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					  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 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 History & Development
   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.
   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 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 1997-
  1998
 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
       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
                    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
 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
   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
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
          South Korea GDP (1990-2007)

700,000
600,000
500,000
400,000
300,000
200,000
100,000
     0
       90

       92

       94

       96

       98

       00

       02

       04

       06
    19

    19

    19

    19

    19

    20

    20

    20

    20
                     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
 China’s 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
           China and the WTO
         years of attempts, China joined
 After 15
 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
           Economic Performance
   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
                                              South Korea
               2000
                  0
                   80

                   84

                   88

                   92

                   96

                   00

                   04
                19

                19

                19

                19

                19

                20

                20
       Foreign Direct Investment
   During 2002, China
    was the world’s
    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
   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
   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  rf  SYS   m
   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 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.
   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%    Bloomberg as of March 28, 2003
Beta
Korean MSCI World Beta                               0.41   Information taken from J.P. Mei
Source                                                      http://pages.stern.nyu.edu/~jmei/b40/L9s1.ppt
Risk Premium
1991-2001                                          9.44%    Geometric average from Damadoran
Source                                                      http://pages.stern.nyu.edu/~adamodar/pc/datasets/histimpl.xls
Market Value of Equity
Market Cap                         5,477,000,000,000.00
Shares Outstanding                       219,080,000.00
Share Price                                    W25,000
Source                                                      Yahoo! Finance as of March 28, 2003
Government Rates
10 Year US Bond Rate                               3.87%    Bloomberg Website
10 Year Korean Bond Rate                           8.80%    www.businessweek.com:/2000/00_02/b3663255.htm
Sovereign Yield Spread
                                                   4.93%    SYS = Local Market Bond Rate - US Bond Rate
Source                                                      SYS Formula taken from J.P. Mei lecture March 10, 2003
Discount Rate Formula
r= rf+SYS+β(US Market Premium)                   13.71%     Goldman Sachs Integrated Formula

Growth Rate:                                       7.00%

Free Cash Flow to Equity 2002:         420,500,000,000.00   Information taken from Deutsche Bank Valuation of Hyundai Motor

Equity Valuation: FCFt+1/(r-g)     6,705,039,938,006.68
Price Per Share:                              30,605.44     Korean Won

Actual Price 3/38/03                              25,000    Korean Won

Recommendation:                  BUY                        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.
       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..
                 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.
   the investment in China’s emerging
 Is
  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
      Hyundai’s 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
      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
     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:                           2003         2004      2005        2006        2007        2008      2009      2010
Units:                       100,000      150,000   200,000     260,000     320,000     380,000   440,000   500,000
Elantra:                      50,000       75,000   100,000     130,000     160,000     190,000   220,000   250,000
Sonata:                       50,000       75,000   100,000     130,000     160,000     190,000   220,000   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 $       450,960 $ 676,440 $ 901,920 $ 1,172,496 $1,443,072 $1,713,648 $1,984,224 $2,254,800
Sonata @ $ 11,057.60 $       552,880 $ 829,320 $ 1,105,760 $ 1,437,488 $1,769,216 $2,100,944 $2,432,672 $2,764,400

Profit:
Elantra:                 $   112,740 $ 169,110 $ 225,480 $ 293,124 $ 360,768 $ 428,412 $ 496,056 $ 563,700
Sonata:                  $   138,220 $ 207,330 $ 276,440 $ 359,372 $ 442,304 $ 525,236 $ 608,168 $ 691,100
Total:                   $   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:                     In Millions
Investments:                ($250,000)                  ($1,100,000)
Cashflows:                $ 125,480 $ 188,220 $ 250,960 $ 326,248 $ 401,536 $ 476,824 $ 552,112 $ 627,400
PV of Plant:              $ 110,351 $ 145,569 $ 170,690 $ 195,143 $ 211,218 $ 220,580 $ 224,614 $ 224,468

NPV                      $152,633.45 POSITIVE!!!!
            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.
               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
 discovered and made in the emerging
 markets of Korea and China!!!
Thank You.

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