September 6, 2017 / 10:08 AM / 2 months ago

Fitch Affirms Hyundai Motor and Kia at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) SEOUL, September 06 (Fitch) Fitch Ratings has affirmed South Korea-based Hyundai Motor Company's (HMC) and its subsidiary Kia Motors Corporation's Long-Term Foreign-Currency Issuer Default Ratings (IDR) at 'BBB+' with a Stable Outlook. Fitch has also affirmed the companies' senior unsecured ratings at 'BBB+' and Short-Term Foreign-Currency IDRs at 'F2'. The ratings on notes issued by HMC's subsidiary, Hyundai Capital America, have also been affirmed at 'BBB+. The ratings and Stable Outlooks on HMC and Kia are supported by their solid financial profile and status as low-cost mass-market auto producers with high capacity utilisation and a well-diversified sales and product portfolio. Fitch has also taken into account the companies' near-term profitability pressure, geopolitical issues and higher capex. KEY RATING DRIVERS Pressure on Profitability: Fitch expects HMC's and Kia's profitability to deteriorate in 2017, reflecting sluggish sales and higher incentive costs in the US market among other factors. HMC's revenue from industrial operations remained flat yoy in 1H17, but operating profit from industrial operations fell by 17%. Kia's revenue and operating profit fell by 3% and 44% yoy, respectively. However, we expect robust sales growth in Western Europe and other emerging markets, such as Russia and Brazil. HMC is likely to show a faster recovery than Kia due to its more aggressive product launch schedule over the next six to 12 months in key markets, such as US and China. Lingering Geopolitical Issues: We believe geopolitical tension, which has resulted in anti-Korean sentiment in China and a major sales decline year-to-date, is likely to linger in the near term. Sales should improve gradually from 2018, more so for HMC, but a recovery to pre-tension levels is likely to take more time. Modest Industry Growth Outlook: Fitch expects global light-vehicle sales to show low single-digit growth in 2017, driven by moderate growth in Western Europe and a modest recovery in emerging markets, such as Brazil, Russia and India. However, US light-vehicle sales are likely to decline to 17 million units in 2017, which implies a 3% decline yoy. For China, we expect passenger-car sales growth to slow to low single-digits, reflecting a tax increase for small-engine vehicles. Domestic market sales growth is likely to be positive for the remainder of the year, coming off a low base due to a tax cut expiry and prolonged strike at HMC in 2H16. Increased Investment: Lower profitability and higher capex due to increasing R&D expenses are likely to squeeze free cash flow. We expect HMC's and Kia's capex to gradually rise over the medium-term due to increased investment in power-train improvement, expanding green-car line-ups and the build-up of HMC's new Genesis luxury brand. Kia also announced a new plant in India, but we believe capacity expansion is likely to remain limited in the near term. Ordinary-Wage Lawsuit: The preliminary ruling for Kia's ongoing lawsuit with labour-union members regarding the scope of ordinary wages came out on 31 August 2017 in favour of the employees. The lower court ruled that the ordinary wage base should include bi-monthly wages, which would retroactively affect overtime pay, compensation for unused leave and severance payments. Kia estimates the financial impact at around KRW1.0 trillion, which will affect 3Q17 earnings. However, the company will appeal and, given similar lawsuits at other companies, we expect the final outcome and actual cash outlay to take at least one to two years. We assume cash payments will be made in 2019. Solid Financial Profile: We expect HMC and Kia to maintain a solid financial profile despite the deterioration in profitability. The combined net-cash position of the companies' industrial operations rose to KRW14.0 trillion in 1H17 (2016: KRW13.1 trillion). We believe the combined net-cash position will remain close to KRW10 trillion over the next two to three years, even after adjusting for operational cash of KRW2.4 trillion and allocating KRW2.3 trillion of financial operations debt to the industrial operations, with a resulting combined adjusted net-debt/EBITDAR ranging around -0.8x to -0.9x (2016: -1.0x). Kia's Rating Linked to Parent: Fitch believes Kia remains integral to HMC's long-term growth strategy as a global automaker and to HMC's group structure. As such, Kia's ratings are equalised with those of HMC due to the strong strategic and operational ties between the two companies. These include platform integration, shared R&D and procurement and the same senior-management team led by the Hyundai group chairman. Kia's financial statements are no longer consolidated into HMC's, but Fitch does not see a change in the strong linkages between the two companies. Fitch assesses Kia's standalone credit profile at 'BBB'. DERIVATION SUMMARY Fitch has based its analysis on the combined credit profile of HMC's industrial operations and those of Kia, with Kia's ratings equalised with those of its parent, based on our view of strong operational and strategic linkage between the two companies. HMC and Kia have a combined business and financial profile that is comparable with that of similarly rated peers. The entities' business profile is similar to that of Nissan Motor Co., Ltd. (BBB+/Stable). HMC's gross leverage is higher, but it enjoys a net-cash position against Nissan's net-debt position. HMC lags behind Volkswagen AG (BBB+/Stable) in terms of business scale and financial profile, but Volkswagen's ratings are constrained by corporate governance issues related to the emission crisis. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Hyundai and Kia include: - KRW/USD of 1,150 in 2017-2019 - Retail sales volume to fall by 10% in 2017, and then increase by 3%-6% in 2018-2019 (2016: up by 1.5% for HMC and up by 3.3% for Kia) - 2017 capex of KRW4.6 trillion for HMC and KRW2.6 trillion for Kia, to increase gradually afterwards - Flat dividends in 2017 - Cash payment of KRW1.2 trillion related to the ordinary-wage lawsuit to be paid in 2019 RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: HMC - HMC's and Kia's combined adjusted net-debt/EBITDAR (industrial operations) above 0.5x (2016: -1.0x) for a sustained period - Evidence of HMC's and Kia's combined operating EBIT margin (industrial operations) permanently declining to below 4% or posting a cyclical dip to below 3% (2016: 5.3%) - A major reversal of market recovery or market-share erosion in key markets for a sustained period Kia - A downgrade in HMC's rating - Weakening of linkages between HMC and Kia Positive: Positive rating action is not envisaged for either HMC or Kia over the next two to three years due to the concentration of the companies' products on the volume segment. LIQUIDITY Adequate Capital Market Access: HMC and Kia enjoy longstanding relationships with Korean financial institutions and excellent access to the local bond market and international capital markets as they are the main companies in the HMC group, one of Korea's largest chaebol groups. Robust Net-Cash Position: HMC's total consolidated debt was KRW71.7 trillion as of June 2017, of which nearly 90% was incurred at the financial subsidiary level. HMC's industrial operations debt was KRW9.1 trillion and Kia's debt was KRW8.5 trillion. The combined cash and cash equivalent position of the two companies exceeded KRW30.0 trillion. The combined net cash from industrial operations was KRW14.0 trillion in June 2017, slightly up from KRW13.1 trillion at end-2016. We expect the two companies to maintain their robust net-cash positions. Contact: Primary Analyst Jeong Min Pak Senior Director +82 2 3278 8360 Fitch Australia Pty Ltd, Korea branch 9F Kyobo Securities Building 97, Uisadang-daero, Yeoungdeungpo-Gu Seoul, Republic of Korea Secondary Analyst Shelley Jang Director +82 2 3278 8370 Committee Chair Emmanuel Bulle Senior Director +34 9 3323 8411 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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