Hyundai Motor Company-

Topics in Emerging MarketsProf. Mei

April 9, 2003

Michael Cheng- mpc238@stern.nyu.eduRichard Lee- rl392@stern.nyu.eduKevin Park- kgp203@stern.nyu.edu

Table of Contents:

1

Executive Summary: 3

Case Study:

Introduction: 4

Case Background: 5

Hyundai Motor Corp Background & History: 6

South Korean Macro Study:

Economic Background: 7

Social Climate: 9

Political Condition: 10

China Macro Study:

Overview: 12

China and the WTO: 13

Korean Foreign Direct Investments in China: 14

Current Chinese Automotive Industry: 15

China’s Automotive Industry Outlook: 16

Asian Financial Crisis:

Summary: 17

Recovery: 18

Hyundai Motor Corp Financial Analysis:

Introduction: 20

Detailed Financial Analysis: 21

Equity Valuation: 24

Conclusion: 24

Case Solution:

Project Valuation: 25

Input Descriptions: 25

Conclusion: 27

Exhibits:

Hyundai Motor Corp Financial Statements 29

Bibliography: 32

2

Executive Summary:

In this case study, we will examine the probability of success of Hyundai’s new

joint venture with Beijing Automotive in China. On February 5, 2002, Hyundai

announced a 50-50 venture to set up a production facility in China. The joint venture

plant to be set up in Beijing will initially produce 100,000 units of Sonatas and Elantras,

then gradually increase to 200,000 units by 2005 and will cost an estimated $250 million.

If the venture is a success within these years, then Hyundai will invest an additional $1.1

billion to increase production to 500,000 by 2010’s year-end.

Hyundai, established in 1967, has come along way from its humble beginnings.

Riding the wave of South Korea’s economic growth in the past three decades, Hyundai

has become a global player in the automotive industry. In 25 years, Hyundai grew from

producing a few hundred cars per year, to exporting cumulative shipments of over 5.5

million units. As such, it is imperative that Hyundai strives to continue to expand and

diversify in other countries, namely, emerging markets. Attributing to this growth are

joint ventures with other automotive manufacturers.

We believe that there is tremendous opportunity to be realized in these

strengthening Asian economies; China is one of the leaders in receiving foreign direct

investments in the world, and this is a strong testament to its economic potential in the

near future. This case will introduce students to two of the strongest emerging markets

and will explore the automotive relationship between Korea and China. Our hope is that

students will recognize this potential and take advantage of it as they embark on their

professional careers.

3

Hyundai Motor Corp Case Study:Building a Car Manufacturing Plant in Beijing

Introduction:

Towards the end of a monthly board meeting, Richard Lee, CEO of Hyundai

Motor Co., leaned over the table towards his CFO, Guan Woo Park, and asked, “Do you

think we should invest the projected $1.1 billion in 2005 in our newly-constructed

manufacturing plant in China to boost production to our desired 500,000 units per year by

2010?”

Mr. Park confidently replied, “Let me get a team together and run the numbers,

and I will have my recommendation on your table in no time at all.”

“Ok, get to work on that, and have a report for the Board the next time we meet.”

“Got it, sir!”

Mr. Park thought about his task for a moment, and before starting, he required

extra knowledge and expertise about China and its automotive industry. Mr. Park

immediately proceeded to call his good colleague, Michael Cheng, who worked for

Mckinsey & Co. in China. Mr. Cheng had a vast knowledge of the automotive industry

in China. He previously worked as a car salesman in China for several years and was

very familiar with the country’s imports and exports of automobiles. Before valuating

the project, Mr. Park felt like he still needed someone to paint a better picture of China’s

demography as well as its political and economic status. Therefore, he called upon his

good friend, Mr. J.P. Mei, who works for the government of China. Mr. J.P. Mei was

also very familiar with foreign direct investment processes through a large number of

projects dealing with global companies.

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Mr. Park flew all of his buddies in from China, and the group got started on

building a recommendation for the Board of Hyundai Motor Company. Mr. Park felt

confident and excited as he embarked on his recommendation for the manufacturing plant

in China. But before they crunched any numbers, the group had a couple of major

questions they had to consider: How should this project be financed? What is an

appropriate cost of capital for the project? How will revenues be projected from year to

year?

