Hyundai Motor on Monday reported a better-than-expected 86% rise in quarterly profit, boosted by exports of its more profitable XG luxury sedans and Sante Fe sport utility vehicles, Reuters reported. The news agency said analysts expect profits to rise further in the second half as an expected recovery in the domestic economy adds to robust exports, particularly to Europe where the strong euro has made Korean imports more competitive.

“The results were better than expected,” Cho Soo-hong, an auto analyst at Dongbu Securities, told Reuters, adding: “Some concerns linger due to the rigid labour climate, but fundamentals are still sound.”

The news agency noted that exports account for around 60% of Hyundai’s annual production and earnings while the company has invested heavily to improve the quality of its cars, launching new models such as the redesigned EF Sonata mid-sized sedan and the Santa Fe SUV, which produce more profit per vehicle than its staple Accent sub-compact line.

Reuters also noted that a recent strike that cost Hyundai $US1.2 billion in lost output is not expected to dent profits much as it whittled away inventories, and costs fell while workers went unpaid. But Reuters added that analysts are concerned about the longer-term impact of the agreed pay rise and of a stronger South Korean currency on exports.

“We don’t have very bright expectations for a drastic improvement in the domestic sales climate, but if exports do at least as well as last year then there would be no need for a discount in Hyundai shares”, Chung Doo-sun, a fund manager at CJ Investment Trust Management, told the news agency.

Reuters said that Hyundai, 10%-owned by DaimlerChrysler, reported a net profit of 570.4 billion won ($US483 million) for the second quarter ended June 30, compared with 306.8 billion a year ago, according to Reuters calculations, while sales were 6.58 trillion won, up 6% from 6.2 trillion.

Analysts told Reuters the results were above the average analyst net profit forecast for 454 billion won, but sales were below expectations for 6.74 trillion won – high sales of the profit-rich new models helped explain the stronger than expected result.

Reuters noted that, in the second quarter of 2002, Hyundai’s profits were depressed because it had to make provisions of more than 200 billion won to cover tighter EU environmental rules and over 500 billion won for warranty pledges in the US market. Warranty provisions in the first half of 2003 were 0.2% of sales, down from 0.7% a year earlier, the report added.

Reuters said Hyundai is betting on exports to drive growth this year in the wake of weak demand at home, where the economy is struggling to emerge from a recession in the first half – the company saw its exports during the first half of this year rise 30% from a year ago to 627,728 vehicles.

“Even though demand was sluggish in the local market, overseas exports were dramatic due to rising sales of higher-value-added cars like the XG sedan and the Santa Fe sport utility vehicle,” Hyundai Motor spokesman Jake Jang told Reuters, which noted that the Santa Fe sells for a minimum of $17,549 and the luxury XG sedan sells for $23,999, well above the $9,999 for the sub-compact Accent and $15,499 for the mid-sized Sonata.

First-half exports to Europe rose 34.5% from a year ago to 141,000 vehicles, while shipments to North America rose 17.7% to 266,000 vehicles, Hyundai said, according to Reuters.

With General Motors, Ford and DaimlerChrysler driving a fierce price war in the US market, Hyundai’s spending on incentives such as cash rebates and other perks stood at about $US1,500 per car in the first half, about the same as the year-ago period, according to Hyundai Motor America figures cited by Reuters.

Citing research firm Autodata, Reuters said Hyundai rival Toyota was offering $1,132 a vehicle in July, although that was still below the “Big Three” average of $4,000.

A Hyundai Motor official told Reuters it raised the average selling price of cars for exports, easing the impact of a stronger won – the average won/dollar rate in the first half strengthened to 1,206 from 1,296 a year ago.

In contrast, Reuters said, domestic sales fell 11% to 342,914 vehicles as South Korea slipped into its first recession in five years on North Korean nuclear worries and weaker household spending after a crackdown on credit card debts.

Reuters noted that Hyundai has a 42% share of South Korea’s car market, while its affiliate Kia Motors, the country’s second-largest car maker, accounts for 27%.