Standard & Poor’s Ratings Services: Hyundai Motor, Kia Motors, Mobis upgraded to ‘A-‘; Outlooks stable

Standard & Poor’s Ratings Services today said that it had raised to ‘A-‘ from ‘BBB+’ its long-term corporate credit and debt ratings on Korea-based Hyundai Motor Co. (HMC) and Kia Motors Corp. (Kia). The outlooks on the long-term corporate credit ratings are stable. At the same time, we raised to ‘A-‘ from ‘BBB+’ our long-term corporate credit rating on Korea-based auto supplier Hyundai Mobis Co. Ltd. (Mobis). The outlook on that rating is also stable. “The upgrades of HMC and subsidiary Kia reflect our expectations that both companies will maintain their global market positions,” said Standard & Poor’s Credit analyst Sangyun Han. “Given their improved brand and product quality over the past few years, we believe their recently announced capacity additions are likely to help them maintain their global market positions,” he added. We expect their global market share to rise above 9% over the next two years from 8.5%-9% in 2011-2014, which compares with our previous forecast of a gradual decline in their market share without capacity additions. In our view, the announced capacity additions–mainly in China and Mexico–should help the companies maintain good market positions in the two key markets of China and the U.S. The upgrades also reflect our expectations that HMC and Kia will maintain good profitability over the next two years. We expect their combined EBITDA margins to remain at around 10% in 2015-2016, which is at the high-end of the industry range, though slightly moderating from 2014 and a decline from 11%-12% in 2011-2013, reflecting our assumptions of further appreciation of the won and increasing incentives in car sales. In our view, the companies’ 2014 performances, though weaker than in 2013, have shown some resilience amid challenges such as a strong won, a weak yen, volatility in emerging markets, and penetration of foreign automakers into the Korean domestic market. We believe the resilience is based on their gradual improvement in average sales prices following a shift in product mix to larger cars and strong cost management. The upgrade of Mobis reflects our expectation that it will continue to benefit from the solid market positions and good profitability of HMC and Kia over the next 24 months. The upgrades reflect HMC’s, Kia’s, and Mobis’ sufficient cash buffers to support investments for capacity additions and research and development (R&D) and withstand the uncertainties over potential industry downturns, currency fluctuations, and rising competition. We expect that the companies’ stable global market positions and good profitability will likely allow them to post significant free operating cash flows to further improve their cash buffers and maintain no adjusted debt over the next two years, even after reflecting increased capital expenditures for capacity additions and R&D and the group’s Korean won (KRW) 10.55 trillion acquisition of the Korea Electric Power Corp. headquarters site. The stable outlooks reflect our opinion that the strong financial risk profiles of the companies and the group–underpinned by significant cash holdings and free operating cash flows–will allow them to weather uncertainties in the highly cyclical and competitive auto industry over the next 24 months.

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