Hyundai

Hyundai Motor Company –Hyundai Motor Company –
Beijing Automotive Joint VentureBeijing Automotive Joint Venture
April 30April 30thth
, 2003, 2003
Topics in Emerging MarketsTopics in Emerging Markets
Richard LeeRichard Lee
Kevin ParkKevin Park
Michael ChengMichael Cheng

Agenda.Agenda.
 Case Study IntroductionCase Study Introduction
 Hyundai Motor CompanyHyundai Motor Company
 South Korea OverviewSouth Korea Overview
 Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis
 China OverviewChina Overview
 Chinese Automotive IndustryChinese Automotive Industry
 Hyundai Financial AnalysisHyundai Financial Analysis
 Case SolutionCase Solution

Case Introduction.Case Introduction.
 In 2003, Hyundai has an investment of $250 million in China inIn 2003, Hyundai has an investment of $250 million in China in
conjunction with Beijing Automotive to produce 100,000 units perconjunction with Beijing Automotive to produce 100,000 units per
yearyear
 Hyundai projects and plans production to be 200,000 units per yearHyundai projects and plans production to be 200,000 units per year
by 2005by 2005
Investment Decision: Does Hyundai invest theInvestment Decision: Does Hyundai invest the
necessary $1.1 billion in year 2005 to increasenecessary $1.1 billion in year 2005 to increase
production that will yield 500,000 units per year byproduction that will yield 500,000 units per year by
2010?2010?
A great test run and indicator of Hyundai’s potential as itA great test run and indicator of Hyundai’s potential as it
plans to become a global automotive playerplans to become a global automotive player

Hyundai History & DevelopmentHyundai History & Development
 Established in 1967, Hyundai is presently South Korea’s #1Established in 1967, Hyundai is presently South Korea’s #1
carmaker, manufacturing dozens of models of cars, vans, andcarmaker, manufacturing dozens of models of cars, vans, and
minivansminivans
 Throughout the past two decades, Hyundai introduced variousThroughout the past two decades, Hyundai introduced various
models: Pony, Excel, Scoupe, Sonata, and Accent.models: Pony, Excel, Scoupe, Sonata, and Accent.
 In 1990, Hyundai introduced its own engine design, the Alpha.In 1990, Hyundai introduced its own engine design, the Alpha.
Two years later, it introduced its second-generation engine,Two years later, it introduced its second-generation engine,
the Beta.the Beta.
 Acquired a 51% stake in Kia Motors in 1998Acquired a 51% stake in Kia Motors in 1998
 In 2001, Hyundai sold a 9% stake to DaimlerChrysler toIn 2001, Hyundai sold a 9% stake to DaimlerChrysler to
strengthen its global market position and to boost salesstrengthen its global market position and to boost sales
abroadabroad

Hyundai Current Market ShareHyundai Current Market Share

South Korea Economic StudySouth Korea Economic Study
 South Korea went from having a GDP as low as Algeria’s inSouth Korea went from having a GDP as low as Algeria’s in
1961 to becoming the world’s 111961 to becoming the world’s 11thth
largest economylargest economy
 Started to export goods like steel, automobiles, and ships.Started to export goods like steel, automobiles, and ships.
 South Korea came a long way from the days when it siphonedSouth Korea came a long way from the days when it siphoned
its scarce capital into strategic industriesits scarce capital into strategic industries
 Politicians and bureaucrats became the instruments for largePoliticians and bureaucrats became the instruments for large
businesses, large wage increases and foolish businessbusinesses, large wage increases and foolish business
decisions diminished competitiveness, and banks weredecisions diminished competitiveness, and banks were
ordered by the government to prop up large firmsordered by the government to prop up large firms
 These things were all for not when the Asian Financial CrisisThese things were all for not when the Asian Financial Crisis
hit South Korea.hit South Korea.

