Hyundai Motor Company ² 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 Hyundai¶s 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 sold a 9% stake to DaimlerChrysler to strengthen its global market position and to boost sales abroad . manufacturing dozens of models of cars. it introduced its second-generation engine. Hyundai introduced its own engine design. Acquired a 51% stake in Kia Motors in 1998 In 2001. secondthe Beta. Two years later. the Alpha. Scoupe. and minivans Throughout the past two decades. Sonata. and Accent. In 1990.Hyundai History & Development      Established in 1967. Excel. Hyundai introduced various models: Pony. vans. Hyundai is presently South Korea¶s #1 carmaker.

Hyundai Current Market Share .

        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 .Agenda.

. 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. and ships.South Korea Economic Study      South Korea went from having a GDP as low as Algeria¶s in 1961 to becoming the world¶s 11th largest economy Started to export goods like steel. large wage increases and foolish business decisions diminished competitiveness. 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. automobiles.

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 .

first meeting between the North and the South to discuss joint unification in 2000 South Korea¶s 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 .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.

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

System of: ‡ High savings ‡ Close cooperation between government and business ‡ Export oriented ‡ GNP rose from US$200 (1960) to US$11.Asian Financial Crisis: Pre-crisis Pre South Korea¶s postwar economy was envy of other developing countries.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 .

000 100.000 600.000 200.000 500.000 300.000 0 2 4 6 0 8 0 2 4 20 0 19 9 20 0 19 9 19 9 19 9 19 9 20 0 20 0 6 .000 400.South Korea GDP (1990-2007) 700.

        Case Study Introduction.Agenda. 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  China¶s  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 .

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

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 .

China was the world¶s leading recipient of FDI China has reduced its import tariff on automobiles and auto parts  .Foreign Direct Investment  During 2002.

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·s 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 .

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

& Return on Sales  Currently trades around 24.Hyundai Financial Analysis.25 billion in global expansion From 300% D/E to 50% D/E Doubled financial ratios across the board ‡ Assets.  After   the financial crisis:   Sales of $20 billion worldwide Hyundai has invested $6.000 KRW (4/9/03) . Revenue. Units Sold.

Our reasoning for this change primarily deals with our assumption that the previous risk premium wouldn¶t be an accurate representation of returns in this particular model.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 4.44%. a reasonable change being that we were valuing an emerging market company.89% which represents the geometric mean of the historical returns from 1961. The latter risk premiums are those returns only from 1991. we decided to use a risk premium of 9.

 Although we could only find a 3 year Korean bond rate.  Appropriate Discount Rate ‡ 13.  Sovereign Yield Spread ‡ To calculate this spread. which is crucial in this model. we prorated this rate over 10 years.87% from the 10 year Korean bond rate of 8. we subtracted the 10 year US bond rate of 3.Cost of Capital Inputs.80%.71% .

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. .000.605. Goldman Sachs Integrated Model Inputs: Riskfree Rate 4.705.87% 8.stern.039.com:/2000/00_02/b3663255.68 30.P.000. Mei lecture March 10.nyu.nyu.000 Yahoo! Finance as of March 28.000.00 219.Equity Valuation.71% 7.ppt Geometric average from Damadoran http://pages.44 25. Mei http://pages.500.44% 5.edu/~jmei/b40/L9s1.93% Bloomberg Website www.00% 420.stern.080. 2003 3. 2003 Goldman Sachs Integrated Formula 13.000.00 W25.000.41 Bloomberg as of March 28.US Bond Rate SYS Formula taken from J.80% 4.938.00 6.businessweek.edu/~adamodar/pc/datasets/histimpl.000.xls 9.006.477.htm SYS = Local Market Bond Rate .000 Information taken from Deutsche Bank Valuation of Hyundai Motor Korean Won Korean Won Hyundai is undervalued.P. 2003 Information taken from J.

000 won on March 28.  Recommendation: BUY  .. 2003. won. translates into a target price of 30. having 219 million shares outstanding. Hyundai Motor Corp (Ticker: 05380.44 won. Hyundai.605. Currently. Hyundai is an undervalued company that has great global potential. we found the value of the company as 6. last traded at 25.7 trillion won.Equity Valuation Summary.  Conclusion on Hyundai Motor Company:    Using the Gordian Growth stable growth DCF model for equity valuation.KS).

