of weakness in Korea's economy and comments from U.S. Treasury Secretary Steven Mnuchin in favor of a weaker greenback. That will tend to depress the value of the 60 percent or so of Hyundai's revenue that's earned outside its home market.

The Trump administration's imposition of tariffs on solar panels and washing machines also raises the threat of punitive action on other traded goods. In contrast to the big Japanese carmakers that supply the vast majority of their U.S. sales from North American factories, Hyundai imports about half of its production, so would be hit particularly hard by any raising of tariffs.

All of which goes to show why Hyundai has made such a habit of disappointing its most dogged optimists. While that tax benefit supported net income, the company's fourth-quarter operating profit, at 775 billion won, was below even the most pessimistic of analyst estimates.

Still, we're finally approaching the point where Hyundai's worst problems should be in its rear-view mirror. Right now, the road ahead could be brighter than it's been in a while.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

To contact the author of this story: David Fickling in Sydney at dfickling@bloomberg.net.

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