No Love for Korean Auto Stocks as Goldman, BlackRock Stay Wary

(Bloomberg) -- Woes at Korea’s biggest companies don’t end with Samsung Electronics Co.

Foreign investors have sold a net $540 million worth of shares this year in Hyundai Motor Co. and affiliate Kia Motors Corp., the fastest pace since Bloomberg began to compile data in 2012, driving shares to near the cheapest levels on record. The two companies have the lowest valuation among major carmakers tracked by Bloomberg.

That’s not convincing money managers it’s time to buy: BlackRock Inc. and Goldman Sachs Group Inc. point to a slew of reasons including slowing sales growth in the U.S. and emerging markets, widespread factory strikes, a lack of new models and a view that the automakers are falling behind in developing electric cars.

"We remain cautious around Korean autos," said Hong Kong-based Andrew Swan, who helps run the $1.5 billion BlackRock Asian Growth Leaders Fund, citing slowing sales in the U.S. The fund is generating a 22 percent return over one year, according to BlackRock.

South Korea, Asia’s fourth-largest economy, has been rocked by a string of corporate debacles at its largest conglomerates including Samsung Electronics’ smartphone disaster, the collapse of Hanjin Shipping Co. and indictments against Lotte Group’s founding family. While the nation’s economy grew slightly more than forecast in the third quarter from the previous period, exports disappointed, prompting Bank of Korea Director General Chung Kyu-il to say a labor strike at Hyundai and Samsung Electronics’ losses curbed expansion.

Hyundai Motor fell 1.5 percent as of 9:16 am in Seoul, after a 2.6 percent gain on Tuesday. Kia Motors was down 0.6 percent. The benchmark Kospi slid 0.9 percent.

Hyundai Earnings

Hyundai’s third-quarter earnings are due Wednesday. Goldman Sachs said on Oct. 10 that loss of shipments from the strikes that halted production in recent months as well as increasing costs because of a strengthening won will weigh on results. Hyundai’s shares rallied the most in a month on Tuesday as the company said executives will take 10 percent pay cuts amid slowing sales. Kia and Samsung report earnings on Thursday.

Global auto sales have been sliding since 2013 and Hyundai Securities Co. says sales in China, the U.S. and Europe are likely to cool further next year. Hyundai and Kia, which combined make up the world’s fifth-biggest carmaker by sales, posted the worst earnings in five years in 2015 and analysts have cut their estimates for a second straight year.

Hyundai’s stock has tumbled 41 percent since the start of September 2014, while Kia’s has plunged 50 percent from a 2012 high. Hyundai trades at 5.6 times its 12-month projected earnings, close to historically cheap levels and about half the valuation of the benchmark Kospi index. Kia trades at a multiple of 5.5. Both companies have the lowest valuation among the 30 members of the Bloomberg World Auto Manufacturers Index.

Norway’s Skagen Fund, the largest shareholder of Hyundai’s preferred stock, almost halved its stake from more than 3 million shares in the third quarter of 2013, to about 1.67 million as of the end of September, according to data compiled by Bloomberg.

"Our fund has a global mandate and at the time we saw better risk-reward in other opportunities," fund manager Knut Gezelius said in an e-mail interview. One of the manager’s latest investments has been Samsung Electronics, as it sees the recent selloff on the unfolding Note 7 crisis as a buying opportunity.

Hyundai has been slow to join the rising trend of electric vehicles and that’s likely to be a disadvantage in the future, according to Duncan Robertson, a manager in Hong Kong whose fund doesn’t hold Korean auto stocks. Hyundai is spending 2.4 percent of its net sales on research and development, compared to Toyota Motor Corp.’s 3.7 percent and Volkswagen AG’s 5.8 percent as of the second quarter, according to data compiled by Bloomberg.

"As a longer-term concern, we think the Korean automakers are among the least best positioned for transitions to EV," said Robertson, who helps manage the TT International Asia Pacific Equity Fund, which is beating 90 percent of its peers with a 19 percent one-year return. In terms of R&D “they seem to be slow,” he said.

For Sat Duhra, a fund manager at Henderson Global Investors Ltd., the valuations of Korean auto stocks look attractive. He also cites plans to improve their corporate governance and dividend payouts as the government pressures family-owned industrial behemoths, known as chaebol, for change.

"We have added exposure to Korean autos recently," Duhra said from Singapore. "We think that the Korean improvement in corporate governance and dividends is real and will benefit autos. It is only a matter of time before some of these inefficient structures are addressed."

Hyunsu Kim, a fund manager at IBK Asset Management in Seoul, is among investors fretting over the company’s third-quarter earnings.

"The earnings for the third quarter will be the important litmus test for investors to figure out where the company spends revenue the most," Kim said.

--With assistance from Sohee Kim To contact the reporter on this story: Heejin Kim in Seoul at hkim579@bloomberg.net. To contact the editors responsible for this story: Jeff Sutherland at jsutherlan13@bloomberg.net, Andreea Papuc, Chan Tien Hin

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