CFA Institute Research Challenge Hosted by CFA Society Korea Handong University
Special Equity Research Report
CFA Institute Research Challenge
A crisis is a chance: Hyundai, soar alone! Company Financial crisis has always provided opportunities to new businesses in the automobile Hyundai Motor (005380) market. In 2008, Hyundai rapidly increased its M/S by launch of new models and active marketing, leading to quantitative growth. Currently, low-growth, high oil prices and Rating downsizing are key factors in automobile industry. Hyundai attracts customers from all around the world by appealing design, high mileage, and localization. Hyundai also BUY prepares qualitative growth through increase in brand value and ASP.
Asia Using the DCF and PER valuation, we set our target price for Hyundai Motor at 352,000
Korea, Republic of won and we recommend "Buy" with 64.5% upside potential.
Automobile Industry & Components Investment Summary
Target Price – 2013 (KRW) 352,000
Price at Nov 9 2012 (KRW) 214,000 1. Quantitative Growth
Upside (%) 64.5% (1) Emerging Market – Quantitative Growth driver Mkt cap current (bn) 50,333 We predict Hyundai will make quantitative growth by capacity expansion in China and 52 week range (KRW) 200,500 ~ 272,500 KOSPI 1,890 Brazil amid increase of demand and more than 50% of sales proportion in emerging
markets. Research Analyst Hand ong University (2) European Market - Remind of their success strategy in U.S in 2009
Ju Sung Hwang [email protected] While competitors in Europe are struggling, Hyundai will reenact outcome made in U.S
Ung Gu [email protected] based upon launch of strategic models (i30, i40) and aggressive marketing through
Ji eun Kim [email protected] relatively abundant funds. So rang Lee [email protected] Young kyu Kim [email protected] 2. Qualitative Growth Stock Price Trend (3) U.S Market – Qualitative Growth driver
(Won) In U.S, Hyundai is expected to make qualitative growth through decrease in incentives, increase in ASP, as well as upstream sales of segments such as Azera, Genesis, and Equus. 300,000
250,000 (4) Allure customers with low TCO in the era of highest oil prices 200,000 In the era of high oil price, Hyundai appeals to customers via lowest TCO among competitors backed by increase in residual value and fuel-efficiency. These two key 150,000 essential competitiveness will serve as a foundation for sustainable growth.
100,000
50,000 Investment risk (1) Incentive competition in U.S 0 (2) Possibility of safe guard invocation in France (3) Aggressive capacity extension by competitors in China (4) KRW appreciation (5) Manufacturing delays due to strike (6) Low R&D rate compared to competitors
Key statistics & Valuation This report is for purpose special equity research report for (bil, Won) 2010 2011 2012E 2013E 2014E the CFA IRC. We do not take any responsibilities of Revenue. 66,985 77,798 81,750 91,174 103,938 decision outcomes made by readers or investors this report. Operating Income 5,919 8,075 8,175 9,117 11,433
Net Income 5,567 7,656 8,860 9,811 10,808
EPS (Won) 25,273 34,756 40,222 44,540 49,029 ROE (%) 22.7% 25.4% 20.1% 19.4% 18.3%
Valuation Results
Case 1. DCF 345,000 Won Case 2. P/E 8.1x 359,000Won
Weighted Target Price 352,000 Won (64.5% upside potential)
Current Price 214,000 Won
1 Business Description Figure 1. The top selling brands of 2011 1. Company Description GM VW Established in 1967, Hyundai Motor Company (HMC) is the largest automaker in South Toyota Korea. Along with affiliate Kia, HMC dominates the Korean car market with 70% Renault-Nissan market share. Since 2007, Hyundai is ranked as the world’s fifth-largest automaker. Hyundai-Kia Ford Along with two dozen auto-related subsidiaries and affiliates, Hyundai not only Fiat-Chrysler manufactures passenger cars and heavy duty automobiles, and auto parts, but also provides PSA automobile maintenance and financial services. Hyundai Motor Group includes Kia, Honda Mobis, Hyundai Steel, Hysco, Glovis, and Hyundai Capital and many more.
0.0% 5.0% 10.0% 15.0% 2. Business Model Source: Company daya Hyundai's structure of production from raw material, parts, production to sale is vertically integrated. (1) Hyundai Hysco manufactures steel plate with raw materials provided by Hyundai Steel. (2) Hyundai Mobis modularizes primarily and secondarily processed parts and functional parts. (3) Hyundai Motor assembles and manufactures completely built up cars. In the process of sales, (1) Hyundai Capital provides financial services such as installment and lease. (2) After service is provided by Hyundai Mobis.
Figure 2. Hyundai’s Business Model
S ource: Handong university
Figure 3. Hyundai global sales mix by segment 3. Sales Breakdown Korea 15% Expanding into global market has enabled Hyundai to improve sales mix by region. N.America Hyundai also internationally constructed major plants, which is one of the major 31% competitiveness of Hyundai. Europe 17% Developed market India N. America (17%): aiming qualitative growth through upstream sales of segment, China 17% 11% Hyundai's N. America capacity is 300,000 units; Alabama plant, U.S. 9% Europe: growing successfully during the recession of Europe, total capacity of 550,000 Other emerging market units consists of plants in Czech Republic (300,000), Turkey (100,000), and Russia (150,000). Source: Company Data Korea (15%): as one of the steady selling markets of Hyundai, its local capacity is 1.86m units.
Figure 4. Hyundai global capacity expansion plan Emerging market 3,500 3,000 China: the most developing region in the auto market, Hyundai's China capacity is now 2,500 900,000 units due to the utilization of the 3rd Beijing plant. India: a 100% affiliate in India, capacity of 600,000 units. 2,000 Other emerging markets: Mid-east, Africa, Oceania and Brazil consist of emerging 1,500 markets. The Brazil plant (130,000) is on the way. 1,000 *Detailed capacity expansion plans are reported in Appendix. 500 0
China India US Turkey Czech(EU) Russia Brazil
Source: Company Data
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Industry Overview
Figure 5. U.S sales data (1,000 units) Developed Market
20,000 15% U.S: Unexpected demand recovery leads the race on fire 15,000 5% -5% 10,000 The U.S market is to grow by 10% YoY to 14,059K units in 2012 and 5% YoY to 14,761K -15% units (+5%) in 2013 by (1) active economy stimulation, and (2) recovery of installment 5,000 -25% finance led by low interest. However, (1) the recovery of Japanese automaker's utilization 0 -35% rate and the consequential incentive competition and (2) major competitor's new model 2008 2009 2010 2011 2012E 2013E cycle will lead the U.S market to intense competition. US Sales(L) Growth Rate(R)
Source: Ward’s, Company Data
Figure 6. Europe sales data (1,000 units) Europe: Decreasing demand while supply capacity remains strong 20,000 18,000 Economic recession in Europe has decreased sales of new cars for the past 5 years and will 16,000 decrease again this year. European auto market will decrease by 6% YoY to 14,353K units in 2012 and increase by 3.9% to 14,720K units in 2013. Because of the continuously 14,000 contracted demand, (1) losses of U.S competitors are increasing($0.4 billion loss for GM, 12,000 Ford in 2012H) and (2) competitiveness of European players such as Fiat and PSA are 10,000 declining due to liquidity crisis, delay of new cars, factory restructuring, etc. 2008 2009 2010 2011 2012E 2013E
Source: ACEA < Korea: Entered maturity, releasing new model is important The Korean domestic market is now matured and will grow about 2.5% annually till 2020. Major competitive factors are the release of new cars and marketing. The recent conclusion of KOR-EU FTA and KOR-U.S FTA led intense marketing and release of new cars for imported cars (BMW, GM, etc.)
