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,
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 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 19971998
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 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

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

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

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

Role 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

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

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 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 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

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+(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.

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.

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

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.

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 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
discovered and made in the emerging
markets of Korea and China!!!

Thank You.

Questions?