South Korea Economic StudySouth Korea Economic Study
 The Korean Won fell by 54% to 1962The Korean Won fell by 54% to 1962
Won/$Won/$
 The KOSPI fell by more than 65% in 1997-The KOSPI fell by more than 65% in 1997-
19981998
 Several major companies went bankruptSeveral major companies went bankrupt
 GDP shrank by 5.8% during this crisisGDP shrank by 5.8% during this crisis
timetime

South Korea Political ClimateSouth Korea Political Climate
 In 1997, Kim Dae-Jung was elected as PresidentIn 1997, Kim Dae-Jung was elected as President

Kim won a Nobel Peace Prize for his commitment to DemocracyKim won a Nobel Peace Prize for his commitment to Democracy
and his reconciliation efforts with the Northand his reconciliation efforts with the North
 Historical, first meeting between the North and the SouthHistorical, first meeting between the North and the South
toto discuss joint unification in 2000discuss joint unification in 2000
 South Korea’s foreign policy calls for the peaceful resolve ofSouth Korea’s foreign policy calls for the peaceful resolve of
their situation with Communist North and any actiontheir situation with Communist North and any action
necessary to maintain its own state of democracynecessary to maintain its own state of democracy
 Political tension continues to brew within the KoreanPolitical tension continues to brew within the Korean
peninsula to this daypeninsula to this day

Agenda.Agenda.
 Case Study Introduction.Case Study Introduction.
 Hyundai Motor CompanyHyundai Motor Company
 South Korea OverviewSouth Korea Overview
 Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis
 China OverviewChina Overview
 Chinese Automotive IndustryChinese Automotive Industry
 Hyundai Financial AnalysisHyundai Financial Analysis
 Case SolutionCase Solution

Asian Financial Crisis: Pre-crisisAsian Financial Crisis: Pre-crisis
 South Korea’s postwar economy was envySouth Korea’s postwar economy was envy
of other developing countries. System of:of other developing countries. System of:
• High savingsHigh savings
• Close cooperation between government andClose cooperation between government and
businessbusiness
• Export orientedExport oriented
• GNP rose from US$200 (1960) to US$11,500GNP rose from US$200 (1960) to US$11,500
(1996)(1996)

Asian Financial Crisis: CrisisAsian Financial Crisis: Crisis
 Fostered corruption and speculationFostered corruption and speculation

Business bankruptcies and employment insecurityBusiness bankruptcies and employment insecurity
• Sharp rise in interest ratesSharp rise in interest rates
• Dramatic fluctuations of exchange rateDramatic fluctuations of exchange rate
• Collapse of stock priceCollapse of stock price
• Exodus of foreign currencyExodus of foreign currency
 Major economic crisis and subsequent laborMajor economic crisis and subsequent labor
unrest in 1997unrest in 1997

General strike calledGeneral strike called

Biggest-ever IMF bailout, $57 billion rescue packageBiggest-ever IMF bailout, $57 billion rescue package

Asian Financial Crisis: RecoveryAsian Financial Crisis: Recovery
 Strong recovery in 1999-2000, negatively affected byStrong recovery in 1999-2000, negatively affected by
global economic slowdown, recover in 2002global economic slowdown, recover in 2002

Fuelled by domestic demandFuelled by domestic demand

Increased government spendingIncreased government spending
 Reasons for recovery:Reasons for recovery:

Break the hold of chaebols over financial sectorBreak the hold of chaebols over financial sector

Economy opened up to short and long-term capital from abroadEconomy opened up to short and long-term capital from abroad

Companies comply with international accounting standardsCompanies comply with international accounting standards

Foreigners account for 40 percent of stock market transactionsForeigners account for 40 percent of stock market transactions

South Korea GDP (1990-2007)
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1990
1992
1994
1996
1998
2000
2002
2004
2006

China Macro OverviewChina Macro Overview
 China’s doors opened to the world in 1978China’s doors opened to the world in 1978

Experienced over 20 years unprecedentedExperienced over 20 years unprecedented
economic growtheconomic growth
 Convert from command economy toConvert from command economy to
market economymarket economy
 Role of State Owned Enterprises (SOEs)Role of State Owned Enterprises (SOEs)

Challenge of dismantlingChallenge of dismantling

China and the WTOChina and the WTO
 After 15 years of attempts, China joinedAfter 15 years of attempts, China joined
the World Trade Organization onthe World Trade Organization on
September 15, 2001September 15, 2001
 Over next 5 years, China will removeOver next 5 years, China will remove
barriers to entrybarriers to entry