The three colleagues stared at each other for a moment, scratched their heads, and

strapped on their thinking caps....

Case Background:

In recent years, the Asian financial markets have suffered tremendously, to say

the least. Only recently have the Asian markets improved. Of the countries in the Asian

financial crisis, South Korea has been one of the countries that survived the crash and is

now thriving. Scandals, corruption, and bad accounting are in the process of being

addressed, and the traditional “Jaebuls” are slowly disappearing and being replaced with

more structured management. Korean businesses have experienced and survived the

worst part of the Asian market crisis and the future of those companies has much

potential in becoming global players in all industries.

China, the most populous country in the world, has just opened its doors to the

world of automotive trade. Analysts have commented that for Chinese automakers to

survive, they must partner up or parish. Hyundai, having already set up four other

production plants in China, has been successful. However, with a volatile global market

and changing trends, will Hyundai be able to make their biggest investment project pay

off?

5

Hyundai Motor Corp. History and Background

Hyundai Motor Corp was established in 1967 and is South Korea’s #1 carmaker.

Hyundai product line includes roughly a dozen models of cars and minivans, trucks,

buses, and other commercial vehicles. In 1998, it acquired a 51% stake in Kia Motors,

resulting in its position as the leading carmaker in Korea. Hyundai's main exports

include the Accent and Sonata models, while its Korean domestic models include the

Atoz sub-compact.

Hyundai hopes to establish a strong worldwide manufacturing presence.

DaimlerChrysler has purchased a 9% stake in Hyundai as part of a plan to boost

DaimlerChrysler's Asian market presence. The two companies plan to form a joint

venture to develop small cars for the global market.

It initially began manufacturing cars and light trucks through a joint venture with

Ford. However, by the early 1970s Hyundai was ready to build cars under its own name

by debuting its subcompact Pony in 1974.

The Pony was a great success domestically and soon propelled Hyundai to the top

spot among Korea's carmakers. During the mid-1970s, the company began exporting the

Pony to El Salvador and Guatemala. Several years later, Hyundai started to mass

produce and anticipated penetrating strategies into markets around the world including

Canada.

Hyundai then introduced the Hyundai Excel in 1985. That very year the company

established a subsidiary in the United States, the Hyundai Motor America. Hyundai

exported Excels to the US and sales soared the next year. Building on this success, it

built a factory in Quebec, Canada. The company introduced its first sports car, the

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Scoupe, in 1990. The following year it developed the first Hyundai-designed engine,

called the Alpha. Two years later Hyundai unveiled its second-generation proprietary

engine, the Beta.

By 1998 Hyundai was beginning to feel the pinch of the Asian economic crisis as

domestic demand dropped drastically. However, the decrease in Korean demand was

largely offset by exports. Hyundai not only established a joint venture with

DaimlerChrysler but went on to establish a collaboration with Mitsubishi Motors to

further develop small cars for the global market. It is also important to note that Hyundai

acquired Kia Motors in 1998, thereby increasing their market share in South Korea.

Hyundai’s Market Share in South Korea:

South Korean Macro Study

Economic Background:

The South’s success was quite unforeseen. The country where Park Chung Hee

seized power in 1961 had a GDP per head equal to Algeria’s. Its third-largest export was

wigs. The average life expectancy of its people was 55. But those people were well-

educated, they worked hard and they saved what they could. The government did its best

to promote development, supporting firms that succeeded in foreign markets. Thirty-six

7

years later South Korea was the world’s 11th-largest economy, with an income per head

on a par with Portugal, and had become a member of the OECD. Average life expectancy

had jumped to 71. The country had also become home to the sort of industries that a

strong military government would want plenty of, such as giant steel firms, car makers

and shipbuilders.

But this miracle came at a price. Outside the regime’s charmed circle, no

entrepreneur could thrive. Petty-minded officials banned such “extravagances” as neon

lights (until the 1970s), red cars (until the mid-1980s) and holidays abroad (until 1987).

Successive governments used the supposed threat of subversion by the North to justify

oppression, purges, incarceration, rigged elections, propaganda and a harsh national-

security law.

