South Korea’s Hyundai Motor reported a better than expected quarterly operating profit, helped by brisk sales of sport-utility vehicles.

Hyundai has turned in its best quarterly operating profit in over two years and said it was on track for higher profit margins in 2020, powered by more sales of sport-utility vehicles (SUVs) such as the Palisade and Kona.

However, sales for Hyundai and affiliate Kia Motors hit a seven-year low in 2019 as business in China slumped, missing their target for a fifth time, but they have forecast better numbers for this year.

The better-than-expected quarterly operating earnings, which fuelled a rise in shares, indicates measures by Hyundai Motor Group heir-apparent Euisun Chung to revamp the image of the automaker known for its sedan-heavy lineup were beginning to pay off.

So while overall vehicle sales for the South Korean company held mostly steady on year over October-December, its bottom line benefited as high-margin SUVs accounted for more of the sales mix - 42% versus 37% a year earlier.

Hyundai said it would meet its target for a 5% operating profit margin this year, versus 3.5% in 2019, by selling even more SUVs and launching fully redesigned versions of some of its best-selling models, the Elantra sedan and the Tucson SUV.

“We understand that achieving this year’s operating profit margin of 5% is more important than ever,” Kim Sang-hyun, head of finance and accounting division, said on an earnings call.

“The company views this year as the first to fully establish a virtuous sales cycle by optimising supplies, profits and strengthening brand competitiveness,” Kim said.

“We will do our best to secure a sustainable revenue base in a difficult business environment.”

Hyundai expects SUVs to account for about 43% of its sales in 2020, helped by the launch of a new premium Genesis brand SUV in the second half, in addition to the GV80 launched last week.

“The market has been sceptical of the 5% profit margin target, but the target seems to be achievable thanks to new Genesis models,” said Lee Jae-il, an analyst at Eugene Investment & Securities.

While Hyundai is seeing a recovery in US sales, thanks to demand for new SUVs and a favourable currency exchange rate, its business in China continues to suffer amid a broader slowdown in the world’s biggest auto market.

Its passenger car sales in China fell 4.8% on year in 2019.

Hyundai, however, expects its wholesale vehicle sales in China to reach 730,000 this year from 650,000 vehicles in 2019.

It also said it was looking for the best time to launch its premium Genesis brand in China and Europe.

For October-December, Hyundai’s operating profit was 1.24 trillion won ($1 billion), highest since the second quarter of 2017. It was more than analysts’ average estimate of 1.06 trillion won, according to Refinitiv I/B/E/S data.

Hyundai shares closed up 8.6%, versus a 1.2% rise in the wider KOSPI.

Meanwhile, South Korea’s central bank (CB) on Friday held key rates, citing strong economic recovery and housing bubble risk. Bank of Korea (BOK) kept its benchmark rate steady and struck an upbeat tone, considering signs of an improving trade environment and a resilient domestic backdrop that suggested policymakers are in no rush to lower borrowing costs again.

The country’s annual inflation hit a record-low last year but analysts are split on whether there would be further easing, not least because a deal signed by the United States and China on Wednesday could entrench a recovery in the Korean economy.

The Bank of Korea’s policy board voted 5-2 to keep the base rate steady at 1.25%, as predicted by all 33 analysts surveyed by Reuters, standing pat for a second meeting following two reductions in July and October last year.

Analysts characterized the statement as less dovish than the previous one in November as it included a fresh clause highlighting better capital investment and concerns over surging home prices.

“The statement suggests policymakers are seeing a rebound in growth sentiment. It’s more hawkish than the previous one but doesn’t deviate too much,” said Paik Yoon-min, fixed-income analyst at Kyobo Securities, who sees one rate cut in 2020.

The March contract on 3-year treasury bond futures dropped after the statement was released but pared back as Governor Lee started speaking at a press conference. It was up 0.02 points from previous close to 110.31.

Reuters