Improve external economic relationsImprove external economic relations

Bring in increased competitionBring in increased competition

Increase speed of economic reformIncrease speed of economic reform

Economic PerformanceEconomic Performance
 Large increases in per capita incomeLarge increases in per capita income
 Rise in non-state sector activityRise in non-state sector activity
 Growth in exports and domestic demandGrowth in exports and domestic demand
GDP (1980-2007)
0
2000
4000
6000
8000
10000
12000
1980
1984
1988
1992
1996
2000
2004
China
Hong Kong
Taiwan
Japan
South Korea

Foreign Direct InvestmentForeign Direct Investment
 During 2002, ChinaDuring 2002, China
was the world’swas the world’s
leading recipient ofleading recipient of
FDIFDI
 China has reduced itsChina has reduced its
import tariff onimport tariff on
automobiles and autoautomobiles and auto
partsparts

China’s Automobile IndustryChina’s Automobile Industry
 State of undergrowthState of undergrowth

Due to past regulation of Chinese governmentDue to past regulation of Chinese government
 Currently about 25 factoriesCurrently about 25 factories

Manufacturers cannot meet quotasManufacturers cannot meet quotas
 Steady development and progress overSteady development and progress over
last couple yearslast couple years

Yearly increase of 6.63% from 1995Yearly increase of 6.63% from 1995

Automotive Industry OutlookAutomotive Industry Outlook
 Very promising futureVery promising future
• Opening up ofOpening up of
Chinese MarketChinese Market
• Implementation ofImplementation of
mass productionmass production
techniquestechniques
• Increase inIncrease in
manufacturingmanufacturing
technologytechnology

Hyundai Financial Analysis.Hyundai Financial Analysis.
 After the financial crisis:After the financial crisis:

Sales of $20 billion worldwideSales of $20 billion worldwide

Hyundai has invested $6.25 billion in globalHyundai has invested $6.25 billion in global
expansionexpansion

From 300% D/E to 50% D/EFrom 300% D/E to 50% D/E

Doubled financial ratios across the boardDoubled financial ratios across the board
• Assets, Revenue, Units Sold, & Return on SalesAssets, Revenue, Units Sold, & Return on Sales

Currently trades around 24,000 KRW (4/9/03)Currently trades around 24,000 KRW (4/9/03)

Cost of Capital Inputs.Cost of Capital Inputs.
 Goldman Sachs Integrated Model:Goldman Sachs Integrated Model:
 Model Inputs:Model Inputs:

Risk PremiumRisk Premium
• Instead of using the US risk premium of 4.89% whichInstead of using the US risk premium of 4.89% which
represents the geometric mean of the historical returnsrepresents the geometric mean of the historical returns
from 1961, we decided to use a risk premium of 9.44%.from 1961, we decided to use a risk premium of 9.44%.
Our reasoning for this change primarily deals with ourOur reasoning for this change primarily deals with our
assumption that the previous risk premium wouldn’t be anassumption that the previous risk premium wouldn’t be an
accurate representation of returns in this particular model.accurate representation of returns in this particular model.
The latter risk premiums are those returns only from 1991,The latter risk premiums are those returns only from 1991,
a reasonable change being that we were valuing ana reasonable change being that we were valuing an
emerging market company.emerging market company.
mf SYSrR λβ++=

Cost of Capital Inputs.Cost of Capital Inputs.

Sovereign Yield SpreadSovereign Yield Spread
• To calculate this spread, which is crucial in thisTo calculate this spread, which is crucial in this
model, we subtracted the 10 year US bond rate ofmodel, we subtracted the 10 year US bond rate of
3.87% from the 10 year Korean bond rate of3.87% from the 10 year Korean bond rate of
8.80%.8.80%.

Although we could only find a 3 year Korean bond rate,Although we could only find a 3 year Korean bond rate,
we prorated this rate over 10 years.we prorated this rate over 10 years.

