Hyundai Motor Company –
Beijing Automotive Joint Venture
April 30th, 2003
Topics in Emerging Markets
Richard Lee
Kevin Park
Michael Cheng
Agenda.
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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.
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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.
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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
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Established in 1967, Hyundai is presently South Korea’s #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
Hyundai Current Market Share
Agenda.
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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
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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, 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 19971998
 Several major companies went bankrupt
 GDP shrank by 5.8% during this crisis time
South Korea Political Climate
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In 1997, Kim Dae-Jung was elected as President
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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 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
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Agenda.
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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
 South
Korea’s 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
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Fostered corruption and speculation
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Business bankruptcies and employment insecurity
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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
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General strike called
Biggest-ever IMF bailout, $57 billion rescue package
Asian Financial Crisis: Recovery
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Strong recovery in 1999-2000, negatively affected by
global economic slowdown, recover in 2002
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Fuelled by domestic demand
Increased government spending
Reasons for recovery:
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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
South Korea GDP (1990-2007)
700,000
600,000
500,000
400,000
300,000
200,000
100,000
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
0
Agenda.
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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
 China’s
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doors opened to the world in 1978
Experienced over 20 years unprecedented
economic growth
 Convert
from command economy to
market economy
 Role
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of State Owned Enterprises (SOEs)
Challenge of dismantling
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
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Improve external economic relations
Bring in increased competition
Increase speed of economic reform
Economic Performance
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Large increases in per capita income
Rise in non-state sector activity
Growth in exports and domestic demand
GDP (1980-2007)
12000
10000
China
8000
Hong Kong
6000
Taiwan
4000
Japan
2000
0
19
80
19
84
19
88
19
92
19
96
20
00
20
04
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South Korea
Foreign Direct Investment
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During 2002, China
was the world’s
leading recipient of
FDI
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China has reduced its
import tariff on
automobiles and auto
parts
Agenda.
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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
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of undergrowth
Due to past regulation of Chinese government
 Currently
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about 25 factories
Manufacturers cannot meet quotas
 Steady
development and progress over
last couple years
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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.
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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
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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
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Currently trades around 24,000 KRW (4/9/03)
Cost of Capital Inputs.
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Goldman Sachs Integrated Model:
R  rf  SYS   m
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Model Inputs:
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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 wouldn’t 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.
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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%.
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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
0.41
9.44%
Geometric average from Damadoran
http://pages.stern.nyu.edu/~adamodar/pc/datasets/histimpl.xls
Yahoo! Finance as of March 28, 2003
3.87%
8.80%
Bloomberg Website
www.businessweek.com:/2000/00_02/b3663255.htm
4.93%
SYS = Local Market Bond Rate - US Bond Rate
SYS Formula taken from J.P. Mei lecture March 10, 2003
13.71%
Growth Rate:
Goldman Sachs Integrated Formula
7.00%
Free Cash Flow to Equity 2002:
420,500,000,000.00
Information taken from Deutsche Bank Valuation of Hyundai Motor
6,705,039,938,006.68
30,605.44
Korean Won
25,000
Korean Won
Actual Price 3/38/03
Recommendation:
Information taken from J.P. Mei
http://pages.stern.nyu.edu/~jmei/b40/L9s1.ppt
5,477,000,000,000.00
219,080,000.00
W25,000
Source
Discount Rate Formula
r= rf+SYS+β(US Market Premium)
Equity Valuation: FCFt+1/(r-g)
Price Per Share:
Bloomberg as of March 28, 2003
BUY
Hyundai is undervalued.
Equity Valuation Summary.
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Conclusion on Hyundai Motor Company:
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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
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Hyundai is an undervalued company that has great
global potential..
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.
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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.
the investment in China’s emerging
market a good move by Hyundai?
Project Summary Inputs.
 Cash
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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
Hyundai’s historic profit margin per car of
20%.
50% of revenue would go to Beijing
Automotive
Project Summary Inputs.
 Cost
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of Capital:
In our previous valuation of Hyundai, we
calculated the relative cost of capital for all
Hyundai’s 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
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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
Hyundai-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 $
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
Profit:
Elantra:
Sonata:
Total:
$
$
$
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
Hyundai's Share
50% Share of Profits:
$
125,480 $ 188,220 $ 250,960 $ 326,248 $ 401,536 $ 476,824 $ 552,112 $ 627,400
Cost of
capital:
13.71%
NPV:
Investments:
Cashflows:
PV of Plant:
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
NPV
$152,633.45 POSITIVE!!!!
Project Summary.
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After doing a DCF valuation of the HyundaiBeijing 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
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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
discovered and made in the emerging
markets of Korea and China!!!
Thank You.
Questions?