Company Report (27 KS) Auto China operations running well Visit to DYK s China plants Last week, we visited Ê manufacturing plants in Yancheng, and sales headquarters in Nanjing (domestic made) and Shanghai (imports from Korea). Dongfeng Yueda Kia (DYK), KiaÊs manufacturing arm in China, was established in June 22 under a joint venture between Kia (5% stake), Dongfeng Automotive (25%) and Yueda Co (25%). DYK launched its first plant with an initial annual capacity of 5, units and expanded to 13, units by 24. Then in 27, the venture opened its second plant with a capacity of 3, units. In 211, Kia Motors manufactured and sold a total of 43, units in China, with both plants running at maximum capacity. World class productivity DYKÊs second plant recently improved its UPH (Units Per Hour) to 68 units from 66. In addition, its body process became fully automated, making the plant world class in productivity. The second plant, which manufactures DYKÊs volume sellers the K2, Forte, and K5, is expected to begin production of the new K3 that is slated to be launched in mid October. Meanwhile, DYK plans to have its third plant ready for operations by 214 with a total capacity of 3, units (initial capacity of 1,~15, units). China s capacity to grow an additional 7% in 213 We believe DYKÊs total production could exceed 5, units in 213, assuming its second plant runs at 68 UPH. This equates to a growth of 7% in 213, which is similar to 212Ês. Thus, we believe that DYK will at minimum maintain its market share in China. Unlike other global plants, it appears that DYK is effectively utilizing its current plants without resorting to three shifts and additional hiring. As of yet, Chinese workers have not raised the issue of working beyond their ten hour daily shifts. However, we do not see over utilization of labor force continuing in the future, as wage increases and quality issues become highlighted. DYKÊs third plant will relieve some pressure from the second plant, but both plants should continue to run at full capacity. Earnings & Valuation Metrics FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 12/1 35,827 2,49 7. 2,682 6,83 3,298 3,677 32.1 7.4 2.3 7.2 12/11 43,191 3,525 8.2 3,416 8,556 4,49 2,137 29.1 7.8 2.2 6.4 12/12F 49,43 4,612 9.3 4,647 11,468 5,638 2,489 29.6 6.6 1.9 5.5 12/13F 53,48 5,149 9.6 5,175 12,772 6,23 2,52 25.4 6. 1.4 4.7 12/14F 55,861 5,429 9.7 5,585 13,782 6,581 3,734 21.9 5.5 1.2 3.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Daewoo Securities Co., Ltd. Michael Yun +822-768-4169 michael.yun@dwsec.com Young-ho Park +822-768-333 youngho.park@dwsec.com Buy (Maintain) Target Price (12M, W) 99, Share Price (9/14/12, W) 76,1 Expected Return (%) 3.1 EPS Growth (12F, %) 34. Market EPS Growth (12F, %) 12.2 P/E (12F, x) 6.6 Market P/E (12F, x) 1.8 KOSPI 2,7.58 Market Cap (Wbn) 3,848 Shares Outstanding (mn) 45 Avg Trading Volume (6D, ') 1,333 Avg Trading Value (6D, Wbn) 1 Dividend Yield (12F, %).9 Free Float (%) 64.3 52-Week Low (W) 64, 52-Week High (W) 84,8 Beta (12M, Daily Rate of Return).89 Price Return Volatility (12M Daily, %, SD) 1.8 Foreign Ownership (%) 34.7 Major Shareholder(s) HMC et al. (35.63%) NPS (6.95%) Price Performance (%) 1M 6M 12M Absolute -3.1 4.7 15.5 Relative -5.7 6.5.7 Key Business KoreaÊs second-largest auto manufacturer. The companyês global competitiveness has leveled up following the global economic crisis. 13 12 11 1 9 8 7 Share price KOSPI 9/11 1/12 5/12 9/12 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