Appropriate Discount RateAppropriate Discount Rate
• 13.71%13.71%

Equity Valuation.Equity Valuation.
Riskfree Rate
4.91% Bloomberg as of March 28, 2003
Beta
Korean MSCI World Beta 0.41 Information taken from J.P. Mei
Source http://pages.stern.nyu.edu/~jmei/b40/L9s1.ppt
Risk Premium
1991-2001 9.44% Geometric average from Damadoran
Source http://pages.stern.nyu.edu/~adamodar/pc/datasets/histimpl.xls
Market Value of Equity
Market Cap 5,477,000,000,000.00
Shares Outstanding 219,080,000.00
Share Price W25,000
Source Yahoo! Finance as of March 28, 2003
Government Rates
10 Year US Bond Rate 3.87% Bloomberg Website
10 Year Korean Bond Rate 8.80% www.businessweek.com:/2000/00_02/b3663255.htm
Sovereign Yield Spread
4.93% SYS = Local Market Bond Rate - US Bond Rate
Source SYS Formula taken from J.P. Mei lecture March 10, 2003
Discount Rate Formula
r= rf+SYS+β(US Market Premium) 13.71% Goldman Sachs Integrated Formula
Growth Rate: 7.00%
Free Cash Flow to Equity 2002: 420,500,000,000.00 Information taken from Deutsche Bank Valuation of Hyundai Motor
Equity Valuation: FCFt+1/(r-g) 6,705,039,938,006.68
Price Per Share: 30,605.44 Korean Won
Actual Price 3/38/03 25,000 Korean Won
Recommendation: BUY Hyundai is undervalued.
Goldman Sachs Integrated Model Inputs:

Equity Valuation Summary.Equity Valuation Summary.
 Conclusion on Hyundai Motor Company:Conclusion on Hyundai Motor Company:

Using the Gordian Growth stable growth DCF modelUsing the Gordian Growth stable growth DCF model
for equity valuation, we found the value of thefor equity valuation, we found the value of the
company as 6.7 trillion won.company as 6.7 trillion won.

Hyundai, having 219 million shares outstanding,Hyundai, having 219 million shares outstanding,
translates into a target price oftranslates into a target price of 30,605.44 won30,605.44 won..

Currently, Hyundai Motor Corp (Ticker: 05380.KS),Currently, Hyundai Motor Corp (Ticker: 05380.KS),
last traded atlast traded at 25,000 won25,000 won on March 28, 2003.on March 28, 2003.
 Recommendation: BUYRecommendation: BUY

Hyundai is an undervalued company that has greatHyundai is an undervalued company that has great
global potential..global potential..

Case Study Summary.Case Study Summary.
 Hyundai agreed to pay $250 million in aHyundai agreed to pay $250 million in a
joint venture with Beijing Automotive.joint venture with Beijing Automotive.

Starting at 100,000 units in 2003, plans toStarting at 100,000 units in 2003, plans to
expand to 200,000 units by 2005.expand to 200,000 units by 2005.

If the production is a success, Hyundai willIf the production is a success, Hyundai will
invest $1.1 billion to increase productivity toinvest $1.1 billion to increase productivity to
500,000 by 2010.500,000 by 2010.
 Is the investment in China’s emergingIs the investment in China’s emerging
market a good move by Hyundai?market a good move by Hyundai?

Project Summary Inputs.Project Summary Inputs.
 Cash Flows Assumptions:Cash Flows Assumptions:

Invoice prices of the Sonata & Elantra areInvoice prices of the Sonata & Elantra are
global pricesglobal prices

After finding this revenue stream, weAfter finding this revenue stream, we
calculated the cost of each car by usingcalculated the cost of each car by using
Hyundai’s historic profit margin per car ofHyundai’s historic profit margin per car of
20%.20%.

50% of revenue would go to Beijing50% of revenue would go to Beijing
AutomotiveAutomotive

 Cost of Capital:Cost of Capital:

In our previous valuation of Hyundai, weIn our previous valuation of Hyundai, we
calculated the relative cost of capital for allcalculated the relative cost of capital for all
Hyundai’s future projects of 13.71%.Hyundai’s future projects of 13.71%.

Appropriate discount rate since Hyundai willAppropriate discount rate since Hyundai will
finance the project with firm assets like equityfinance the project with firm assets like equity
and cash.and cash.