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 .

If the production is a success.1 billion to increase productivity to 500. plans to expand to 200.  Hyundai  agreed to pay $250 million in a joint venture with Beijing Automotive.Case Study Summary.   Is the investment in China¶s emerging market a good move by Hyundai? .000 units in 2003.000 by 2010.000 units by 2005. Hyundai will invest $1. Starting at 100.

we calculated the cost of each car by using Hyundai¶s historic profit margin per car of 20%.Project Summary Inputs. 50% of revenue would go to Beijing Automotive .  Cash  Flows Assumptions:   Invoice prices of the Sonata & Elantra are global prices After finding this revenue stream.

Appropriate discount rate since Hyundai will finance the project with firm assets like equity and cash.Project Summary Inputs.  Cost  of Capital:  In our previous valuation of Hyundai. we calculated the relative cost of capital for all Hyundai¶s future projects of 13.71%. .

Project Summary Inputs. production will increase 60.000 units From 2005 to 2010.000 till 2005 ultimately producing 200.  Production   Starting at 100.000 units per year .000 units. production will increase by 50.

45 POSITIVE!!!! .672 $2.040.800 $ 125.351 $ 145.254.500 Sonata @ $ 13.372 $ 442.960 $ 676.690 $ 195.000 75.100 $ 1.127.100.400 13.960 $ 326.216 $2.000 220.248 $ 401.000 50.20 $ Sonata @ $ 11.000 2009 440.00 $ 691.HyundaiHyundai-Beijing Motor Project Valuation.000 220.536 $ 476.400 $ $ $ 112.211.818.496 $1.760 $ 1.248 $ 401.400 $ 1.200 $ 1.000 250.236 $ 608.220 $ 207.822.124 $ 360.000 100.860 $2.800 552.180 $3.536 $ 476.000 2006 260.000 130.840 $2.000) ($1.960 $ 376.000 2007 320.072 $1.944 $2.218 $ 220.400 $ 110.280 $2. DCF Valuation on Hyundai-Bejing Auto Joint Venture in China Year: Units: Elantra: Sonata: 2003 100.443.056 $ 563.00 $ 563.824 $ 552.172.880 $ 829.110 $ 225.796.768 $ 428.614 $ 224.520 $2.036.330 $ 276.000 2004 150.000 130.220 $ 250.480 $ 188.000 100.000 190.840 $3.764.224 $2.000 160.500 Cost: Elantra @ $ 9.650 $ 1.000 160.060 $2.274.824 $ 552.072 $ 953.143 $ 211.000 Revenue: In Millions Elantra @ $ 11.320 $ 1.440 $ 901.412 $ 496.254.920 $ 1.496 $ 803.769.550 $ 1.382.455.740 $ 169.920 $ 652.000 2008 380.440 $ 359.432.626.440 $ 501.100.112 $ 627.057.700 138.168 $ 691.480.713.580 $ 224.71% In Millions ($250.220 $ 250.984.142.100 250.480 $ 293.700 $ 845.480 $ 188.437.104.112 $ 627.60 $ Profit: Elantra: Sonata: Total: Hyundai's Share 50% Share of Profits: Cost of capital: NPV: Investments: Cashflows: PV of Plant: NPV 450.803.105.019.000 190.000 50.000 2010 500.224 $1.000 250.465.000 2005 200.569 $ 170.960 $ 326.633.304 $ 525.648 $1.620 $1.000) $ 125.468 $152.000 75.488 $1.648 $1.

political.633. . we believe that it is a reasonable and rational valuation and will offer a reference point for the project. we get a positive NPV of $152. Although this valuation may not be entirely accurate because factors like inflation.Project Summary. social and economic risk are not wholly accounted for.   After doing a DCF valuation of the HyundaiHyundaiBeijing Motor project.450 for the 8 year 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 China¶s deregulated auto market   .

Relevance  Great opportunity for Hyundai¶s 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? .