Table 1. DYKÊs China plant sites 1 st Plant 2 nd Plant 3 rd Plant ( April 214) Production models (Five) (Four) K3, new D-segment car Optima (Soon to be phased out) Cerato (Soon to be moved to 1st) EV Rio Forte Sportage K5 Soul K2 Sportage R K2 5 Dr K3 (Oct. 212) Capacity 14, 3, Initially 15, UPH (Units Per Hour) 32 66 Over 6 (Recently increased to 68) Total employees 1,755 2,678? Source:, Cruising in China After our plant visits, we went to Ê sales headquarters in Nanjing and then to its sales headquarters for Kia imports in Shanghai. Through our meetings and visits to dealerships, we felt that Kia was on track with stable improvements in both quantity and quality. Despite concerns of rising inventory in China, Kia has continued to gain market share and improve profitability through new car launches and sales mix improvement. KiaÊs 212 market share has jumped to 7 th among all manufacturers (ranked 13 th in 29 and 21). On top of that, KiaÊs sales in the upper C-segment and SUV increased to 59% of total sales in 212 from 15% in 27. If we look just at KiaÊs D-segment and above, sales increased to 35% of total from 6% during the same period. Kia has a separate sales headquarters (Shanghai) and dealer network for Kia imports (manufactured in Korea), which costs approximately twice the price of locally produced cars due to high tariffs (22.5%) and consumption taxes (maximum 23%). Sales of imported Kia cars have grown dramatically in the recent years with this yearês annual sales target of 3, units (27 annual sales were 11, units). However, with competition heating up, sales growth of imported Kia cars will likely cool from this year. Figure 1. KiaÊs sales trend in China (') 5 K2, K5, Sportage R launch 4 3 Forte, Soul launch 3% 2 1 Cerato launch Sportage launch 38% Grwoth rate 7% 5% 4% 23% 76% -12% 15% 2 3 4 5 6 7 8 9 1 11 Source:, 2
Table 2. AutomakersÊ annual unit sales and market share in China (Â units) 29 21 211 212 YTD Rank Maker Units Rank Maker Units Rank Maker Units Rank Maker Units 1 Shanghai VW 728 1 Shanghai VW 1,35 1 Shanghai GM 1,2 1 Shanghai GM 737 2 Shanghai GM 728 2 Shanghai GM 1,1 2 Shanghai VW 1,166 2 Shanghai VW 734 3 FAW VW 669 3 FAW VW 87 3 FAW VW 1,35 3 FAW VW 731 4 Hyundai 57 4 Hyundai 73 4 Nissan 89 4 Nissan 525 5 Nissan 519 5 Nissan 654 5 Hyundai 74 5 Hyundai 437 6 BYD 447 6 Chery 527 6 Toyota 53 6 Toyota 336 7 Chery 437 7 BYD 58 7 Chery 445 7 DYK 254 8 Toyota 417 8 Toyota 56 8 DYK 433 8 Ford 252 9 Honda 366 9 Ford 411 9 BYD 431 9 DPCA 236 13 DYK 241 13 DYK 333 1 Ford 419 1 BYD 222 Source:, Figure 2. KiaÊs sales by segment in China Figure 3. Sales of imported Kia cars (%) 1 B C D CUV SUV Mini van (') 35 8 3 25 6 4 Sales mix improvement with high price line up 2 15 1 2 5 2 3 4 5 6 7 8 9 1 11 12.1~8 1 2 3 4 5 6 7 8 9 1 11 Source:, Source:, Risks and opportunities coexist in China After the global economic crisis, the Chinese auto market underwent prodigious growth, which has resulted in the maturation of the auto market in major cities. However, as we believe the overall auto market retains significant room for further growth, risks and opportunities coexist in China for global auto makers. Recently, luxury automakers have started to offer discounts as high as RMB1, due to intensifying competition, and this is now trickling down to non-luxury automakers. Furthermore, local Chinese automakers are continuing to lose ground in the market. As a result, we are seeing inventories increase for all major automakers in China. However, we believe Kia will maintain stable utilization with its highly productive plants, allowing it to generate stable growth and solid profitability. 3
(27 KS/Buy/TP: W99,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 43,191 49,43 53,48 55,861 Current Assets 11,75 13,374 16,254 19,366 Cost of Sales 33,139 37,822 4,883 42,568 Cash and Cash Equivalents 2,34 3,218 4,143 6,191 Gross Profit 1,52 11,68 12,598 13,293 AR & Other Receivables 2,611 3,3 3,421 3,694 SG&A Expenses 6,553 7,24 7,526 7,877 Inventories 4,33 4,543 5,14 5,339 Operating Profit (Adj) 3,499 4,585 5,72 5,417 Other Current Assets 223 192 719 752 Operating Profit 3,525 4,612 5,149 5,429 Non-Current Assets 19,18 21,184 22,991 25,11 Non-Operating Profit 1,197 1,595 1,751 2,17 Investments in Associates 6,89 8,222 9,93 11,921 Net Financial Income 