Hyundai Motor Company – Beijing Automotive Joint Venture

1. Hyundai Motor Company – Beijing Automotive Joint Venture April 30th, 2003 Topics in Emerging Markets Richard Lee Kevin Park Michael Cheng

2. 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

3. 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

4. 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

5. 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

6. Hyundai Current Market Share

7. 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

8. 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.

9. 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

10. 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

11. 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

12. 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)

13. 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

14. 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

16. 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

17. 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

18. 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

19. Economic Performance • Large increases in per capita income • Rise in non-state sector activity • Growth in exports and domestic demand

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

21. 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

22. 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

24. Automotive Industry Outlook • Very promising future • Opening up of Chinese Market • Implementation of mass production techniques • Increase in manufacturing technology

25. 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

26. 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)

27. Cost of Capital Inputs. • Goldman Sachs Integrated Model: • 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.

28. 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%

29. Equity Valuation.

30. 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..

31. 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

32. 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 China’s emerging market a good move by Hyundai?

33. 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

34. 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.

35. 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

36. Hyundai-Beijing MotorProject Valuation.

37. 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.

38. 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

39. 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!!!

40. Thank You.Questions?