Emerging market
Figure 7. China PV sales (1,000 units) China: The largest markets with strong growth potential 20,000 0.6 15,000 The Chinese auto market has grown at CAGR 22% for the past ten years. Based on our 0.4 10,000 research, Chinese auto market will increase by 8% YoY to 15,217K units in 2012 and 0.2 8.5% YoY to 16,511K units in 2013. It still has the most potential growth due to the 5,000 following factors; (1) only 55 people out of 1,000 owns car and (2) new demand will arise 0 0 in the west inland area by the urbanization. However, competitors such as VW or GM are 2008 2009 2010 2011 2012E 2013E increasing more capacity which will lead to intense competition. PV sales % YoY Source: China Business Update, Deutsche Bank
Figure 8. India PV sales (1,000 units) India: Providing attractive sales growth opportunity 5,000 40% 4,000 30% The Indian auto market has rapidly grown by 15.6% this past ten years due to low 3,000 20% urbanization rate and low car penetration rate in India. We forecast India will grow about 2,000 the same growth rate as China through 2010~2020E, but will grow mainly by low 1,000 10% profitable subcompact cars because of low GDP compared to China's. 0 0% 2008 2009 2010 2011 2012E 2013E PV Sales % YoY Source: Society of India Automobile Manufacturers, Deutsche Bank
Table 1. Industry Summary Conclusion: Low growth and rational consumption in developed Growth Competition country, emerging market's motorization U.S Low High Europe Low High Affected by the global economy slowdown, demand from major developed countries'(U.S, China High High Europe) is also slowing down. This will lead to rational consumption such as preference of India High Moderate small and low holding cost cars. On the other hand, motorization will lead growth for Korea Low Moderate emerging markets including China.
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Table 2. Leading factors in auto industry Competitive Positioning P Q C Brand GDP Platform Companies with 10% of M/S are in competition in the auto market. Our research team Quality Capacity Location identified the major factors of P×Q-C (refer to appendix) and compared them to Hyundai Incentive Line-up Productivity and their competitors to find out the competitive positioning of Hyundai.
Figure 9. Price factor analysis P: Brand, Quality, Incentive Brand Brand: Brand value is determined by design, quality, residual value, etc. The higher the brand value, the higher the customer loyalty and sales price. Quality: Quality most affects the residual value and brand value. The higher the product's quality, the more residual value increase which also affects the sales price to increase. Incentive: When the auto companies are in bad sales, for sales promotion, they provide incentives for dealers and consumers. However, when elevating incentives highly, the sales price, profitability and brand value gets lower. Quality Incentive Based on VDS (Vehicle Dependability Study), Hyundai's quality rank was 23rd in 2006 Hyundai Toyota but went up to 10th this year. Hyundai's rank is higher than GM (13th) and VW (26th). By VW GM comparison, the brand value is still lower than Toyota and VW. To overcome their position, Hyundai is trying to enhance the brand value through improving quality and low Source: Handong University estimates incentive strategy. This strategy will bring the virtuous cycle; 'brand value↑ → incentive↓ → ASP↑ → brand value↑'.
Figure 10. Quantity factor analysis Q: GDP, Capacity, Line-up Emerging market GDP: The correlation between GDP and demand for cars is 0.927, which is directly connected to demand for cars. Therefore, countries with low GDP (China, India etc.) have high growth potentials. Capacity: In the auto industry, to affect economies of scale, companies have to enlarge production capacity up to 2mil per year. Through economies of scale, it is able to build price competitiveness and line-up. Line-up: Variety of cars by segment, design and price can suit many customers’ needs and Line-up CAPA bring increase in sales volume.
Even if Hyundai has high sales and production breakdown in the emerging market, their Hyundai Toyota capacity is smaller than its competitors. However, Hyundai successfully fulfilled localizing VW GM in each market. Based on this, Hyundai is improving the product mix through expanding Source: Handong University estimates its line-up.
Figure 11. Cost factor analysis C: Platform Sharing, Location, Productivity Platfor m Platform: Companies can reduce production cost and cost of parts by sharing platform. It can also bring two new car effects through product differentiation by additional design and convenience items and can also increase product power. Location: Exchange rate, labor policy, trade barrier, population, etc. differ by countries. Therefore the location makes the difference in cost and fundamental competitiveness. Productivity: Labor cost is an important factor; therefore, production per person is also production cost competitiveness. Product Locatio ivity n Hyundai is now gradually reducing its platform and securing its cost competitiveness through building additional factories at low labor cost regions like Alabama, Czech, etc. However, its domestic productivity is low compared to its competitors because of Hyundai Toyota Hyundai's union strike problem. VW GM Source: Handong University estimates
Figure 12. Competitive Positioning Summary Conclusion: Now Hyundai goes for Volkswagen not Toyota
VW Hyundai Motor used to benchmark Toyota to concentrate on quantitative indexes like M/S. Through our competitive positioning analysis, Hyundai Motor already attained the level of Hyundai Toyota in quality, market developing through localization and cost competitiveness. Toyota Therefore Hyundai will keep its quantitative growth in the emerging market and will achieve qualitative growth like Volkswagen through value pricing strategy, increasing GM proportion of platform sharing and expanding line-up in the developed countries. 0 200 400 600
Price Quantity Cost
Source: Handong University estimates
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Investment Summary
1. Quantitative Growth in Emerging market and EU
Figure 13. % of Hyundai’s EM production Emerging market - Capacity expansion will lead to volume growth 3,000 60% Emerging market plays a key role in the current global automobile supply. We predict that China’s new 3rd plant and Brazilian plant to be completed this year will contribute Hyundai 2,000 40% to maintaining quantitative growth. This is a possible scenario since the company has high sales proportion in emerging markets (40%) and production capacity over 110%. 1,000 20% Especially in China, where C/D/SUV segments are brand leaders, Hyundai possesses the most optimized product mix consists of Avante(C), Sonata (D), Tucson(SUV) and so on. 0 0% Hyundai is even expected to make product mix improvement by manufacturing Santa Fe 2004 2006 2008 2010 2012E and new Avante at the 3rd plant in China. For Brazil, production capacity is expected to EM Capa(Million units) EM portion(%) increase from 10K in 2012 to 90K in 2013 by cutting import tax bill. Source: Company data
Figure 14. Europe auto market share European Market - Remind of its succeeded strategy in U.S in 2009 (%) 16 14 Hyundai is forecasted to make another notable growth as the company did achieve 8~9% 12 growth rate in U.S when U.S market demand declined sharply by 20% during financial 10 crisis in 2008. In fact, during the first six month of the year, Hyundai and Kia are the only 8 companies recording 12% and 25% increase in sale respectively when growth record of European automobile market was -7%. 6
4 The trend is prospected to continue for a while for the following reasons. (1) Hyundai 2 benefits by steadily launching various models that meet the needs of customers such as i20, 2010 2011 2012 i30, or i40 while major competitors in Europe such as PSA, Fiat, and Renault are PSA Fiat Renault Hyundai undergoing restructure. (2) Hyundai uses financial crisis as an opportunity to increase Source: ACEA market share through active expansion of agency and direct franchise in Germany and France (43% to 67%). (3) Relatively stabilized financial structure based upon active market share expansion. Due to liquidity problem, PSA, Fiat, Renault, etc. are currently losing average of €350~600 per vehicle.