79-13 -18-246 Property, Plant and Equipment 9,184 9,61 1,11 1,371 Net Gain from Inv in Associates 1,337 1,41 1,78 1,991 Intangible Assets 1,517 1,496 1,491 1,487 Pretax Profit 4,722 6,27 6,9 7,446 Total Assets 3,255 34,558 39,245 44,476 Income Tax 1,22 1,56 1,725 1,862 Current Liabilities 11,422 11,182 11, 1,999 Profit from Continuing Operations 3,519 4,647 5,175 5,585 AP & Other Payables 6,61 6,764 7,244 7,578 Profit from Discontinued Operations Short-Term Financial Liabilities 3,122 2,121 1,72 1,271 Net Profit 3,519 4,647 5,175 5,585 Other Current Liabilities 1,699 2,297 2,55 2,149 Controlling Interests 3,416 4,647 5,175 5,585 Non-Current Liabilities 5,324 5,442 5,363 5,279 Non-Controlling Interests 14 Long-Term Financial Liabilities 2,53 2,395 2,395 2,395 Total Comprehensive Profit 3,794 4,658 5,231 5,641 Other Non-Current Liabilities 2,546 2,918 2,985 3,46 Controlling Interests 3,683 4,642 5,216 5,625 Total Liabilities 16,746 16,624 16,363 16,277 Non-Controlling Interests 111 15 15 15 Controlling Interests 13,51 17,919 22,852 28,153 EBITDA 4,49 5,638 6,23 6,581 Capital Stock 2,133 2,139 2,139 2,139 FCF (Free Cash Flow) 2,137 2,489 2,52 3,734 Capital Surplus 1,734 1,736 1,736 1,736 EBITDA Margin (%) 1.4 11.4 11.6 11.8 Retained Earnings 9,225 13,597 18,489 23,749 Operating Profit Margin (%) 8.2 9.3 9.6 9.7 Non-Controlling Interests 15 31 46 Net Profit Margin (%) 7.9 9.4 9.7 1. Stockholders' Equity 13,51 17,934 22,882 28,199 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 4,57 4,349 3,583 4,512 P/E (x) 7.8 6.6 6. 5.5 Net Profit 3,519 4,647 5,175 5,585 P/CF (x) 6. 5.4 4.9 4.6 Non-Cash Income and Expense 2,41 1,311 1,27 997 P/B (x) 2.2 1.9 1.4 1.2 Depreciation 696 737 815 85 EV/EBITDA (x) 6.4 5.5 4.7 3.9 Amortization 295 316 316 315 EPS (W) 8,556 11,468 12,772 13,782 Others -1,47-272 79-18 CFPS (W) 11,38 14,66 15,562 16,657 Chg in Working Capital -923-38 -895-28 BPS (W) 29,775 4,515 52,695 65,783 Chg in AR & Other Receivables 456-77 -418-273 DPS (W) 6 7 8 9 Chg in Inventories -74-244 -561-236 Payout ratio (%) 7.1 6.1 6.3 6.5 Chg in AP & Other Payables -184 191 48 334 Dividend Yield (%).9.9 1.1 1.2 Income Tax Paid -491-1,3-1,725-1,862 Revenue Growth (%) 2.6 14.5 8.2 4.5 Cash Flows from Inv Activities -2,26-2,337-1,938-1,694 EBITDA Growth (%) 36.1 25.6 1. 6.1 Chg in PP&E -1,336-1,182-1,373-1,12 Operating Profit Growth (%) 41.6 3.8 11.7 5.4 Chg in Intangible Assets -438-295 -311-311 EPS Growth (%) 25.3 34. 11.4 7.9 Chg in Financial Assets -332-738 -45-523 Accounts Receivable Turnover (x) 19.4 21. 19.7 18.4 Others -11-123 196 26 Inventory Turnover (x) 11. 11.2 11.1 1.7 Cash Flows from Fin Activities -1,627-1,12-72 -771 Accounts Payable Turnover (x) 9. 9.9 1.1 1. Chg in Financial Liabilities -894-1,89-419 -431 ROA (%) 12.5 14.3 14. 13.3 Chg in Equity 32 9 ROE (%) 29.1 29.6 25.4 21.9 Dividends Paid -199-242 -284-324 ROIC (%) 32.3 39.2 38.7 38.2 Others -566-41 -17-16 Liability to Equity Ratio (%) 124. 92.7 71.5 57.7 Increase (Decrease) in Cash 688 914 925 2,48 Current Ratio (%) 97. 119.6 147.8 176.1 Beginning Balance 1,616 2,34 3,218 4,143 Net Debt to Equity Ratio (%) 12.5-6.3-12.7-21. Ending Balance 2,34 3,218 4,143 6,191 Interest Coverage Ratio (x) 18.3 8.7 297.5 344.8 Source: Company data, estimates 4
Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. Stock Ratings Industry Ratings Buy Relative performance of 2% or greater Trading Buy Relative performance of 1% or greater, but with volatility Hold Relative performance of -1% and 1% Sell Relative performance of -1% Overweight Fundamentals are favorable or improving Neutral Fundamentals are steady without any material changes Underweight Fundamentals are unfavorable or worsening (W) KiaMtr 12, 1, 8, 6, 4, 2, 9/1 3/11 9/11 3/12 9/12 * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystês estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. 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