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

98

00
96

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
 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

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.
 Is the investment in China’s 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
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.

Questions?