2. Quantitative Growth in U.S
Figure 15. Hyundai’s U.S Large size sedan sales U.S Market – Successful change in strategy from volume to profit trend (1,000units)
80 20.00% After financial crisis in 2008, the brand value of Hyundai has dramatically increased from 4.8 billion dollars in 2008 to 7.5 billion dollars in 2012. Based on reevaluated brand quality, Hyundai has strengthened profitability by raising ASP of newly launched models 30 10.00% such as MD Elantra and HG Grandeur. In case of Grandeur, despite 20% increase in price, sales volume increased by 10 times, indicating possible value pricing. Although investors worry about Hyundai’s sales volume decrease, according to our team’s research, Hyundai -20 0.00% 2008 2009 2010 2011 2012E 2013E will gain more operating profit when ASP increases by 1% (the operation profit growth Genesis Equus rate increases 8.4%), than when quantity increases by 1%, the operation profit growth rate only increases by 1.4%. Grandeur Large size sedan Source: Company data
Figure 16. Hyundai’s Incentive & Inventory trend This is a strategy based on profitability rather than volume. Hyundai is expected to ($) (Month) maintain low inventory and incentive in future. The strategy is opposite to the one that was 3,500 4.5 made four years ago when Hyundai aggressively gained the market share by magnifying 4 incentive up to $4,000. This time, Hyundai’s strategy will be based on quality, not 2,500 3.5 3 quantity. 2.5 1,500 2 1.5 500 1
08 09 10 11 12 HMC US customer incentive (L) HMC inventory trend(R) Source: Bloomberg 3. Low TCO and trading down are the trend
Table3. % of TCO in auto purchasing With continuous financial recession as well as high oil prices, customers have high Segment 2007 2011 tendency to purchase small sized and low-TCO vehicles more than ever. This trend will A 49.3% 70.0% favorably affect Hyundai because (1) competitiveness of Hyundai’s compact cars is B 35.7% 61.8% already demonstrated by vehicles such as Avante or Accent, (2) economic feasibility C 30.6% 53.7% (factors such as price, maintenance cost, or value for money) of Hyundai is evaluated D 34.3% 65.4% higher than competitors in the industry (see appendix), and (3) Hyundai maintains SUV 23.3% 35.7% relatively low TCO compared to its competitors based upon higher residual value (lower Source: NCBC 2011 depreciation) and oil mileage..
5 *TCO=Total Cost of Ownership: refers to the total cost of owning a vehicle, which incorporates depreciation costs, service, maintenance and repair costs, fuel costs, tax costs, insurance costs, etc. Figure17. Factor Analysis purchasing auto Table 4. TCO Comparative analysis; i30(HMC) better than competitive model (€) 40% Residual Competitive Price Maker Model Depr. TCO 30% Value (Contained TCO) 20% Hyundai I30 38% 8,987 14,496(100%) 13,956(100%) Ford Focus 37% 10,077 15,013(104%) 14,350(103%) 10% VW Golf 42% 9,541 14,700(101%) 16,151(116%) 0% Toyota Auris 35% 10,329 15,147(104%) 15,160(109%) Honda Civic 37% 10,392 15,650(108%) 17,602(126%) Industry Average 37% 10,301 15,148(105%) 15,750(113%) Sources: JATO, CAP, What Car
Industry Average Hyundai Source: NCBS 2011 Financial Analysis
Figure17. Hyundai’s sales growth estimates Sales - expect growth of 11.5% YoY in 2013 and 14% YoY in 2014 120,000 20% 100,000 We calculated annual profit of 2012-13 by estimating growth rate of sales volume in each 15% country except China. Then we multiplied ASP to the growth rate. As a result, we forecast 80,000 5.1% growth rate in 2012 and 11.5% in 2013. In 2014, due to replacement of current 60,000 10% models, we applied CAGR14%, the growth rate during 2008-11 caused by new cars cycle. 40,000 5% *Sales of BHMC (Beijing Hyundai Motor) are not consolidated and included as equally 20,000 method income. 0 0% Developed Market
Sales Growth Rate (%) U.S: We forecast that U.S has enough potential for sales growth due to (1) expanded Source: Company data, Handong University estimates production capacity through a three-shift conversion of U.S factories in October, and (2) launch of new Azera and Santa Fe on February and May respectively. Hyundai’s current
strategy is based upon value pricing rather than sales volume. Thus, instead of CAGR 10% (2008-2011), we conservatively prospect CAGR 5% from 2012 to 2014.
Europe: Despite negative demand outlook in Europe, we predict it is reasonable to apply 2008-2011 average CAGR 10% to 2012-2014 because of (1) newly launching strategic
models like i30, (2) expansion of direct branch in Germany and France, and (3) promotion enhancement and financial instrument suitable for economic depression.
Korea: Since domestic automobile industry is already in maturity and oligopoly by Hyundai and Kia, Hyundai is expecting steady growth without significant changes in spite of increasing imported vehicles (please see strategic Risk 4). To reflect the situation after the financial crisis in 2008, we multiplied the past three year average CAGR 3%.
Emerging Market
China: Financial crisis as a turning point, Hyundai has record of 295,000 units sold in 2008 and 570,000 units sold in 2009, up 93% from 2008. Since then, Hyundai has shown CAGR 11% each year for the past three years and forecasts 11% growth rate this year. In 2013 and 2014, we forecast CAGR 16%, due to (1) expanded production capacity due to operation of newly completed 3rd plant, and (2) operation in a new plant is consist of new models such as new Avante, and Santa Fe.
India: Although the past three year CAGR was 15%, the growth rate is slowing down from 22% in 2009 to 6% in 2011. Considering no further extension, we apply 5% of
growth rate from 2012 to 2014 for conservative outlook.
Figure18. Hyundai’s ASP Trend Finance: Hyundai’s current utilization rate of Hyundai Capital America (HCA) increased 25,000 from 10% in 2009 to 50% in 2011. Along with increased utilization rate, Hyundai Capital will contribute to Hyundai’s profit more than ever with Santander Bank. HCA’s sales are 20,000 accumulated not one time used; therefore HCA will be able to fulfill 5% constant growth rate in 2012-2014. 15,000 ASP: Considering no more factors to drop ASP due to (1) value pricing strategy, (2) launch 10,000 of new Santa Fe, (3) globally high production rate (110%), we applied average of ten year
long term average 5%.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2013E 2014E 2012E ASP (ex China) ASP 10yr Trend
Source: Company data, Handong University estimates
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Figure19. Operating profit and OPM Margin: Despite intense competition, margin will stay high 12,000 12% 10,000 10% Hyundai’s OPM is to go up to 10% in 2012 and 11% in 2013 ~ 2014. We forecast that 8,000 8% increase in ASP is backed by 1) expansion of platform share proportion with Kia, 2) 6,000 6% maintenance of low incentive with sale at affordable price and 3) launch of new models 4,000 4% such as new Avante and new Santa Fe in China. 2,000 2% 0 0%
Cash Flow: Despite major investment until this year, Hyundai has created two trillion won Operating Profit OP margin(%) scales of FCF. With constant operating profit, the company is forecasting 3.5 trillion won scales of FCF for the next three years. Source: Company data, Handong University estimates
Figure20. Cash flow trend Capital Structure: Hyundai maintains stabilized financial structure as well. Hyundai’s 10,000 debt ratio has been decreased steadily from 307% in 2008 to 171% in 2011. We forecast Hyundai will have even more secure financial structure due to constant FCF and improved capital structure of subsidies such as Kia and Hyundai Capital. Contrast to rival companies 5,000 such as PSA, FIAT, Renault, etc. suffering in liquidity problems, it will be a competitive advantage for Hyundai. -
2010 2011 2012E 2013E 2014E
-5,000 OCF CAPEX FCF Source: Company data, Handong University estimates
Valuation
Valuation model – DCF, PER
We evaluated Hyundai motor by applying two techniques: Discounted Cash Flow (DCF) and Multiple Analysis (PER). In case of DCF, even though Hyundai Motor is a typical cyclical company, cash flow can be calculated based upon (1) reasonable profit due to over 100% global utilization rate and (2) no more planned CAPEX expansion until 2014. We calculated P/E by comparing P/E of industry average. Our target price is the weighted average of the prices resulting from our DCF and our Multiple Analysis.
