Hyundai Motor Company

1
Hyundai Motor Company Beijing Automotive Joint
Venture

• April 30th, 2003
• Topics in Emerging Markets
• Richard Lee
• Kevin Park
• Michael Cheng

2
Agenda.

• Case Study Introduction
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

3
Case Introduction.

• In 2003, Hyundai has an investment of 250
  million in China in conjunction with Beijing
  Automotive to produce 100,000 units per year
• Hyundai projects and plans production to be
  200,000 units per year by 2005
• Investment Decision Does Hyundai invest the
  necessary 1.1 billion in year 2005 to increase
  production that will yield 500,000 units per year
  by 2010?
• A great test run and indicator of Hyundais
  potential as it plans to become a global
  automotive player

4
Agenda.

• Case Study Introduction
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

5
Hyundai History Development

• Established in 1967, Hyundai is presently South
  Koreas 1 carmaker, manufacturing dozens of
  models of cars, vans, and minivans
• Throughout the past two decades, Hyundai
  introduced various models Pony, Excel, Scoupe,
  Sonata, and Accent.
• In 1990, Hyundai introduced its own engine
  design, the Alpha. Two years later, it
  introduced its second-generation engine, the
  Beta.
• Acquired a 51 stake in Kia Motors in 1998
• In 2001, Hyundai sold a 9 stake to
  DaimlerChrysler to strengthen its global market
  position and to boost sales abroad

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Hyundai Current Market Share
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Agenda.

• Case Study Introduction
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

8
South Korea Economic Study

• South Korea went from having a GDP as low as
  Algerias in 1961 to becoming the worlds 11th
  largest economy
• Started to export goods like steel, automobiles,
  and ships.
• South Korea came a long way from the days when it
  siphoned its scarce capital into strategic
  industries
• Politicians and bureaucrats became the
  instruments for large businesses, large wage
  increases and foolish business decisions
  diminished competitiveness, and banks were
  ordered by the government to prop up large firms
• These things were all for not when the Asian
  Financial Crisis hit South Korea.

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South Korea Economic Study

• The Korean Won fell by 54 to 1962 Won/
• The KOSPI fell by more than 65 in 1997-1998
• Several major companies went bankrupt
• GDP shrank by 5.8 during this crisis time

10
South Korea Political Climate

• In 1997, Kim Dae-Jung was elected as President
• Kim won a Nobel Peace Prize for his commitment to
  Democracy and his reconciliation efforts with the
  North
• Historical, first meeting between the North and
  the South to discuss joint unification in 2000
• South Koreas foreign policy calls for the
  peaceful resolve of their situation with
  Communist North and any action necessary to
  maintain its own state of democracy
• Political tension continues to brew within the
  Korean peninsula to this day

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Agenda.

• Case Study Introduction.
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

12
Asian Financial Crisis Pre-crisis

• South Koreas postwar economy was envy of other
  developing countries. System of
• High savings
• Close cooperation between government and business
• Export oriented
• GNP rose from US200 (1960) to US11,500 (1996)

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Asian Financial Crisis Crisis

• Fostered corruption and speculation
• Business bankruptcies and employment insecurity
• Sharp rise in interest rates
• Dramatic fluctuations of exchange rate
• Collapse of stock price
• Exodus of foreign currency
• Major economic crisis and subsequent labor unrest
  in 1997
• General strike called
• Biggest-ever IMF bailout, 57 billion rescue
  package

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Asian Financial Crisis Recovery

• Strong recovery in 1999-2000, negatively affected
  by global economic slowdown, recover in 2002
• Fuelled by domestic demand
• Increased government spending
• Reasons for recovery
• Break the hold of chaebols over financial sector
• Economy opened up to short and long-term capital
  from abroad
• Companies comply with international accounting
  standards
• Foreigners account for 40 percent of stock market
  transactions

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Agenda.

