2 February 2017 Asia Pacific/South Korea Equity Research Leasing & Logistics Hyundai Glovis (086280.KS / 086280 KS) Rating NEUTRAL Price (31-Jan-17, W) 155,500 INITIATION Target price (W) 140,000 Upside/downside (%) -10.0 Mkt cap (W/US$ bn) 5,831 / 5.02 Stagnant growth with rising uncertainty Enterprise value (W bn) 6,234 Number of shares (mn) 37.50 ■ Initiating with NEUTRAL. We initiate coverage on Hyundai Glovis (Glovis) Free float (%) 48.6 with a NEUTRAL rating and W140,000 target price. Glovis is a logistics 52-wk price range (W) 207,500-149,000 company which generates over 70% of sales from Hyundai Motor Group ADTO-6M (US$ mn) 14.0 (HMG). ES Chung, the Vice-Chairman and the heir apparent of the group Target price is for 12 months. Research Analysts chairman MK Chung, owns 23.3% of Glovis. As the growing value of Glovis benefits ES Chung the most, the stock has long been considered as the Michael Sohn 82 2 3707 3739 beneficiary of HMG's future holding structure changes. Yet, we have a non- [email protected] consensus view on the stock for the following reasons. ■ Captive HMG is no longer a growth driver. In 2006-2016, Glovis' sales showed 99.8% correlation with its operating profit and 97.3% correlation with HMG's (Hyundai Motor + Kia Motors) sales volume. Considering 2016-2019E HMG volume growth CAGR of 3.1% (vs 2006-2016 CAGR of 7.6%), we forecast Glovis' sales CAGR of 3.6% (vs 23.3% in 2006-2016) and OP CAGR of 4.4% (29.3% in 2006-2016). ■ Valuation de-rating with the ownership and regulation uncertainty. To meet the regulation, the Chung family made a block trade on Glovis in 1Q15 to lower the ownership to 29.99% from 43.39%. Not only was the stock limited down (-15%) on the next day, its valuation premium has also gradually disappeared since then. In addition, proposed bills by the opposition party, if passed, would force the Chung family to lower the ownership of Glovis further to below 20% and disconnect HMG's circular holdings, while their lock up period on Glovis expires in February-2017. Glovis' ownership premium has become an ownership uncertainty triggered by tightening regulations on conglomerates. ■ Valuation and risks. We derive our target price of W140,000 by applying target PER of 9.6x, which is based on an average PER of HMG stocks and Glovis' historical average PER, to 2017E EPS. Risk to our call is faster-than- expected growth in third-party sales which can bring incremental growth. Share price performance Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E Revenue (W bn) 14,671.2 15,340.6 15,869.5 16,566.6 EBITDA (W bn) 827.0 897.0 971.9 1,023.2 EBIT (W bn) 698.0 728.8 783.6 815.8 Net profit (W bn) 377.0 505.6 552.7 575.9 EPS (CS adj.) (W) 10,052 13,483 14,739 15,357 Change from previous EPS (%) n.a. - - - Consensus EPS (W) n.a. 15,384 16,150 17,346 EPS growth (%) (29.7) 34.1 9.3 4.2 The price relative chart measures performance against the P/E (x) 15.5 11.5 10.6 10.1 KOREA SE KOSPI IDX which closed at 2,067.57 on Dividend yield (%) 1.9 2.3 2.6 2.9 31/01/17. On 31/01/17 the spot exchange rate was EV/EBITDA (x) 8.0 7.0 6.1 5.4 W1,161.1/US$1 P/B (x) 1.88 1.67 1.49 1.34 Performance 1M 3M 12M ROE (%) 12.8 15.4 14.9 14.0 Absolute (%) 0.6 -9.6 -23.8 Net debt/equity (%) 24.5 12.3 2.5 Net Cash Relative (%) -1.4 -14.1 -31.2 Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 2 February 2017 Focus charts Figure 1: As over 70% of Glovis sales come from Figure 2: …Glovis sales and HMG sales units (HMC Hyundai Motor Group… + Kia) have shown 97% correlation (%) (Won tn) (Mn units) 90 20 CS forecast 11 Correlation = 97.3% 80 15 9 70 10 2016-19E 7 HMG sales Glovis' sales portion target 5 volume 5 60 : 50% in 2020E 2006-16 HMG volume growth CAGR: 3.1% CAGR: 7.6% 0 3 50 2006 2008 2010 2012 2014 2016 2018E 2012 2013 2014 2015 3Q16YTD Glovis sales (LHS) HMC + Kia sales volume (RHS) HMG sales portion Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates Figure 3: With limited margin volatility