Figure21. Economy growth Table 4. Valuation Results 4% Case 1. DCF 345,000Won Case 2. P/E 8.1x 359,000 Won
3% Weighted Target Price 352,000 Won (64.5% upside potential)
2% Current Price 214,000 Won
1%
0% High growth High inflation Low growth Case 1. Target price is 345,000 Won, upside potential 62% used the DCF (1946~1968) (1969~1982) (2000~2012)
Source: Bloomberg, News Sales forecast: We believe rationally predicted sales growth can be made until 2014 and Table5. WACC assumptions thus we apply perpetual growth rate since then. We use sales growth rate from 2012-2014 Cost of Debt 4.0% listed in financial analysis. Tax Rate 24.2% Capital Expenditure: We apply 5% growth rate since there will be no large scale plant Weight of debt 42.0% expansion for a while after completion of Brazilian plant this year. Cost of Equity 10.4% Net working Capital: Applied the same growth rate of sales growth. Risk free rate 2.8% Terminal value assumption: After the financial crisis, worldwidely low growth is Risk Premium(Rm-Rf) 7.0% expected. U.S's GDP growth rate during the past low growth time was 1.8%. We reflected Beta 1.09 Weight of debt 58.0% the cyclical aspect of the automobile industry conservatively and applied 1%. WACC 7.3% WACC: Detailed WACC assumptions are summarized in table. Source: Handong University estimates
Figure22. Sensitivity Analysis on DCF Sensitivity Analysis WACC g 6.0% 7.0% 7.3% 7.5% 9.0% 2.0% 516,012 419,732 397,966 384,782 310,074 In order to measure the change of company value based on WACC and terminal growth 1.6% 475,278 393,673 374,806 363,301 296,985 rate, we performed the sensitivity analysis. According to our analysis, the target price is 1.2% 441,333 371,208 354,683 344,548 285,238 256,000 won representing 19.6% upside potential even if we applied 9% WACC which is 1.0% 426,397 361,099 345,000 336,037 279,806 the highest historical level, and 0% terminal growth rate. 0.8% 412,610 351,643 337,038 328,034 274,638 0.4% 387,990 334,448 321,438 313,381 265,024 0.0% 366,653 319,219 307,547 300,290 256,000 Source: Handong University estimates
7 Table6. DCF Appendix (billion won) 2008 2009 2010 2011 2012E 2013E 2014E Sales 52,484 57,595 66,985 77,798 81,750 91,174 103,938 Growth Rate (%) 15.2% 9.7% 16.3% 16.1% 5.1% 11.5% 14% Auto 44,269 50,004 57,293 67,128 74,029 83,071 95,391 US 402 435 538 646 678 712 748 Growth rate (%) -14% 8% 24% 20% 5% 5% 5% Europe 287 337 362 403 443 488 536 Growth rate (%) -10% 18% 7% 11% 10% 10% 10% China 336 602 712 767 851 988 1,146 Growth rate (%) 21% 79% 18% 8% 11% 16% 16% India 242 295 346 368 386 406 426 Growth rate (%) 16% 22% 17% 6% 5% 5% 5% Korea 570 701 660 683 703 725 746 Growth rate (%) -9% 23% -6% 4% 3% 3% 3% Other 1,002 907 1,108 1,226 1,287 1,416 1,633 Growth rate (%) 15% -10% 22% 11% 5% 10% 15.3% Total Global Volume (ex-China) (000 unit) 2,503 2,676 3,015 3,331 3,499 3,739 4,089 ASP (ex-China) (W mn) 17,685 18,685 19,005 20,151 21,159 22,216 23,327 Financial 5,924 4,830 6,520 7,288 7,652 8,035 8,476 Growth rate(%) 76% -18% 35% 12% 5% 5% 5% Others 31.0 34.0 46.0 68.0 68.0 68.0 70 Growth rate(%) 82% 9.68% 35.29% 47.83% 0% 0% 3% Operating Profit 2,900 4,282 5,919 8,075 8,175 9,117 11,433 OP margin (%) 6% 7% 9% 10% 10% 10% 11% NOPLAT 6,197 6,911 8,666 Depreciation 2,452 2,574 2,703 Capital Expenditure -1,104 -1,159 -1,217 Change in NWC -3,270 -3,647 -4,158 Change in Others -1,226 -1,368 -1,559 FCFF 3,048 3,312 4,436 PV of FCFF (A) 3,048 3,086 3,851 PV of Terminal value (B) 53,407 Sum of PV FCFF (A+B) 63,392 Non-operating Asset Discount 30% due to not holding for the purpose of short term trading 1,228 Net cash 2,703 Value of BHMC Multiply 8.1x to next year's net income 8,802 Equity Value 76,125 Diluted Number of shares(1,000) 220,276 Target Price (Won) 345,000 Current price (Won) 214,000 Upside potential (%) 61.2%
Figure23. P/E comparing with competitors Case 2. Target price is 359,000 Won, applying industry average P/E 8.1x
P/E The average P/E of Global Auto OEM except China and India is 8.1. However, Hyundai’s 12 Toyota current P/E is 7, 16% discounted. Since Hyundai does not manufacture luxury brands like 11 Toyota, it is difficult to apply the same premium of competitors like Toyota. Yet because of (1) reasons mentioned in investment summary, (2) ASP reaching comparable levels of 10 Honda competitors, and (3) low valuation despite high profit margin compared to competitors, we 9 Fiat Ford Daimler consider it is rational that Hyundai’s P/E is to grow to industry average P/E. Thus, we 8 apply P/E of industry average 8.1 with 16% premium. GM VW 7 Nissan Hyundai 6 Table7. Growth stage comparison 0 2 4 6 8 10 12 Toyota - Quantitative Growth Hyundai - Quantitative Growth OPM(%) 1981 ~ 1982 P/E 7x→10x (16.6%) 2008 ~ 2012 P/E 7.0x→8.1x (15%) M/S in U.S 1.0%→6.7% M/S in U.S 6.2%→8.2%
Source: Bloomberg, 17% of premium was applied to Toyota as well when Toyota finished its quantity-based growth and stock price was reevaluated by the market. We accounted that Hyundai also successfully finished its quantity-based backed by (1) increased in global market share
from 3.7% in 2007 to 5.1% in 2012, (2) global operating rate over 110%, and (3) no planning for capital investment after completion of plants in Brazil and Turkey in December and next year respectively. We consider P/E with 18.6% of premium rate, similar to one of Toyota, is a meaningful figure.
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Figure24. Scenario Analysis on P/E Scenario Analysis
We applied different multiple by each scenario. If the company accomplishes qualitative growth, we apply 8.1 times. However, if the company is not able to achieve value pricing and qualitative growth due to intense competition and decrease in automobile demand, we apply 6.6 time which is the four year average PER. Nevertheless the target price is 269,000 Won with 26% upside potential.
