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 Investment risk 50,000 (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 2 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.