Auto shares bounce back with foreigners' net buying

South Korean auto shares are showing some signs of a rebound after a long downtrend since the second half of last year. Foreign investors have returned to buying car shares since late March. The chip shortage is likely to ease in the second half of this year, and valuations have hit their lowest levels, attracting new investors.

Korean top automaker Hyundai Motor Co. shares rose by 1.69% to 181,000 won ($147.84) on Wednesday of this week. From March 15 to April 13, shares of Hyundai Motor and Korea’s No. 2 carmaker Kia Corp. jumped 11.04% and 12.57%, respectively, while the main bourse Kospi rose only 3.62% during the same period.  

Korean car shares have weakened since the second half of 2021 amid growing concerns over chip shortage-driven performance deterioration. Some automaking plants, including Hyundai Motor and GM Korea Co., the Korean unit of US auto giant General Motors Co., were suspended last year because of chip shortage problems.

The Russia-Ukraine war has also worsened car shares -- the combined sales of Hyundai and Kia cars in Russia plunged by 68% in March, compared with the same month last year, according to the Association of European Businesses (AEB). Hyundai and Kia shares hit 52-week lows on March 15, respectively, closing at 162,000 won and 68,100 won.

SHARES DEFENSIVE TO WAR AND CHIP SHORTAGE

The auto shares are set to bounce back as the chip constraint will ease later this year. "Global automotive chip makers, such as NXP Semiconductors N.V., Infineon Technologies AG and STMicroelectronics N.V., are expanding facility investments. They will produce chips from the increased facilities from the second half of this year,” said Kim Joon-sung, an analyst at Meritz Securities Co. “The Shanghai Containerized Freight Index (SCFI) has recently slid, and global logistics bottlenecks are looking to ease later this year,” said Kim.  

Despite the sales slump in Russia, the performances of Hyundai Motor and Kia weren't deeply hurt for the first three months of this year. Hyundai Motor’s global wholesale sales during the first quarter were 902,000 units, down 9.7% from the same period of 2021. Kia’s in the first quarter were 685,000 units, down only 0.7% from the same period of the last year.

The automakers’ performances are expected to improve on their strategy to increase luxury car sales and the weakened Korean won. Kia’s operating profit in the first quarter is estimated to have risen 15.2%, compared with the same period of 2021, according to financial information provider FnGuide. 

LOWERED VALUATIONS, HIGHER TARGET PRICE

Foreigners are betting on Hyundai Motor shares. From April 1 to 13, they turned to buy a net 34.4 billion won worth of the automaker's shares while selling a net 2.5 trillion won on the Kospi. Foreign shareholders of Hyundai Motor had been on a net-selling spree during the first three months of 2022 -- they sold a net 179.4 billion won in January, 414.6 billion won in February and 265.9 billion won worth of its shares in March. 

Foreigners hold a 26.56% stake in Hyundai Motor as of April 12, down from 28-31% in 2021 and over 40% in 2019. To bring foreign investors’ holding rate up to 30%, Hyundai Motor has to sell more of its shares worth 1.3 trillion won, based on the current stock price, to the investors.

The major carmakers’ valuations have lowered enough to attract new investors. The firm’s 12-month forward price-earnings ratio is 7.8 times, compared with 10-11 times a year ago. Kia’s is 5.7 times, compared with 7.8 times a year ago. Some positive outlooks are also expected to boost the stocks  -- Morgan Stanley recently raised the target price of Hyundai Motor from 260,000 won to 270,000 won and that of Kia from 80,000 won to 85,000 won.

Write to Hyeong-Gyo Seo at seogyo@hankyung.com
Jihyun Kim edited this article.