Source: Handong University estimates
Investment Risk
Figure25. U.S Major automaker’s incentive trend Competition Risk (1) Possibility of incentive increase in U.S 5,000 We expect incentive competition to get rid of outmode vehicles inventory followed by recovery of Japanese automobile companies and newly introduced vehicles will be intensified. However, (1) Hyundai’s operating rate in U.S plants is over 100%, (2) Hyundai has low inventory level, and (3) increase in incentive will be limited because of replacement of Santa Fe which accounted for 20% of total incentive. 0
Competition Risk (2) Regulation on imported cars in Europe
2009 2010 2011 2012 2008 GM Ford Toyota Hyundai/Kia French government has recently requested EU trade authorities to apply safeguard on Hyundai vehicles sold in Europe. However, it is unlikely that the French government Source: Autodata actually is entitled to issue the safeguard because of FTA between South Korea and EU. Even if EU trade authorities invoke safeguard, the impact will be very limited because Figure26. Capacity expansion in China vehicles that are sold in Europe is only 4~5million units (only 15% of exported cars 3,500 produced in plants in Korea), and rest of vehicles are manufactured in Eastern Europe after 3,000 paying 6.5% of tariff. 2,500 2,000 Competition Risk (3) Capacity expansion despite oversupply in China 1,500 1,000 Oversupply is concerned in the Chinese automobile market because of continuous 500 extension of capacity despite of 70% of low operation rate. However, major automobile 0 companies already have nearly 100% of operating rate. Intensified competition is very limited to local companies that have weak brand and technical skills.
2009 2010 2011 2012E 2013E
Source: Industry data
Figure27. Market share of imported car in Korea Competition Risk (4) Expansion of imported cars M/S
14% After signing FTA with the United States and EU, market share of imported car is 12% increasing due to drop in prices and aggressive marketing of foreign automobile 10% companies. However, we still predict that the market share of imported cars are limited 8% because (1) import carts are introduced when Hyundai’s new vehicles are launched, (2) 6% complaint of imported vehicles is getting stronger because of poor after service and 4% expensive repair cost. 2% 0% Financial Risk: Risk due to exchange rate fluctuations 2008 2009 2010 2011 2012E 2013E Even if Hyundai's exports is high, profitability loss due to exchange rate fluctuations will Source: KAIDA be limited. For that reason, (1) the overseas manufacturing recently enlarged by 65% and (2) Hyundai's current new models were developed when the won was strengthening, so it was structured to make profit even if the exchange rate was \1,000. Therefore, if there is no longer a rapid change in the exchange rate, profitability loss will be limited.
Operating Risk: Production disruption due to strike
For the first time in 4 years, the strike resumed. The strike resulted in the largest ever loss; 137 thousand units production disruptions, 2.8 trillion won loss. Last August, Hyundai made offers which are advantageous to the union; abolished night shift, reduced 1~2 work hours, increase 5.4% of their wages etc. Result of the strike, Hyundai's chronic union risk has risen up again. This will be a negative effect on Hyundai's long-term competitiveness.
9
Figure28. R&D per portion compared to sales Other Risk (1) Low R&D rate compared to competitors property 5% Major competitors are investing 4-5% of their sales in R&D while Hyundai is investing 2.2% only This can be a long-term risk factor. However, Hyundai as a (1) public auto 4% maker not a luxury maker, strategy of securing cost competitiveness worked rather than 3% investing in R&D. (2) starting this year Hyundai is trying to concentrate on qualitative growth. After this CAPEX cycle, they will change their mix to luxury products through 2% R&D investment. 1% Other Risk (2) Potential risk in platform sharing 0% 2006 2007 2008 2009 2010 2011 Hyundai Motor is planning to increase the platform sharing rate up to 90% till 2014. After Germany France this platform sharing, if something gets wrong in one of the parts, there can be a massive Italy Japan recall like Toyota recently went through. However, unlike Toyota, Hyundai can be Korea considered to have lower risk because they are conservative in capacity expansion and capacity management. Source: Blommberg, Company data
Figure29. Corporate Governance of Hyundai Chae-bol Risk: Cross shareholding structure
Hyundai is operated under family management system. Established in 1967 by the first CEO, Chung Ju-yung, the company was run by Chung Se-Yung as the second CEO and Chung Mong-gu in 1999 as the third CEO. Current control of Hyundai is focused on incumbent CEO Chung Mong-gu, and his son, Chung Eui-sin as the vice president. The following is the corporate governance: ‘Hyundai Mobis(6.96%) →Huyndai Motors(5.17%)→Kia Motors (1.74%)→Kia Motors(1.74%)→Hyundai Mobis(6.96%). Due to cross-shareholding, the family can exercise control on several subsidiaries with small shares.
This kind of family centered governance, also known as Chae-bol, is very familiar in South Korea. Family centered corporate governance has drawbacks such as transparent decision making. However, we consider the family centered corporate governance is beneficial to Hyundai because it allows (1) long range outlook and investment, and (2) rapid decision- making system in a short range. Source: Company
Additional issues on the Corporate Governance
If congress legalizes currently debated fair-trade act to ban cross-sharing, about 6 to 11 trillion won will be spent to restructure cross-sharing processes. Once the act comes into effect with three to four years of legal delay, transparency of corporate governance can be improved by reorganizing cross-sharing linkages, eventually increasing value of Hyundai. Since Hyundai explores to get Hyundai Emco listed on KOSPI, the costs can be even more reduced.
