September 6, 2017 / 10:08 AM / 10 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: Additional information is available on 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 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below