 ProductionProduction

Starting at 100,000 units, production willStarting at 100,000 units, production will
increase by 50,000 till 2005 ultimatelyincrease by 50,000 till 2005 ultimately
producing 200,000 unitsproducing 200,000 units

From 2005 to 2010, production will increaseFrom 2005 to 2010, production will increase
60,000 units per year60,000 units per year

Hyundai-Beijing MotorHyundai-Beijing Motor
Project Valuation.Project Valuation.
Year: 2003 2004 2005 2006 2007 2008 2009 2010
Units: 100,000 150,000 200,000 260,000 320,000 380,000 440,000 500,000
Elantra: 50,000 75,000 100,000 130,000 160,000 190,000 220,000 250,000
Sonata: 50,000 75,000 100,000 130,000 160,000 190,000 220,000 250,000
Revenue: In Millions
Elantra @ 11,274.00$ 563,700$ 845,550$ 1,127,400$ 1,465,620$ 1,803,840$ 2,142,060$ 2,480,280$ 2,818,500$
Sonata @ 13,822.00$ 691,100$ 1,036,650$ 1,382,200$ 1,796,860$ 2,211,520$ 2,626,180$ 3,040,840$ 3,455,500$
Cost:
Elantra @ 9,019.20$ 450,960$ 676,440$ 901,920$ 1,172,496$ 1,443,072$ 1,713,648$ 1,984,224$ 2,254,800$
Sonata @ 11,057.60$ 552,880$ 829,320$ 1,105,760$ 1,437,488$ 1,769,216$ 2,100,944$ 2,432,672$ 2,764,400$
Profit:
Elantra: 112,740$ 169,110$ 225,480$ 293,124$ 360,768$ 428,412$ 496,056$ 563,700$
Sonata: 138,220$ 207,330$ 276,440$ 359,372$ 442,304$ 525,236$ 608,168$ 691,100$
Total: 250,960$ 376,440$ 501,920$ 652,496$ 803,072$ 953,648$ 1,104,224$ 1,254,800$
Hyundai's Share
50% Share of Profits: 125,480$ 188,220$ 250,960$ 326,248$ 401,536$ 476,824$ 552,112$ 627,400$
Cost of
capital: 13.71%
NPV: In Millions
Investments: ($250,000) ($1,100,000)
Cashflows: 125,480$ 188,220$ 250,960$ 326,248$ 401,536$ 476,824$ 552,112$ 627,400$
PV of Plant: 110,351$ 145,569$ 170,690$ 195,143$ 211,218$ 220,580$ 224,614$ 224,468$
NPV $152,633.45 POSITIVE!!!!
DCF Valuation on Hyundai-Bejing Auto Joint Venture in China

Project Summary.Project Summary.
 After doing a DCF valuation of the Hyundai-After doing a DCF valuation of the Hyundai-
Beijing Motor project, we get a positive NPV ofBeijing Motor project, we get a positive NPV of
$152,633,450 for the 8 year project.$152,633,450 for the 8 year project.
 Although this valuation may not be entirelyAlthough this valuation may not be entirely
accurate because factors like inflation, political,accurate because factors like inflation, political,
social and economic risk are not whollysocial and economic risk are not wholly
accounted for, we believe that it is a reasonableaccounted for, we believe that it is a reasonable
and rational valuation and will offer a referenceand rational valuation and will offer a reference
point for the project.point for the project.

Project OutlookProject Outlook
 In order to be successful:In order to be successful:

Must form synergies on all levels with ChinaMust form synergies on all levels with China
and Beijing Automotiveand Beijing Automotive

Hyundai must use their experience inHyundai must use their experience in
investing in 4 other plants in Chinainvesting in 4 other plants in China

Take advantage of the first mover opportunityTake advantage of the first mover opportunity
in China’s deregulated auto marketin China’s deregulated auto market

RelevanceRelevance
 Great opportunity for Hyundai’s businessGreat opportunity for Hyundai’s business
developmentdevelopment
 Tremendous global growth potentialTremendous global growth potential
Bottom lineBottom line:: There is lots of money to beThere is lots of money to be
discovered and made in the emergingdiscovered and made in the emerging
markets of Korea and China!!!markets of Korea and China!!!

Thank You.Thank You.
Questions?Questions?

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