10 Appendix Appendix 1. Income Statement (Won Billion) 2010 2011 2012E 2013E 2014E Sales 66,987 77,798 81,750 91,174 103,938 COGS 51,266 58,902 62,130 69,292 78,993 Gross Profit 15,722 18,896 19,620 21,882 24,945 SG&A & Other inc./exp. 9,804 10,821 11,445 12,764 13,512 Operating Profit 5,918 8,075 8,175 9,117 11,433 Income from associates 1,682 2,404 2,934 3,339 3,800 Pretax Profit 7,492 10,447 11,109 12,456 15,233 Net profit before minority interest 6,001 8,105 9,466 10,481 11,547 Net profit after minority 5,567 7,656 8,860 9,811 10,808
Appendix 2. Balance Sheet (Won Billion) 2010 2011 2012E 2013E 2014E Cash & Cash Equivalents 6,216 6,232 6,498 6,649 7,513 ST Financial Goods 7,422 9,183 8,303 8,743 8,523 Account Receivable 3,192 3,846 4,041 4,507 5,138 Inventory 5,491 6,238 6,315 7,043 8,832 ST Loans & Receivable 17,732 19,658 21,793 24,160 26,785 Others 3,468 3,771 4,100 4,100 4,100 Current Assets 43,520 48,926 51,050 55,203 60,891 Investment 6,909 11,709 12294 12909 13555 PP&E 18,514 19,548 20,640 21,792 23,010 Intangibles 2,652 2,660 2,660 2,660 2,660 LT Loan & Receivable 15,233 17,452 19,994 22,907 26,244 Operating Lease Assets 2,602 5,268 5,531 5,808 6,098 Others 5,283 3,916 4,600 4,258 4,429 Non-current Assets 51,194 60,554 65,719 70,334 75,995 Total Assets 94,714 109,480 116,770 125,537 136,886 Account Payble 6,353 6,666 6,999 7,769 8,857 ST Debt 15,207 15,859 15,533 15,696 15,615 Accrued Expenses 1,008 1,103 1,056 1,079 1,067 Other Current Liabilities 8,877 9,535 10,012 10,512 11,038 Current Liabilities 31,445 33,164 33,600 35,057 36,577 LT Debt 22,737 27,138 26,138 25,388 24,888 Provision for Severance 490 649 860 1,139 1,508 LT Sales Provision 4,390 4,961 5,209 5,470 5,743 Other LT Liabilities 2,764 3,241 3,800 4,456 5,225 Non-current Liabilities 30,381 35,989 36,007 36,452 37,364 Total Liabilities 61,826 69,152 69,607 71,509 73,941 Total Equity 32,888 40,328 47,163 54,028 62,945
11 Appendix 3. Cash Flow Statement (Won Billion) 2010 2011 2012E 2013E 2014E Net Income 6,001 8,105 9,466 10,481 11,547 Depreciation & Amortization 2,155 2,335 2,452 2,574 2,703 Change in Working Capital - 2,920 - 4,634 - 3,270 - 3,647 - 4,158 Change in Others - 859 - 1,674 - 3,262 - 3,638 - 4,148 CF from Operating 4,376 4,132 5,385 5,770 5,944
Capital Expenditures - 1,887 - 2,786 - 1,104 - 1,159 - 1,217 Change in Others - 6,744 - 4,330 - 2,780 - 3,555 - 3,168 CF from Investing - 8,631 - 7,116 - 3,884 - 4,714 - 4,385
Free Cash Flow 2,489 1,346 3,048 3,312 4,436
Increase in ST Debt 652 341 178 260 219 Increase in LT Debt 4,297 4,401 - 1,000 - 750 - 500 Increase in Equity 170 213 0 0 0 Dividends - 414 - 414 - 414 - 414 - 414 Chg in Others 329 - 1,433 0 0 0 CF from Financing 5,033 3,109 - 1,236 - 904 - 695
Change in Cash 816 16 266 152 864
Appendix 4. Ratio Analysis 2010 2011 2012E 2013E 2014E
Growth Rate (%)
Sales 16.3% 16.1% 5.1% 11.5% 14.0% Operating Profit 22.5% 36.4% 1.2% 11.5% 25.4% Net Profit 87.4% 37.5% 15.7% 10.7% 10.2%
Margins (%)
Gross Profit 23.5% 24.3% 24.0% 24.0% 24.0% Operating profit 8.8% 10.4% 10.0% 10.0% 11.0% Net Profit 8.3% 9.8% 10.8% 10.8% 10.4%
Returns (%)
ROE 22.7% 25.4% 20.1% 19.4% 18.3% ROA 6.8% 8.1% 8.1% 8.3% 8.4%
Gearing (%)
Debt/Equity 188.0% 171.5% 147.6% 132.4% 117.5%
12 Appendix 5. Global retail volume by region & YoY changes 2008 2009 2010 2011 2012E 2013E 2014E
Global retail volume by region ('000 units) Korea 570 701 660 683 703 718 725 YoY change (%) -9% 23% -6% 4% 3% 2% 1% US 402 435 538 646 678 712 748 YoY change (%) -14% 8% 24% 20% 5% 5% 5% EU 287 337 362 403 443 488 512 YoY change (%) -10% 18% 7% 11% 10% 10% 5% China 336 602 712 767 851 987 1,145 YoY change (%) 21% 79% 18% 8% 11% 16% 16% India 242 295 346 368 405 425 446 YoY change (%) 16% 22% 17% 6% 10% 5% 5% Others 1,002 907 1,108 1,226 1349 1416 1,487 YoY change (%) 15% -10% 22% 11% 10% 5% 5% Total (ex-China) 2,503 2,676 3,015 3,331 3,578 3,758 3,918 YoY change (%) 2% 15% 14% 10% 8% 5% 4%
Appendix 6. Consensus of major subsidiaries’ performance (Won bn) % owned 2008 2009 2010 2011 2012E 2013E Kia 34% 12 512 865 1,108 1,526 1,683 BHMC 50% 63 311 474 579 753 870 Hyundai E&C 21% NA NA NA 58 170 190 Hyundai Hysco 29% 4 13 51 78 101 117 Wia 27% 12 31 60 79 107 128 Others -15 0 232 502 277 351 TOTAL 64 867 1,682 2,404 2,934 3,339 YoY growth -56% 1258% 94% 43% 10% 8%
13 Appendix 7. Hyundai Motor global capacity expansion plan ('000 units, %) 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E Domestic 1,760 1,760 1,760 1,760 1,820 1,820 1,820 1,820 1,870 1,870 1,870 China 200 300 300 300 400 500 600 600 900 1,000 1,000 India 250 250 250 400 500 600 600 600 600 600 600 US 150 300 300 300 300 300 300 300 370 370 Turkey 60 60 60 100 100 100 100 100 100 100 200 Czech(EU) 20 200 200 300 300 300 300 Russia 150 220 220 250 Brazil 20 150 200 Total overseas(LHS) 510 760 910 1,100 1,320 1,700 1,800 2,050 2,440 2,740 2,920 Overseas as a % of total 22.5 30.2 34.1 38.5 42.0 48.3 49.7 53.0 56.6 59.4 61.0 Total overall 2,270 2,520 2,670 2,860 3,140 3,520 3,620 3,870 4,310 4,610 4,790 Overall growth (YoY, %) 9.7 11.0 6.0 7.1 9.8 12.1 2.8 6.9 11.4 7.0 3.9
Appendix 8. Hyundai's new model launch schedules in key markets Hyundai Motor - new model launch plan 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Korea Equus(F/L), Santa Fe (long body) Genesis
Elantra coupe
US Santa Fe, Santa Fe (long body) Equus-Face lift Tucson-Face lift
Avante coupe
Europe Santa Fe Santa Fe (long body) Tucson-Face lift
China New Elantra New Santa Fe Santa Fe (long body)
India Santa Fe New Avante New Santa Fe Brazil B- segment new model
Appendix 9. Five force model in Automaker industry Threat of New Entrants Low The entry barrier is high in the automaker industry because it is hard to build the scale of economy, capital investment, brand, etc. in a short period of time. Even though local makers of the developing countries enter the market, the threat of new entrants are low because there is a huge gap between major brand companies (VW, GM, Toyota, etc.).
Bargaining power of buyers Moderate Macroscopic consideration on demand for automobiles is consumers' propensity to consume by economic situations. Microscopic consideration is brand, design, fuel efficiency, etc.
Bargaining power of suppliers Low In the automaker industry, bargaining power of suppliers is low because there are more parts suppliers than carmakers.
Threat of Substitutes Low There is no substitute for cars as a transportation mean. Substitutes for cars as a internal combustion engine can be hydrogen cars or electric cars. However, the threat of substitutes is low because it is too expensive to be popularized.
Intensity of competitive rivalry Strong Demand will decrease in the developed countries due to global slowdown. On the other hand, in the developing country, there will be intense competition due to aggressive capacity expansion.
14 Appendix 10. Major competitors and competitive market analysis VW - U.S, EU, China While VW has price categories of all different vehicles from low cost brand such as Skoda or SEAT to ultra luxury brands like Bugatti, the company maintains efficient platform integration and overwhelming cost competitiveness. The company has models that overlap products from VW. Although Hyundai has higher cost competitiveness on quality as well as better plant locations and lower labor cost than VW, the brand value gap between VW and Hyundai is huge. It is very likely that VW will be major competitor of Hyundai.
Toyota – U.S, China Toyota, the most aggressive competitor of Hyundai, competes with Hyundai in U.S, China, and European market. As Toyota has recently recovered from supply delay due to earthquakes and floods and operating profit increases, the company has aggressively marketing via increase in incentives and so on. Toyota is expected to complement its low price competitiveness and design by (1) continuous launch of new models (see Appendix), (2) brand power, and (3) vast overseas network.