South Korea’s great achievement in the past decade has been to begin to shed this

legacy, peacefully. The country’s current president, Kim Dae Jung, is a former dissident

who was almost assassinated on the orders of one general, and sentenced to death on

trumped-up charges on the orders of another. In 1997 he was elected without a murmur

from the armed forces. And the economy has come a long way since the days when the

planning commission siphoned scarce capital into strategic industries under the country’s

five-year plan.

Yet in the past few years South Korea’s continued shortcomings have also been

plain for all to see. Politicians and bureaucrats became the instruments of big business.

During the 1990s, large wage rises and foolhardy diversification diminished Korean

companies’ competitiveness. The government, desperate to avoid failures, instructed

banks to prop up large firms. But this did not work for long: the Asian crisis knocked the

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country sideways. From peak to trough, the won fell by 54% to 1,962 to the dollar, the

stock market plunged by 65% between June 1997 and June 1998, and some of the

country’s best-known companies went bankrupt. Last year GDP shrank by 5.8%. Just

when the South Koreans thought they had made it, their economic miracle seemed to be

evaporating.

To its credit, the country has acknowledged its faults with remarkable candor. It

has not tried to blame foreigners for its troubles, nor has it hid behind tariff barriers or

currency controls. Instead, it has pledged to abandon the economic system that took it

from poverty to prosperity in a generation.

Social Climate:

To fully understand the South Korean social climate, one must recognize the

tremendous highs and the dreadful lows Korea has faced in their economy, technology,

financial markets, global relations, and their domestic politics. Over the past decade,

seemingly, South Korea has experienced what most countries have faced in their whole

history. Beginning in the early 1990’s, South Korea experienced an influx of

technological advancements, increased political certainty, and a growing economy. With

the introductions of these new aspects of Korean life, the accumulation of wealth seemed

to increase as well. Although slow at first, the continuous global investments began to

grow and soon Korea was considered one of the Four Dragons, nicknamed for having

such a growing economy and having much potential in terms of global investment

opportunities.

It was during this boom that Korea’s GDP exploded. Relative to some other

Asian countries, East and South, Korea was thriving off of a booming automotive and

9

electronics markets. Soon the GDP was seven times that of India, and nearly thirteen

times that of its communist neighbors in the North. Korea’s GDP grew so much, in fact,

that their GDP rivaled that of some European Union Countries. These were the times that

Korea and its people were thriving. Socially, people were spending more on luxury

goods and companies worldwide opened businesses and invested heavily in one of the

Four Dragons. All of the growth, wealth, and investments, however, ultimately came to a

crashing end during the Asian Financial Crisis.

As mentioned above, in 1997-1998, Korea, along with almost all of the other

developing Asian countries experienced the worst of financial times. The growth these

countries have faced in the past just could not continue. Countries now hesitated on

investing in Asian countries, being that these countries potentially have tremendous risk

involved with it. More important to the people, however, wealth, jobs, and pride were

lost. Looking back on the crisis, now that the worst is over, South Korea has rebounded

pretty nicely. In 2001, the South Korean economy has outperformed the majority of the

other Asian Countries and has continued to show much improvement from just three

years prior.

Political Condition of South Korea:

South Korea is a republic where the president, serving a term of 5 years, and the

legislature, consisting of 273 members, share power. The country has nine provinces and

six separate cities: Seoul, Pusan, Inchon, Taegu, Kwangju, and Taejon. There are several

political parties that include the Millennium Democratic Party (MDP), the Grand

National Party (GNP), the United Liberal Democrats (ULD), and the Democratic People's

Party.

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In 1997, Kim Dae-jung of the National Congress for New Politics (NCNP) won

the presidential election, defeating Lee Hoi-Chang and Rhee In-Je. On his inauguration

in February 1998, Kim stated an engagement policy toward the North based on the

separation of economic and political issues but still wanted to take a firm stance on

security. This approach has been maintained despite strong criticism from the opposing

GNP and sometimes from the North, including attempted infiltrations into the South. In

2000, Kim was awarded the Nobel Peace Prize for his commitment to democracy and his

efforts toward reconciliation with the North.

President Kim's relations with the opposition have often been contentious and heated.

The GNP remains the largest-single party in the National Assembly. However, in January

2001, President Kim's party, renamed the Millennium Democratic Party (MDP), re-

entered into a coalition with the United Liberal Democrats (ULD) led by former Prime

Minister Kim Jong-Pil. With the new coalition and an agreement from the Democratic

People's Party, President Kim established a majority power in the Assembly in February

2001.