• Case Study Introduction.
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

17
China Macro Overview

• Chinas doors opened to the world in 1978
• Experienced over 20 years unprecedented economic
  growth
• Convert from command economy to market economy
• Role of State Owned Enterprises (SOEs)
• Challenge of dismantling

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China and the WTO

• After 15 years of attempts, China joined the
  World Trade Organization on September 15, 2001
• Over next 5 years, China will remove barriers to
  entry
• Improve external economic relations
• Bring in increased competition
• Increase speed of economic reform

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Economic Performance

• Large increases in per capita income
• Rise in non-state sector activity
• Growth in exports and domestic demand

20
Foreign Direct Investment

• During 2002, China was the worlds leading
  recipient of FDI
• China has reduced its import tariff on
  automobiles and auto parts

21
Agenda.

• Case Study Introduction.
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

22
Chinas Automobile Industry

• State of undergrowth
• Due to past regulation of Chinese government
• Currently about 25 factories
• Manufacturers cannot meet quotas
• Steady development and progress over last couple
  years
• Yearly increase of 6.63 from 1995

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Automotive Industry Outlook

• Very promising future

• Opening up of Chinese Market
• Implementation of mass production techniques
• Increase in manufacturing technology

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Agenda.

• Case Study Introduction.
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

26
Hyundai Financial Analysis.

• After the financial crisis
• Sales of 20 billion worldwide
• Hyundai has invested 6.25 billion in global
  expansion
• From 300 D/E to 50 D/E
• Doubled financial ratios across the board
• Assets, Revenue, Units Sold, Return on Sales
• Currently trades around 24,000 KRW (4/9/03)

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Cost of Capital Inputs.

• Goldman Sachs Integrated Model
• Model Inputs
• Risk Premium
• Instead of using the US risk premium of 4.89
  which represents the geometric mean of the
  historical returns from 1961, we decided to use a
  risk premium of 9.44. Our reasoning for this
  change primarily deals with our assumption that
  the previous risk premium wouldnt be an accurate
  representation of returns in this particular
  model. The latter risk premiums are those
  returns only from 1991, a reasonable change being
  that we were valuing an emerging market company.

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Cost of Capital Inputs.

• Sovereign Yield Spread
• To calculate this spread, which is crucial in
  this model, we subtracted the 10 year US bond
  rate of 3.87 from the 10 year Korean bond rate
  of 8.80.
• Although we could only find a 3 year Korean bond
  rate, we prorated this rate over 10 years.
• Appropriate Discount Rate
• 13.71

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Equity Valuation.
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Equity Valuation Summary.

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

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Agenda.

• Case Study Introduction.
• Hyundai Motor Company
• South Korea Overview
• Impact of the Asian Financial Crisis
• China Overview
• Chinese Automotive Industry
• Hyundai Financial Analysis
• Case Solution

32
Case Study Summary.

• Hyundai agreed to pay 250 million in a joint
  venture with Beijing Automotive.
• Starting at 100,000 units in 2003, plans to
  expand to 200,000 units by 2005.
• If the production is a success, Hyundai will
  invest 1.1 billion to increase productivity to
  500,000 by 2010.
• Is the investment in Chinas emerging market a
  good move by Hyundai?

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Project Summary Inputs.

• Cash Flows Assumptions
• Invoice prices of the Sonata Elantra are global
  prices
• After finding this revenue stream, we calculated
  the cost of each car by using Hyundais historic
  profit margin per car of 20.
• 50 of revenue would go to Beijing Automotive

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Project Summary Inputs.

• Cost of Capital
• In our previous valuation of Hyundai, we
  calculated the relative cost of capital for all
  Hyundais future projects of 13.71.
• Appropriate discount rate since Hyundai will
  finance the project with firm assets like equity
  and cash.

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Project Summary Inputs.

• Production
• Starting at 100,000 units, production will
  increase by 50,000 till 2005 ultimately producing
  200,000 units
• From 2005 to 2010, production will increase
  60,000 units per year

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Hyundai-Beijing MotorProject Valuation.
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Project Summary.

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

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Project Outlook

• In order to be successful
• Must form synergies on all levels with China and
  Beijing Automotive
• Hyundai must use their experience in investing in
  4 other plants in China
• Take advantage of the first mover opportunity in
  Chinas deregulated auto market

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Relevance

• Great opportunity for Hyundais business
  development
• Tremendous global growth potential
• Bottom line There is lots of money to be
  discovered and made in the emerging markets of
  Korea and China!!!

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Thank You.Questions?