GM – U.S, China After financial crisis, GM has recovered partial competitiveness through (1) competitive new models, (2) cost reduction by decreased number of brands and labor cost, and (3) less rigid shape of union. The following is the core strategy in each countries: (1) U.S-aggressive launch of new models, price cutting (2) China-placed as the premier brand with localized product mix consist of compact cars such as Chevrolet, Buick, and Cadillac. (3) Europe-ongoing process to generalize Chevrolet brands. Nevertheless, we judge that GM still has higher price and lower quality competitiveness than those of Hyundai.
Fiat, PSA - EU Both Fiat and PSA are undergoing decrease in sales volume and liquidity crisis after financial crisis in Europe. Due to demand slowdown in major markets such as France, Italy, and Spain, both companies (1) has lowered dependence on European market, but high on emerging countries, (2) asked for safeguard and protest against FTA with Japan, and (3) actively reduced costs by delaying launch of new models for liquidity issue and factory lockout. We forecast that those companies will lose competitiveness in the long run while Hyundai will increase market share.
15 Appendix 11. Hyundai’s stock price factor analysis (1) We analyzed Hyundai's stock price trend from September 2001 to October 2012 to figure out variables that affect Hyundai's stock price. As a result, Macro and corporate factor are the major factors that have the impact on stock price.
Increasing factor: Each product affects the change of stock price, but particularly launch of new cars and upstream of segments have a positive effect on the stock price. Other than that, product mix, exchange rate and production capacity also upturns the stock price.
Decreasing factor: The major macro factors are credit crunch and deterioration of the real economy. Financial crisis causes housing market recession → decrease asset price → decrease business investment → recession on manufacturing economy → deteriorate trade balance → decreased in company performance → decrease employment → decrease disposable income → deteriorate consumer sentiment → decrease household consumption expenditure, and finally affects the automobile industry.
Other fundamental factor: The upper factors are medium and short term stock price changes. In the view of long term, P is brand value, incentive, quality and Q is sales proportion of the emerging market, capacity, line-up and C is platform, high cost country proportion, productivity.
16
Appendix 12. Hyundai's stock price factor analysis (2) Increase in Main Stat. Factors Main Stat. Positive Negative Unemployment Rate Real Income Growth ① Household Debt/Fed Fund Rate House price Growth CCI HFCE ② Macro Factors Stimulative Policy(Tax-cut/Subsidy) Oil & Gas Price
Change in Population
Replacement Cycle ③ % of Urbanization/ industrialization Trade Barrier(Safe Guard) Pace of Change Technical Development ④
Regulation (Environmental Reg.) Industry Factors Investment Issue War/Nuclear issue
& Event Political Conflict
% of High Segment(Quality) # of Product Mix(Quantity) New Car(scheduled) ⑤ Fuel Efficiency
Durability Product Quality ⑥ % of R&D # of Dealers
⑤ % of Direct Sales
Auto Financial Service
Sales Incentive(Discount) ⑥ Oversea Market Development Reserve Marketing Cost
⑤ Exchange Rate (the Weakened Won) Credit Rate
Acct. ⑥ Contribution to Provision for Product Warranties Corporate Factors Increase in CAPA ⑤ Stability of Value Chain
Labor Problems(Strike)
Inventory Cost Utilization Rate % of Combined Platform
⑥ Price of Raw Materials Production Profit of Affiliates Location of Industry Labor Cost New Car Competitor Production Problem (Delay/Recall) Factors Exchange Rate (the Weakened Yen)
Reacquire Treasury Stock/Cancellation of Shares M&A/ Joint Venture/Partnership ⑦ Paid-in Capital Increase Litigation/ Investigation/ Secret Funds Corporate Governance Problem Undervalued Supply-demand Relation in Institutional Investors & Foreigners/ Short Stock ⑧ Selling Stock Market StockFactors Market Learning Effect/ Investors Sentiment
17 Appendix 13. P∙Q-C score conversion criteria Based on Appendix 9, among several factors, we demonstrated ‘P*Q-C’ model based on the most important factors. The following is how we scored each process.
1. Price (1) Brand Value Hyundai Toyota VW GM Brand 3,598(9th) 21,779(2nd) 8,519(6th) (11th:Expected) Score 60 95 75 50 Source: Millward Brown(on the basis of 100 points)
Referring to the global brand value rank of car makers made by one of the leading global research agency, Millward Brown, we put the 1st as 100 points and granted points giving the interval of 5 points.
(2) Incentive (U.S criteria) Hyundai Toyota VW GM Incentive $964 $1,478 $925 $3,283 Score 86 56 90 25 Source: Edmond.com(on the basis of 100 points) We researched the incentives in the U.S market. We put VW's lowest incentives the 1st as 90 points and granted points giving the proportion of it.
(3) Quality Hyundai Toyota VW GM
PQS 62.3 80.1 69.6 55.4 Score 62.3 80.1 69.6 55.4 VDS 125 104 169 135 Score 75 90 50 69 Total Score 68.6 85 59 62 *Higher the PQS points, better the quality. Lower the VDS points, better the Quality. **Consider GM as Chevrolet Source: J.D. Power (on the basis of 100 points)
2. Quantity (1) Emerging market proportion % Hyundai Toyota VW GM Emerging Market 38 14.7 42.5 31.9 sales proportion Score 76 29.4 85 78 Source: Bloomberg (on the basis of 100 points) . (2) CAPA (10,000 units) Hyundai Toyota VW GM Capacity 669 704 788 793 Score 55 60 70 80 Source: Company Report
(3) Line-up Figure 29. Comparison with major companies in segment and price
70,000 Car price($) 60,000 50,000 40,000 30,000 Hyundai Toyota VW GM 20,000 10,000
0 Segment 0 1 B 2 C3 4 D 5 E 6 SUV7 8 Luxury9 10
18 Hyundai Toyota VW GM
Slope of Line-up line 2108.8 3258.0 4626.2 1429.7 Score 40 63 90 27
3. Cost
(1) Cost competitiveness (Platform) (10,000 units) Hyundai Toyota VW GM Number of platform 6 14 5 18 Production per platform 120 69 150 45 Score 75 35 90 30 Source: HIS Automotiv
(2) Plant location (%) Hyundai Toyota VW GM High cost country production 9.3 68.5 40 43 proportion Score 90 13.5 23 21 *High cost countries are U.S, West Europe and Japan Source: Company data
(3) Productivity Hyundai Toyota VW GM
Car production per person 31 53 20 22 Score 52 90 33 37 Source: KPC
Appendix 14. Sensitivity analysis We performed a sensitivity analysis to figure out the change of operating profit, when ASP and quantity increases 1%. As a result, we found that change in ASP has more impact on the operating profit than change in quantity. Therefore, despite concerns on sales slowdown, it will have an impact on the profit due to the value pricing strategy.
(Wbn) 2011 2011 2011 Consolidated financial (K-IFRS) 1% increase in ASP 1% increase in quantity Revenue 77,798 78,464 78,464 Auto 67,128 67,794 67,794 Global volume ex-China ('000 unit) 3,331 3,331 3,364 ASP ex China (W mn) 20,151 20,353 20,151 Others 10,670 10,670 10,670 Variable Cost 57,259 57,259 57,832 Variable Cost Ratio (%) 73.6% 73.0% 73.7% Fixed Cost 12,448 12,448 12,448 Fixed Cost Ratio (%) 16.0% 15.9% 15.9% Operating profit 8,075 8,757 8,184 Operating margin (%) 10.4% 11.2% 10.4% Change in Operating profit (%) 8.4% 1.4%
19 Appendix 15. Major localization models analysis As we have previously analyzed, Hyundai has a advantage of localization. Through our team's research, we found out that Hyundai is producing the same models differently by country. Hyundai is diversifying in design, convenience, fuel efficiency, etc. by each country.