From June 13 to 15, 2000, the leaders of the two Koreas held a historic meeting in

Pyongyang and signed a joint declaration which promised continued dialogue, the

reunion of separated family members, cultural exchanges, and the pursuit of

reunification. Following the meeting, contacts between the Republic of Korea and the

Democratic Republic of South Korea increased and the defense ministers from each

country met for the first time on Cheju Island in South Korea on September 25. In

August and November 2000 and in February 2001, the two Koreas sent delegations of

100 members of separated families to each other's capitals for reunion meetings. While

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South Koreans take pride in its democratic state, it is their hopes that their Northern

counterparts can enjoy the same civil rights, economic freedom, and lifestyle that they

possess; their foreign policy includes the peaceful resolve of their situation with

Communist North and any action necessary to maintain its own state of democracy.

Recently, however, their northern neighbor has helped fuel a global concern of war.

Armed with nuclear weapons and lead by an arguably crazy leader, North Korea has

commanded attention on the global platform. Peace treaties, foreign interventions, and

threats of war have all but decreased North Korea’s stance on communist threat.

China Macro Study

Overview:

China's doors were opened to the world in 1978 by Deng Xiaoping, and since,

China has experienced over 20 years of unprecedented economic growth, with its

economy growing faster than any other in history. China has had great success in

converting from a command economy to a market economy, moving from a rural to an

urban society, and maintaining political stability. However, China has even greater

challenges ahead. Movement of workers from inefficient state-owned enterprises

("SOEs") into the private sector brought about corruption, regional income inequality,

weak financial institutions, industrial over-capacity, price deflation and unemployment.

During China's economic development, SOEs had played a key role, providing

employment, directing investment to strategic industries and providing various social

services. Because of the broad role and importance the SOEs played in Chinese society,

dismantling them is a major challenge. Because of this history, the transition to a market

economy largely depends on the corresponding introduction of new private sector jobs

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and the pace at which SOEs can be restructured and their excess workers released. Rapid

economic growth is essential in China’s restructuring. Maintaining the SOEs weighs

down other sectors of the economy, but shutting them down precipitously could create a

political instability.

China and the World Trade Organization:

After 15 years of attempts to secure membership, China joined the World Trade

Organization ("WTO") on Sept. 15, 2001, and accessed into the WTO in December 2001.

Entering the WTO will greatly benefit China in many ways. It will increase the speed of

economic reform, improve external economic relations and bring in increased

competition. Over the next five years, China will slash tariff and non-tariff barriers, as

well as open up sectors of the economy that have long been blocked off to foreigners.

Economic Performance:

China's market-oriented reforms have had large success in economic

transformation, helping hundreds of millions of people out of poverty. There has been

large progress and increases in per capita incomes, a substantial rise in non-state sector

activity, growing integration into the global economy and an effective start to resolution

of financial sector reform. Economic growth gained momentum during 2000. Strong

fiscal spending and private consumption drove domestic demand. Export growth

accelerated to 28 percent as the global IT boom entered its final year.

The economy grew by 7.9 percent in the first half of 2001, but had a reduction in

the growth rate in the second half of 2001 as the economic slump in the developed world

affected Chinese exports, with import growth also slightly slowing. Nevertheless,

reported GDP growth remains strong despite the weakening export sector. There has been

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a strong increase in private consumption and fixed investment, reflecting strongly rising

incomes. China has not been affected by the weakening global economy as some of its

"Asian Tiger" neighbors.

Three consecutive years of expansionary fiscal and monetary policy as well as

fast-growing domestic demand helped China's economy escape the worst effects of

contagion from the Asian and Russian financial crises and the global recession of 2001.

During the period, the country has maintained the peg of its exchange rate to the US

dollar, continued to attract strong external investment and achieved robust growth. China

has substantial assets and advantages to confront future challenges. The country has

mobilized large inflows of foreign direct investment and has an enormous potential

market of newly empowered consumers with rapidly rising incomes.

Korean Foreign Direct Investment (FDI) into ChinaIn recent years, attracting foreign investment has had an irreplaceable status in

economic development in China. For twenty years, China has achieved strong economy

growth, social development and impressive improvement of living standards, which were

witnessed by the world. China has become a popular country for foreign investment.

