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S&P deflates outlooks for Hyundai units

Ratings agency cites slump in car sales, woes in China, U.S.
Sept 12,2017
Three major affiliates of Hyundai Motor Group got their credit outlooks downgraded by S&P Global Ratings because of declining sales and a miscalculated strategy in major markets like China and United States.

The agency also estimated lower dividend incomes from Hyundai Motor and Kia Motors’ Chinese joint ventures until 2018.

S&P, a major credit ratings agency, announced Friday it revised credit outlooks for Hyundai Motor, Kia Motors and Hyundai Mobis from “stable” to “negative.” It is the first decline in outlook for the three companies since 2015.

The revision indicates that the company’s credit ratings could be downgraded in the next one to two years. This year, however, S&P maintained its “A-” long-term corporate credit ratings on the three companies.

S&P cited Hyundai Motor and Kia Motors’ “weakening sales and profitability” as the major reason for its revision. The agency remained uncertain as to whether Hyundai Motor and its smaller affiliate Kia Motors would be able to turn around declining sales over the next year.

“We believe the companies may be unable to return to their historical profitability over the next 12 months due to increased competition in the U.S. and China,” the agency said in a statement.

“Geopolitical uncertainties related to the Chinese operations” and a “weaker product mix than that of peers and continued conflicts with labor union in Korea” were additional reasons for the lowered outlooks.

Due to its high dependency on Hyundai Motor and Kia Motors, S&P expected auto parts supplier affiliate Hyundai Mobis to see a slump in the next one or two years.

“We expected Mobis’ module division profitability to be weak over the next 12 months on Hyundai Motor and Kia Motors’ declining auto production volume in China,” the agency said.

The agency said if Hyundai Motor and Kia Motors’ combined earning before interest, tax and depreciation (Ebitda) margin stays near 6 percent, it could lower the ratings from the current A-. It said declining sales volume and high incentives offered to customers due to intense competition might lead to a lower margin rate.

However, if the Ebitda margin stays above 7 percent, S&P said it could return its outlook from negative to stable. In order to achieve that, the agency said, a lineup expansion and normalization of dividends from Chinese operations would be necessary.

“Aside from elements like the geopolitical conflicts between Seoul and Beijing, S&P is warning that Hyundai Motor lacks effort in improving its competitiveness in the U.S., expanding its SUV lineup and negotiating with its domestic union,” said Koh Tae-bong, an analyst at HI Investment & Securities.

“Hyundai Motor Group needs to show enhanced profitability in its operations segment or else it will get its credit ratings downgraded,” Koh added.

Hyundai Motor share fell by 0.37 percent on Monday, closing at 135,000 won ($119.34). Kia Motors’ shares fell by 0.62 percent, closing at 31,800 won on Monday.


BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]