American-style 'Granduer'
Sophisticated exterior design, improved efficiency and performance to meet the needs of U.S demand. Azera U.S (Granduer) Navigation with N. America only blue link, voice recognition blue tooth, nine airbags etc. various safety specifications and convenient items loaded.
European strategic type model
High fuel efficiency compared to competitors. Reflected the European style which emphasizes on economics.
i30 i30→23.0km/l, VW Golf→21.9km/l, Mazda→20.6km/l
EU
European strategic type model
Unlike, i30 it is a wagen type, mid-sized vehicle.
i40 Aimed for the European market, it is designed to have a large volume of trunk.
'Avante' Chinese model
Reflecting the Chinese market's trait which prefers big and fancy features, Hyundai enlarged the hood and car body to make it look like Yue Dung China a mid-sized car. . (Avante)
Indian type model
Aiming Indian's preference for low cost vehicle, Hyundai launched a low cost car(\6~8mil) by lessening convenient specifications and India Eon added Indian preference design.
'Avante' Russian model
Installed a battery that can start in the bitter cold.
Installed a quick braking alarm device, considering the Russian driving Russia Solaris culture.
20 Appendix 16. Hyundai i30 VS Volkswagen Golf Our research team compared the most best selling hatchback model car in Europe, VW 'Golf', with Hyundai's European strategic model, 'i30'. Through our analysis, we found out that i30 has an advantage of design, price, value for money, etc. while Golf still is good at brand and residual value. Therefore Hyundai's growth will be able to be accelerated in Europe. Model Hyundai i30 VW Golf
Price 20.08 million won (18.11~21.65) 30.06 million won (30.60~41.80) Fuel Efficiency 20km/l (16.3~23.0km/l) 21.9km/l (12.6~21.9km/l) Fuel Efficiency 1 1 rating Displacement 1582cc 1598cc Max. output 128 ps/4000rpm 105 ps/4000rpm Max .torque 26.5 kg∙m/1900~2750rpm 25.5 kg∙m/1500~2500rpm Residual Value 38% 42% Depreciation 8,987 9,541 TCO 14,496(100%) 14,700(101%) TCO reflected 13,956(100%) 16,151(116%) Pros Spacious cabin Strong brand value Great Value for money High level of weight reduction of car High spec, Low TCO Fuel Efficiency Cons Hyundai’s brand Relatively high TCO High running cost with gearbox *i30 is diesel 1.6 VGT model, Golf is diesel 1.6 TDI model inside the parenthesis is for all models of i30 and Golf **Price is domestic price.
21 Appendix 17. Comparison between Toyota and Hyundai's growth history We can't exclude Toyota's growth history while researching Hyundai. Toyota was able to fulfill quantitative growth by increasing their M/S in the U.S market whenever there was a crisis like oil shock. Entering the 1990's, Toyota (1) reinforced their brand value and profitability through the sales of Lexus, (2) utilized the Europe plants and improved the performances of overseas subsidiaries (￥21trillion-> ￥74trillion), and (3) their financial services(TMCC) performed well. Toyota was able to fulfill qualitative growth through these factors. Hyundai is reenacting Toyota's history by fulfilling quantitative growth during the 2008 financial crisis and getting ready for qualitative growth recently. Rather, in some parts of the situation, Hyundai is more positive than it was in Toyota's case.
Toyota Era Era of quantitative growth Era of qualitative growth Period 1980~1982 1985.9~1987.2 1989.3~1996.3 Event Oil shock Savings and loan crisis Savings and loan crisis Quality, High fuel Keyword Line-up Brand efficiency (1) Increase of brand value and profitability through sales of Lexus (1) Entered the U.S market (1) Utilize U.S plants (1986), (2) Utilization of Europe plants and performance with high fuel efficiency Strategy (2) Initiate Camry overseas improvement of overseas subsidiaries and small cars. production (1987) (￥21trillion->￥74trillion), (2) Launching Camry (3) Financial services(TMCC) performance contribution (25%->43%) Valuation 7x -> 10x 10x -> 17x 30x -> 35x (30% increase) (P/E) U.S M/S 1.0%->6.2% 16.2% Hyundai Era Era of quantitative growth Era of qualitative growth Period 2008~2012 2012~ Event Financial crisis Global economy slowdown Keyword Quality, High fuel efficiency, Line-up Brand (1) Enlarged global and U.S M/S through small and mid-sized car (1) Gradual upstream sales of segments (Genesis, Equus with high fuel efficiency. etc.) Strategy (2) Aggressive incentive strategy ($1,700 -> Maximum $3,000), (2) Value pricing of existing products and brand (3) Enlargement of overseas production and performance reinforcement through incentive decrease($3,000->$900) improvement of overseas subsidiaries. (1.4trillion -> 2.2trillion) (3) Financial services(HCA) performance contribution Valuation 6x -> 8x (P/E) U.S M/S 0.9%->4.8%
22 Appendix 18. Effect of Exchange rate Exchange rate is highly related to Hyundai's sales and profit. Particularly both KRW/USD and JPY/USD are very important variables and thus our research team analyzed the changes between Hyundai's stock price and KRW/USD, JPY/USD. The results are as follows.
1. KRW/USD: Unless there is a drastic change in KRW/USD, there is no meaningful correlation. The early 2000's and the rise of exchange rate in 2008~2009 led the increase of Hyundai's stock price. However, recently, it seems that there is no meaningful correlation between Hyundai's stock price and KRW/USD.
As we have mentioned the reason early, (1) the overseas manufacturing recently enlarged by 65% and (2) Hyundai's current new models were developed when the won was strengthening, so it was structured to make profit even if the exchange rate was 1,000 KRW/USD.
Therefore, unless KRW/JPY shows a structural change in any level, KRW/JPY will not severely affect on Hyundai's stock price.
2. JPY/USD: After 2009, correlation between Hyundai's stock price and JPY/USD went high. Since 2009, Hyundai's stock price has been affected more by JPY/USD than KRW/USD. Strong JPY/USD has been the factor to increase Hyundai's stock price 2009.
It is because Hyundai was able to gain the M/S of Japanese companies due to the strong JPY/USD.
If JPY/USD gets weaker in the long term trend, Hyundai's stock price might drop in a high probability.
Appendix 19. Correlation between GDP and automobile demand
55 40000 Germany 53 R² = 0.927 35000 11 France 51 UK 08 10 30000 49 Japan 07 25000 Korea 47 06 45 05 20000 US 04 43 15000 03 Taiwan 41 02 China 01 10000 39 00 5000 37 99 India 35 0
50 55 60 65 70 75 80 85 0 20,000 40,000 60,000
According to our regression analysis, correlation between GDP and automobile demand is 0.927. Considering 2012-2020 long term economic growth rate announced by IMF is 2%, we believe 1% of our terminal growth assumption is very conservative.
23 Appendix 20. Hyundai Motor group shareholding structure
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24 Disclosures Ownership and material conflicts of interest: The author (s) or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s) or a member of their household, of this report knows of the existence of any conflicts of interest that might bias the content or publication of this report.
Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director: The author (s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making: The author (s) does not act as a market maker in the subject company’s securities.
Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author (s) to be reliable, but the author (s)does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Korea Society, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge
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