over the Figure 4: …sales growth is the key to drive earnings years… growth which we expect to be stagnant (%) CS forecast (Won tn) (Won tn) 10 20 CS forecast 1.0 Correlation = 99.8% 9 16 0.8 +1 std 8 12 0.6 7 -1 std 8 2016-2019E 0.4 Stable GPM between 7.3% to 8.2% sales 6 4 2006-2016 sales growth CAGR: 3.6% 0.2 CAGR: 23.3% 5 0 0.0 2006 2008 2010 2012 2014 2016 2018E 2006 2008 2010 2012 2014 2016 2018E GPM Glovis sales (LHS) Glovis operating profit (RHS) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 5: Ownership premium relative to HMG's Figure 6: Expecting valuation not to be re-rated average P/E multiple has quickly been de-rated post again as the ownership premium has become the Chung family's block trade in 1Q15 ownership uncertainty from 1Q15 (%) Losing premium post Chung family's (X) Losing premium post 300 selling stakes in 1Q15 5.0 Chung family's selling stakes in 1Q15 200 4.0 3.0 100 2.0 0 Kia's P/E multiple was soared 1.0 -100 due to near BEP earnings 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Glovis P/B trend (RHS) * HMG PER is weighted average of HMC, Kia, Mobis, Hyundai Steel, and Hyundai E&C Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Hyundai Glovis (086280.KS / 086280 KS) 2 2 February 2017 Stagnant growth with rising uncertainty Initiating with an We initiate coverage on Hyundai Glovis (Glovis) with a NEUTRAL rating and a W140,000 UNDERPERFORM and target price. With an inseparable business structure with Hyundai Motor Group (HMG), we target price of expect 3.6% YoY sales growth CAGR in 2016-2019E and see 4.4% OP CAGR for the stock W140,000 in 2016-2019E. In addition, the long lasted ownership premium on the stock has become an ownership uncertainty post Chung family's block trade in 1Q15, while tightening regulations under 'Economic Democratisation' will continue to be an overhang, which will depress the valuation, in our view. Under any HMG group restructuring scenarios, we expect the Chung family's Glovis shares to be eventually traded with new Holdco shares. Captive HMG is no longer a growth driver HMG affiliates' 70% of Glovis' sales come from its captive Hyundai Motor Group (HMG) and 87% of sales are stagnant growth generated from logistics and CKD (complete knock down parts, (link)) which have inseparable CAGR limits Glovis' business relationships with HMG. As HMG's major entities (Hyundai Motor, Kia Motors, growth Hyundai Mobis and Hyundai Steel) are expected to grow at 2.2% sales growth CAGR in 2016-2019E (vs 2006-2016 CAGR of 12.8%), we forecast Glovis to post 2016-2019E sales CAGR of 3.6% (vs 23.3% in 2006-2016) and OP CAGR of 4.4% (vs 29.3% in 2006-2016). Valuation de-rating with ownership and regulation uncertainty Valuation de-rated Since the IPO in December 2005, Glovis was known as the key beneficiary of HMG's future post Chung family's holding structure changes as growing value of the company benefits ES Chung and MK block trade in 1Q15 Chung who own 29.99% of the company. The company posted solid growth supported by which we expect to HMG, and Chung family's major ownership was the main reason for the stock to receive 68% continue P/E premium on an average in 2006-1Q15 over HMG's entities. Yet, after the Chung family made a block trade attempt on Glovis in January-2015 and made a block trade in February- 2015 to meet the tightened regulation on intra-group revenue transaction, the stock limited down in the next day (vs Mobis up 12%) and its valuation premium has gradually disappeared since then (Hyundai’s Chungs revive Glovis' stake sale to avoid probe). In addition, the proposed bill by the opposition party would force the Chung family to lower the ownership further to below 20%, if passed, while their lock up period on Glovis expires in February 2017. As such, we believe the Chung family ownership premium on Glovis should be considered as the ownership uncertainty with regulation uncertainty will continue to depress the valuation and stock performance.