During 2002, China was the world's leading recipient of foreign direct investment (FDI),

netting over $53 billion. China remained one of the developing world's main locations

for FDI, attracting more capital than any of its neighbors in Asia.

After China’s accession to the World Trade Organization (WTO), the government

agreed to give foreign companies increasing levels of market access for the following

five years. Following China's entry into the WTO, there will be tremendous business

opportunities for foreign companies in a large number of industries, including the

automobile industry. China has reduced its tariff on automobiles to an average rate of

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25%, and the import tariff on auto parts to an average rate of 10%. All reductions will be

completed by January 1, 2006, with 10% of reduction each year starting from the year of

2000.

China’s Current Automobile Industry Condition

China's current automobile industry is in a state of undergrowth. Many car

manufacturers cannot meet their quotas, and their production capacity has been idle for

long periods of time. Factories have since been waiting to stimulate the demand and

grow the market for automobiles. There are now about 25 factories producing various

types of automobiles nationwide.

China has grown into the framework of a market economy over the past couple of

decades. However, the automobile industry, one of the most competitive industries in

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China, still remains under a planned economy system. And so, without competition in its

real sense, the automobile industry will never grow up and mature.

In the last couple of years or so, there has been some steady development and

progress in the auto industry. The introduction of mass production and further

reconstruction has brought about a bolstering of the industry and its economic benefits

are beginning to show.

In 2002, the volume of auto sales increased to 2.15 million cars, a yearly average

increase of 6.63% from 1.46 million in 1995.

China’s Automobile Industry OutlookThe automobile industry in China has a very promising future. There has

increasingly been a boom in the automobile industry, and increasing demand from the

local market presents great potentials to foreign companies. However, foreign companies

have found great difficulty in accessing this market and dealing with Chinese government

bodies and companies.

With quick development and further reformation of the Chinese economy, the

auto industry shows new and strong signs. There has been a concentration on boosting

the production of units on a yearly basis; investments in new, distracting projects have

been minimized. Also, the recent implementation of mass production has helped to meet

the high demands for cars. Manufacturing technology has also been enhanced, resulting

in better cars and car parts. All these signs point to a positive outlook for the automobile

industry in China in the future.

Asian Financial Crisis

16

Summary:

South Korea faced a major economic crisis and subsequent labor unrest in 1997.

A general strike was called to oppose a proposed amendment to the labor law that, on the

pretext of ensuring international competitiveness of the Korean economy, would result in

massive layoffs. Due to the financial crisis, the year ended with the biggest-ever IMF

bailout.

Before the economic crisis of 1997, South Korea's postwar economy had been the

envy of most developing countries. By using the Japanese model of high savings, close

cooperation between government and business, and export-oriented growth, the country

quickly transformed itself from a poor war-torn nation into an industrial and technical

powerhouse. GNP per capita in South Korea had risen from a mere US$200 in 1960 to

more than US$11,500 by 1996.

But rapid growth hid a much darker side of development. Close cooperation

between government and business also fostered a system of corruption and speculation.

The Korean economic crisis escalated through a series of marked events in 1997:

business bankruptcies and employment insecurity; a sharp rise in interest rates, dramatic

fluctuations of the exchange rate, and a collapse in stock prices; exodus of foreign

currency, a contraction of foreign bank loans and growing difficulty in foreign debt

settlements. Each step in the escalation of the crisis brought the Korean economy closer

to an overall meltdown. To stem the crisis, Korea began negotiating with the IMF for a

huge bailout. In December 1997, Seoul agreed to a US$57 billion rescue package, but the

IMF insisted the aid be equated with reforms in South Korea's financial system. The

changes endorsed by the IMF are expected to cause mass unemployment. According to

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the National Statistical Office, the nation's jobless rate reached 3.1% last December, the

highest figure in 54 months.

The government announced that the economic growth rate for 1998 is expected to

be around 3% and unemployment at 3.9%. However, various other private economic

research institutions have presented a much more pessimistic outlook. Daewoo Economic

Research Institute forecasts 1998 economic growth rate of 2.2% and unemployment rate

at 5.0%. From these figures, it is possible to estimate that unemployment will reach about

1.2 million people, a sharp increase from the current level of 470,000.

