Hong Kong, November 01, 2018 -- Moody's Investors Service has changed the outlook on the ratings for Hyundai
Motor Company (HMC), Kia Motors Corporation and Hyundai Mobis Co.,
Ltd. to negative from stable.
At the same time, Moody's has affirmed the Baa1 issuer ratings
of HMC, Kia and Hyundai Mobis, and the senior unsecured bond
ratings of Kia.
RATINGS RATIONALE
"The change in the rating outlook for HMC reflects the increasing
likelihood that the company's profitability will remain weak over
the next 1-2 years, because of challenging operating conditions
in its key markets and continued cost pressures," says Wan
Hee Yoo, a Moody's Vice President and Senior Credit Officer.
HMC's operating margin — ex-finance — has registered
below 3.5% over the last four consecutive quarters;
results which were meaningfully lower than the 4.8% in 2017
and 5.6% in 2016.
In particular, the company's operating margin — ex-finance
— fell to 0.5% in 3Q 2018 from 5.0%
in 3Q 2017, owing to the unfavorable movement in foreign exchange
rates and higher provision-related expenses associated with recalls,
as well as quality-related expenses, moderate sales performance
and elevated incentive expenses.
In addition, equity income from its joint venture in China has shown
a slower than expected recovery so far in 2018 from the very low base
in 2017, owing to a softening in auto demand and stiff competition
from local Chinese brands.
Given HMC's weak operating performance during the first nine months
of 2018, Moody's expects the company's adjusted EBITA
margin — including equity income from its China joint venture —
to fall to about 3.6% in 2018 from 5.6% in
2017.
In the absence of sizable provision and quality-related expenses,
Moody's expects HMC's adjusted EBITA margin to improve to
4.5%-5.0% in 2019, underpinned
by: (1) a modest recovery in its sales in China from a low base
in 2017-18; (2) higher utilization in its US plant,
driven by increasing production of SUVs; and (3) a stabilization
or slight decrease in incentive expenses, following the launch of
new models in 2018-19.
Despite the moderate improvement, this level of profitability is
meaningfully lower than the company's historical averages over the
past four to five years, reflecting the heightened challenges in
its key US and China markets.
In addition, there is a considerable downside risk to Moody's
projections, given the increasing challenges in managing product
quality and uncertainties in the global auto market.
That said, these concerns are partly mitigated by its large liquidity
holdings, which continue to provide an adequate financial buffer.
Moody's estimates that HMC's reported net liquidity holdings
— ex-finance — totaled about KRW11.7 trillion
at the end of September 2018, down from KRW13.3 trillion
at the end of 2017.
"The outlook changes for Kia's and Hyundai Mobis' ratings
mirror the rating action on HMC's rating, given the companies'
high degree of linkages with HMC, both from an operational and ownership
perspective," adds Yoo.
Kia's ratings benefit considerably from operational support through a
high degree of integration with HMC in all areas except marketing and
design. In addition, Kia's Baa1 ratings reflects the
high likelihood of support from HMC in times of stress, which results
in a one-notch rating uplift.
Hyundai Mobis' rating is closely linked with HMC's rating, given
the high likelihood of extraordinary mutual support between the two companies,
based on their strategic importance to each other.
In addition, Hyundai Motor group controls most of its group companies
through circular shareholdings among HMC, Kia and Hyundai Mobis,
which reinforces the three companies' close linkages.
HMC's rating outlook could return to stable if the company improves
its profitability through enhanced sales performance and/or a reduction
in expenses, while maintaining its strong balance sheet.
These developments could be evidenced by adjusted EBITA margins above
4.5%-5.0% and adjusted net debt/EBITDA
below 0.5x on a sustained basis, excluding its finance subsidiaries.
On the other hand, Moody's could downgrade HMC's rating
if the company's earnings remain weak or if it undertakes significant
investments, such that adjusted EBITA margins stay below 4.5%-5.0%
or adjusted net debt/EBITDA exceeds 0.5x on a sustained basis,
excluding its finance companies.
Kia's and Hyundai Mobis' ratings outlooks could return to stable
if: (1) HMC's rating outlook returns to stable, and (2) Kia
and Hyundai Mobis maintain their sound financial profiles.
Moody's will downgrade Kia's and Hyundai Mobis' ratings
if Moody's downgrades HMC's rating.
The principal methodology used in rating Hyundai Motor Company and Kia
Motors Corporation was Automobile Manufacturer Industry published in June
2017. The principal methodology used in rating Hyundai Mobis Co.,
Ltd. was Global Automotive Supplier Industry published in June
2016. Please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Hyundai Motor Company, headquartered in Seoul, is Korea's
dominant automaker by sales volume. Together with its subsidiary,
Kia Motors Corporation, Hyundai Motor reported approximately 7.3
million units of auto retail sales in 2017.
Kia Motors Corporation is Korea's second-largest automaker by sales
volume and revenue. The company is a subsidiary of Hyundai Motor
Company. Kia's global retail sales totaled about 2.8 million
auto units in 2017.
Hyundai Mobis Co., Ltd. is Korea's largest manufacturer
of automobile parts by revenue, with facilities in Korea,
China, Slovakia, India, the Czech Republic, Russia,
Mexico, Turkey, Brazil and the US. The company is one
of the key members of the Hyundai Motor group, and is the main auto
parts supplier for Hyundai Motor Company and Kia Motors Corporation.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entities are participating and the rated entities or their agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Wan Hee Yoo
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
