Hyundai Humbled as Investors Abandon Auto Industry's Darling

They were wrong. Shares of South Korea’s largest carmaker tumbled 10% on Tuesday to their lowest close since August 2010, making Hyundai the worst-performing stock among any major automaker in the past year.

It’s been a sobering 12 months for a company that until a few years ago was posting record profits and rattling larger competitors such as Volkswagen AG. Today, the automaker is facing headwinds as foreign brands catch on in Korea and unfavorable exchange rates undermine Hyundai’s ability to compete against the likes of Toyota Motor Corp.

“It’s hard to see any short-term fix to Hyundai’s problems at this point,” Lee Suc Won, head of equities at HI Asset Management Co., which oversees about $11 billion including Hyundai Motor shares, said by phone in Seoul. “I’m holding partmakers on top of a very small Hyundai stake, but think I may need to review that.”

The latest development that spooked investors came Monday, when Hyundai announced that domestic and overseas sales in May declined for a second consecutive month. Local deliveries fell 8.2%, while overseas sales dropped 6.1%.

Hyundai’s offer of interest-free loans, a tactic it last used during the Asian financial crisis almost two decades ago, wasn’t enough to entice buyers at home. Its sales have declined this year in China, the company’s biggest market, while gains in the U.S. have come on the back of an increase in incentives.

Sedan-heavy lineup

One reason could be that the automaker offers more sedans than SUVs, which have gained popularity in an increasing number of markets, including China. Hyundai offers 10 sedans in South Korea including four in the premium category, while the SUV lineup in the country consists of four models.

None of Hyundai’s vehicles ranked among China’s 10 best-selling SUVs in the first quarter. In April, Hyundai showed a version of its revamped Tucson SUV at the Shanghai auto show that it plans to introduce in China this year. And on Tuesday the company said it will introduce its new Creta SUV in India in the second half.

These steps haven’t encouraged investors. The automaker’s shares have dropped 18% this year, in contrast to the 8.5% gain in the key Kospi index.

A year ago, 48 analysts tracking the company had a 12-month target price of more than 300,000 won, according to data compiled by Bloomberg. Their current price target is 207,868 won. The stock closed at 138,500 won today.

Corporate governance

The automaker faced calls from investors last year to improve corporate governance after a real estate purchase for three times the property’s assessed value sparked a rout in the stock. Hyundai and its two affiliates, Kia Motors Corp. and Hyundai Mobis Co., in September won a bid to purchase a land site in Seoul for 10.6 trillion won ($9.5 billion).

In April, the company said it will set up an independent committee within the board of directors to improve decision-making by reflecting minority shareholders’ rights.

Hyundai will continue to “face some difficulties in a very competitive environment especially with a weaker yen and euro,” the company said in an e-mailed response to questions. “With major product launches such as the Tucson and Elantra later this year, we are confident that we can overcome these difficulties.”

The carmaker will probably post its sixth straight quarter of profit decline in the three months ending June 30, according to the average of 23 analysts’ estimates compiled by Bloomberg.

The currency will also weigh on its earnings. A stronger won, which gained about 12% against the yen in the past 12 months, has given its Japanese rivals a competitive edge as they can cut prices without affecting revenue when it’s converted into their home currency.

The currency environment “isn’t favorable,” said Lee Jin Woo, a Seoul-based money manager at KTB Asset Management Co. “I may have to further trim holdings in Hyundai and its parts makers.”