Recovery:

After making a strong recovery in 1999-2000 from the effects of the Asian

financial crisis in 1997-1998, South Korea's economy was negatively affected by the

global economic slowdown of 2001-2002, but has begun to recover in 2002.  Growth in

real gross domestic product (GDP) is projected at 5.8% for 2002, up from 3.3% in 2001

but down from the 9.2% achieved in 2000.  The recovery has been fuelled by domestic

demand, even though export growth has been somewhat weak. Increased government

spending, largely on infrastructure projects, has been a major contributor to increased

domestic demand.

In the wake of the Asian financial crisis, South Korea began an economic reform

program designed to address some of the conditions that made its economy vulnerable.

Most importantly, the South Korean government has begun to break the hold of the

chaebols (large, multi-industry conglomerates) over the financial sector. The lack of an

"arms length" business relationship between borrowers and lenders had led to many

South Korean financial institutions having a very large ratio of non-performing loans.

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While there is no intention of forcing the chaebols to divest their financial subsidiaries,

the government has increased regulation to prevent chaebols from arbitrarily channeling

money into other subsidiaries. Chaebols also have been pressed to spin off their non-core

businesses and to rationalize their corporate structures. To stimulate domestic demand,

the South Korean government under President Kim Dae-jung enacted a package of tax

cuts directed at lower and middle-income workers. 

Under its newest president, the South has embarked on a thoroughgoing program

of economic reform. The economy has opened up to short- and long-term capital from

abroad. Jobs are less jealously protected than they were. Minority shareholders now

have powers to question managers. Starting this year, companies will have to comply

with international accounting standards. The supervision of the financial system has been

overhauled to meet international norms.

To judge by the economic indicators, these measures have been unexpectedly

successful. In the first quarter of this year GDP was 4.6% up on a year earlier. The won is

back to 1,170 against the dollar, and the stock market is back to pre-crisis levels. Exports

have begun to rise again. Stocks have been run down and industrial production has

perked up.

Financially, South Korea is more integrated into the world economy now than it

was in 1994. Foreigners are major players in the capital markets, accounting for nearly 40

percent of stock market transactions, and South Korean residents have greater

opportunities to move their funds abroad. The use by South Korean financial firms of off-

balance sheet transactions and financial derivatives, which did not exist in 1994, is

expanding rapidly. While it is true that the South Korean stock market actually rose

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during the last crisis, the expanded role of foreign participants and the increased

complexity of the financial transactions mean that the market today is far less susceptible

to political intervention than it was a decade ago.

Hyundai Financial Analysis

Introduction:

The collapse of the Asian market bubble in 1997 was more than just a devaluation

of Asian companies and markets. The effects of this crisis forced these companies to

reevaluate their financial and investment position in their own countries. Previous to the

market crash, Korean, and other Asian markets where relatively successful. However,

underlying all the success of those companies in Asian markets was basically an

inefficient economic trend of reckless borrowing and overvaluation. At this point, the

ripple effect took into action and Korean companies, including its biggest automaker,

Hyundai Motor Corp, suffered from overcapacity and smaller companies like Kia Motor

had no choice but to join their rival, Hyundai. To offset the negative effects that this

crisis caused, Hyundai Motor Corp. was forced to invest in other countries to maintain a

positive profit margin. This not only helped their financial outlook, but it also made it

clear to other manufacturers that Hyundai was a legitimate global player.

Since the Asian market crisis, Hyundai has experienced an increase in revenues

for the past five years. Evidence points to Hyundai’s commitment to global expansion as

a main factor for this success. With new manufacturing plants in India, China, Europe,

and the United States, and joint ventures with other automakers in different countries,

Hyundai has been able to stay afloat in the volatile foreign car market. Hyundai also has

its new product development strategy to thank for its financial success. This became

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evident in 2002 when Hyundai announced joint ventures with DaimlerChrysler and

Mitsubishi to produce new technology and automobiles. Since the crisis, Hyundai has

invested a total of $6.25 billion and plans to invest even more in the future to continue its

global success.

Detailed Financial Analysis:

The year ending in 2002, Hyundai’s sales topped 24 trillion won which translates

into approximately $20 billion. Since the Asian crisis, Hyundai has been able to more

than double its sales in the past five years, a feat that is almost unheard in any industry,

especially in an industry where volatility and trends are unpredictable and the

competition is fierce. A primary factor in this substantial growth is the exporting

Hyundai has done with other emerging market countries and in developed countries.

