Hyundai Mobis, Hankook Tire seen as stable bets amid auto sector earnings slump

With the auto sector bracing for a weak third quarter, analysts are advising selective investment in companies that can sustain profitability by absorbing cost pressures rather than pursuing top-line growth for now. Hyundai Mobis and Hankook Tire & Technology have been singled out as relatively stable picks.

DB Securities analyst Nam Ju-shin maintained an overweight rating on the auto sector in a third-quarter earnings outlook report, while flagging that the pace of recovery will differ across companies.

"We expect a volume recovery as production normalizes, but given the ongoing cost burden, the speed of profit recovery will vary by company," Nam said. "In the near term, a selective approach focused on companies that can absorb cost pressures and protect earnings — rather than pursue top-line growth — remains the right strategy."

The backdrop is falling sales and rising costs. Combined wholesale sales by Hyundai Motor and Kia in the third quarter came to about 1.765 million units, down 3.2 percent from the same period last year.

Hyundai Motor's wholesale volume fell particularly sharply, dropping 11.5 percent to 919,000 units, hurt by production disruptions from prolonged wage negotiations and sluggish sales in key markets. Kia, by contrast, posted a relatively solid performance, with volume rising 7.8 percent to 847,000 units.

A weaker won-dollar exchange rate and higher raw materials costs added to the pressure. The average won-dollar rate in the third quarter fell 5.6 percent quarter-on-quarter to 1,417.7 won, a headwind for automakers with heavy export exposure. Raw materials prices that rose in the second quarter have also begun feeding through to second-half manufacturing costs with a two-to-three month lag.

"Even with some cost reversals from the weaker exchange rate, profit improvement from core operations is expected to remain limited due to lower volumes and higher costs," Nam said.

DB Securities estimated Hyundai Motor's third-quarter operating profit at 2.38 trillion won ($1.77 billion), down 6.4 percent from a year earlier and below the market consensus of 2.82 trillion won. Kia's operating profit was forecast at 2.36 trillion won, up 61.5 percent year-on-year but still short of the market consensus of 2.5 trillion won.

Against that backdrop, DB Securities highlighted Hyundai Mobis and Hankook Tire & Technology as companies capable of weathering swings in finished-vehicle output while passing on higher costs through price increases.

"For Hyundai Mobis, we focus on the earnings-defense capability of its after-sales service segment," Nam said. "For Hankook Tire & Technology, we focus on the effect of price increases across all global regions and the product-mix improvement driven by winter tire sales."

Hyundai Mobis is expected to hold up its earnings through stable after-sales service income and expanding sales of electrification components, even as parts sales soften alongside weaker finished-vehicle demand.

DB Securities estimated Hyundai Mobis's third-quarter operating profit at 945 billion won, up 21.0 percent year-on-year. In the fourth quarter, price increases in the after-sales segment and tariff cost compensation are expected to push that segment's profitability to around 25 percent.

Hankook Tire & Technology is also expected to benefit from tire price increases rolled out across global markets. A higher share of premium products driven by growing winter tire sales was cited as an additional factor supporting margin improvement.

On Hyundai Motor, whose share price has fallen sharply of late, DB Securities called the selloff excessive but still cut its target price.

"Near-term earnings estimates need to come down, but this should not be read as a sign that the medium-to-long-term growth story for the robotics business has been impaired," Nam said. "It is important to monitor both the pace of recovery in the core business and the execution of the robotics business, and to maintain a medium-to-long-term perspective." DB Securities lowered its target price for Hyundai Motor from 700,000 won to 600,000 won, while keeping its buy rating.