Hyundai Motor Company Beijing Automotive Joint Venture

April 30th, 2003 Topics in Emerging Markets

Richard Lee Kevin Park Michael Cheng

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

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

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

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, secondthe 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

Hyundai Current Market Share

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

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.

South Korea Economic Study

 The

Korean Won fell by 54% to 1962 Won/$  The KOSPI fell by more than 65% in 199719971998  Several major companies went bankrupt  GDP shrank by 5.8% during this crisis time

South Korea Political Climate



In 1997, Kim Dae-Jung was elected as President Dae

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

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

Asian Financial Crisis: Pre-crisis Pre 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 US$200 (1960) to US$11,500 (1996)

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 BiggestBiggest-ever IMF bailout, $57 billion rescue package

Asian Financial Crisis: Recovery



Strong recovery in 1999-2000, negatively affected by 1999global 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 longCompanies comply with international accounting standards Foreigners account for 40 percent of stock market transactions

South Korea GDP (1990-2007)

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0

4 20 0

19 9

20 0

19 9

19 9

19 9

19 9

20 0

20 0

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

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 of State Owned Enterprises (SOEs)

 Role


Challenge of dismantling

China and the WTO

 After

15 years of attempts, China joined the World Trade Organization on September 15, 2001 next 5 years, China will remove barriers to entry
  

 Over

Improve external economic relations Bring in increased competition Increase speed of economic reform

Economic Performance
  

Large increases in per capita income Rise in non-state sector activity nonGrowth in exports and domestic demand
GDP (1980-2007)
12000 10000 8000 6000 4000 2000 0 China Hong Kong Taiwan Japan South Korea

19 80 19 84 19 88 19 92 19 96 20 00 20 04

Foreign Direct Investment



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

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

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

Automotive Industry Outlook

 Very

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

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

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)

Cost of Capital Inputs.



Goldman Sachs Integrated Model:

R ! r f  SYS  F Pm


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.

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%

Equity Valuation.
Goldman Sachs Integrated Model Inputs: Riskfree Rate 4.91% Beta Korean MSCI World Beta Source Risk Premium 1991-2001 Source Market Value of Equity Market Cap Shares Outstanding Share Price Source Government Rates 10 Year US Bond Rate 10 Year Korean Bond Rate Sovereign Yield Spread Source Discount Rate Formula r= rf+SYS+ (US Market Premium Growth Rate: Free Cash Flow to Equity 2002: Equity Valuation: FCFt+1/(r-g) Price Per Share: Actual Price 3/38/03 Recommendation: BUY 0.41 Bloomberg as of March 28, 2003 Information taken from J.P. Mei http://pages.stern.nyu.edu/~jmei/b40/L9s1.ppt Geometric average from Damadoran http://pages.stern.nyu.edu/~adamodar/pc/datasets/histimpl.xls 9.44%

5,477,000,000,000.00 219,080,000.00 W25,000 Yahoo! Finance as of March 28, 2003 3.87% 8.80% 4.93% Bloomberg Website www.businessweek.com:/2000/00_02/b3663255.htm SYS = Local Market Bond Rate - US Bond Rate SYS Formula taken from J.P. Mei lecture March 10, 2003 Goldman Sachs Integrated Formula

13.71% 7.00% 420,500,000,000.00 6,705,039,938,006.68 30,605.44 25,000

Information taken from Deutsche Bank Valuation of Hyundai Motor

Korean Won Korean Won Hyundai is undervalued.

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. won. Currently, Hyundai Motor Corp (Ticker: 05380.KS), last traded at 25,000 won on March 28, 2003. Hyundai is an undervalued company that has great global potential..

Recommendation: BUY


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

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?

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

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.

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

HyundaiHyundai-Beijing Motor Project Valuation.

DCF Valuation on Hyundai-Bejing Auto Joint Venture in China Year: Units: Elantra: Sonata: 2003 100,000 50,000 50,000 2004 150,000 75,000 75,000 2005 200,000 100,000 100,000 2006 260,000 130,000 130,000 2007 320,000 160,000 160,000 2008 380,000 190,000 190,000 2009 440,000 220,000 220,000 2010 500,000 250,000 250,000 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 $ Sonata @ $ 11,057.60 $ Profit: Elantra: Sonata: Total: Hyundai's Share 50% Share of Profits: Cost of capital: NPV: Investments: Cashflows: PV of Plant: NPV

450,960 $ 676,440 $ 901,920 $ 1,172,496 $1,443,072 $1,713,648 $1,984,224 $2,254,800 552,880 $ 829,320 $ 1,105,760 $ 1,437,488 $1,769,216 $2,100,944 $2,432,672 $2,764,400

$ $ $

112,740 $ 169,110 $ 225,480 $ 293,124 $ 360,768 $ 428,412 $ 496,056 $ 563,700 138,220 $ 207,330 $ 276,440 $ 359,372 $ 442,304 $ 525,236 $ 608,168 $ 691,100 250,960 $ 376,440 $ 501,920 $ 652,496 $ 803,072 $ 953,648 $1,104,224 $1,254,800

125,480 $ 188,220 $ 250,960 $ 326,248 $ 401,536 $ 476,824 $ 552,112 $ 627,400

13.71% In Millions ($250,000) ($1,100,000) $ 125,480 $ 188,220 $ 250,960 $ 326,248 $ 401,536 $ 476,824 $ 552,112 $ 627,400 $ 110,351 $ 145,569 $ 170,690 $ 195,143 $ 211,218 $ 220,580 $ 224,614 $ 224,468 $152,633.45 POSITIVE!!!!

Project Summary.


After doing a DCF valuation of the HyundaiHyundaiBeijing 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.

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

Relevance
 Great

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

Thank You.

Questions?