Exporting accounts for almost half of all automotive units sold in 2002. Interestingly,

Hyundai has been able to achieve financial ratios like this across the board. Hyundai’s

assets, revenue, number of units, return on sales, and net income have all almost doubled

since 1997.

As mentioned before, the Asian financial crisis’ origin came from reckless

borrowing by companies that did not look much to the future effects of this.

Unfortunately, Hyundai was one of those debt hungry corporations. However, like any

resilient corporation, Hyundai was able to learn from their mistakes and corrected the

problem almost immediately. Rather than borrow from unstable treasuries, Hyundai

turned to partnerships and equity to finance their global strategy. At their debt-ridden

peak, Hyundai’s debt-to-equity ratio was close to 300%, currently, however, they have a

ratio in the lower bound of 50%. A lot of the success that contributed to this tremendous

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growth is their affiliate companies in which their ownership varies. Hyundai has interest

in over a dozen affiliates including internet companies, Hyundai Motor in countries such

as China and Germany, and chemical companies.

Trading on Korea’s KSE composite index, Hyundai Motor Corp trades at 24,000

won with an average volume of 1.5 million shares. Hyundai does pay a dividend of 850

won, which is a common practice in the automotive industry both in domestic and foreign

markets. With a price-to-earnings ratio of 5.03, Hyundai does lag compared to the

competition. The industry’s average P/E is approximately 21.65, a relatively low P/E

when you look at conglomerates such as Ford, General Motors, or DaimlerChrysler. The

vast differences between the P/E ratios could be explained by a couple of factors. Being

a cyclical industry, the P/E ratio would not be a good benchmark to compare these

companies. A more accurate ratio that one could use would be the Price-Earnings-

Growth ratio. Since Hyundai is in an emerging market and has experienced

unprecedented growth in the past five years or so, a PEG ratio would incorporate the

growth aspect to the valuation regression.

Goldman Sachs Integrated Model Inputs:

Risk Free Rate: This valuation model uses the US 30 year risk free rate of 4.91%.

Beta: The beta in this valuation model calls for a correlation between the Korean market

beta and the US S&P 500 index. Taken from the chart given out in Lecture 9, the Korean

Market is correlated .41 versus the S&P 500. The beta represents an accurate depiction

of market correlation. Since Korea is an emerging market, an American investor must be

aware that investing in this country does carry some risk, especially after the 1997 Asian

financial crisis.

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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.

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.

Discount rate: Using the formula below, we found an appropriate cost of equity for

Hyundai Motor Corp of 13.71%.

At first glance, the cost of equity from an American investor’s stand point is relatively

low for an emerging market company. However, as described in our previous reports,

Hyundai is experiencing tremendous growth and is an automotive leader in profit

margins. Key partnerships, a growing economy, and increased market share also

attribute to the attractiveness of the firm.

Valuation:

Our valuation of equity started with the estimation of growth. Looking at

analysts’ estimations ranging from 2.5% to 9%, and doing our own estimation, we

estimated an appropriate growth rate of 7%. Originally, we thought it would be best to

have a lower growth rate; however, it is our assumption that Hyundai is a stable company

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that has enough earnings and expansion potential to increase their growth for at least the

next 10 years. Looking at the balance sheets of Hyundai, we found that the free cash

flow to equity is approximately 420 billion won. 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.

Riskfree Rate4.91% Bloomberg as of March 28, 2003

BetaKorean MSCI World Beta 0.41 Information taken from J.P. MeiSource http://pages.stern.nyu.edu/~jmei/b40/L9s1.pptRisk Premium1991-2001 9.44% Geometric average from DamadoranSource http://pages.stern.nyu.edu/~adamodar/pc/datasets/histimpl.xlsMarket Value of EquityMarket Cap 5,477,000,000,000.00Shares Outstanding 219,080,000.00Share Price W25,000Source Yahoo! Finance as of March 28, 2003Government Rates10 Year US Bond Rate 3.87% Bloomberg Website10 Year Korean Bond Rate 8.80% www.businessweek.com:/2000/00_02/b3663255.htmSovereign Yield Spread

4.93% SYS = Local Market Bond Rate - US Bond RateSource SYS Formula taken from J.P. Mei lecture March 10, 2003Discount Rate Formular= 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) 6,705,039,938,006.68Price Per Share: 30,605.44 Korean Won

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

Recommendation: BUY Hyundai is undervalued.

Goldman Sachs Integrated Model Inputs:

Equity Valuation on Hyundai Motor Corp

Our look on Hyundai Motor Co.:

Looking closely at the financials of Hyundai Motor Company and its competitors,

the analysis proves that Hyundai is well on its way to accumulating global presence

through sales. Although Hyundai’s market share in the global economy is relatively very

small compared to the United States and European giants, their continued joint ventures

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and foreign investments will allow them to compete. In fact, Hyundai’s net profit margin

is higher than most all of the aforementioned companies. Although the financial crisis

has impacted nearly every Asian company, it has only dented Hyundai’s financial

standpoint. One can also argue that the crisis was a positive event for the long run of this,

and other Asian companies because it forced those companies to rethink how they do

business.

Solution:Project Valuation:

After doing thorough research in both the emerging markets of Korea and China,

we have completed a project valuation for Hyundai-Beijing Automotive joint venture.

Our valuation is based on many assumptions of Hyundai Motor Corp, Korea and China’s

automotive industry, trade agreements, and cost of capital.

To implement a strategy that will most efficiently resolve this problem, we have

done a thorough investigation of all aspects related to this project. Specifically, we have

done valuations (above) on Hyundai Motor Corp, and to get a sense of firm status, we

have done a valuation on the project itself and completed a comprehensive automotive

analysis in both countries.

Inputs:

Cash-flows: Since the project is a relatively straightforward case, we made the

assumption that Hyundai’s listed invoice/MSRP for their Sonata and Elantra units were

global prices. As such, using the US dollar as a currency, we found the cash flows by

multiplying the projected production units of each car by the MSRP price from Hyundai.

After finding this revenue stream, we calculated the cost of each car by using Hyundai’s

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historic profit margin per car of 20%. Once the profit per car was calculated, we then

split those profits per year by 50% because of the assumption that Beijing Automotive

would take their share of profits. Also, it is important to know that Hyundai’s $250

million and $1.1 billion investments in 2005 and 2010, respectively, are Hyundai’s

investment share into the project, not the total investment required for the whole project.

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%. We believe that this is an appropriate

discount rate to use in this particular project. Being that Korea and China share many

similarities in economic growth, financial markets, and risk, the cost of capital for this

venture into China remained at 13.71%. It is also important to assume that we are

valuing this project from an American investors’ perspective thus the previous

assumptions of the cost of capital still apply.

Production: Given the details of the production units per year in 2005 and 2010, we

prorated the potential production capacity for each year in between. Starting at 100,000

units by 2003’s year end and the projected 200,000 units by 2005, we found that the

growth in each year in between would increase by 50,000 unit increments. From 2005 to

2010, we projected a growth of 60,000 units per year until their goal of 500,000 by

2010’s year end.

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Year: 2003 2004 2005 2006 2007 2008 2009 2010Units: 100,000 150,000 200,000 260,000 320,000 380,000 440,000 500,000Elantra: 50,000 75,000 100,000 130,000 160,000 190,000 220,000 250,000Sonata: 50,000 75,000 100,000 130,000 160,000 190,000 220,000 250,000

Revenue: In MillionsElantra @ 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 Share50% 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 MillionsInvestments: ($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!!!!

DCF Valuation on Hyundai-Bejing Auto Joint Venture in China

Conclusion:

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. In the business world, especially in the emerging

markets, anything can happen. What Hyundai must realize when investing so heavily in

China, is that if the project fails for some reason, weather it be because of macro or micro

factors, it will be a sunk cost. Rarely will you find other companies or countries that are

willing to buy a plant that is in distress. Keeping all this in mind, Hyundai must make a

decision on their plans for the 2005 expansion. It is our belief that Hyundai should

venture into this relatively new emerging market to capture the market and benefit from

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the first mover advantage. Though the risks involved into this project are great, the

benefits that can be reaped outweigh the risk in our opinion.

Ultimately, Hyundai will have to form synergies with Beijing Motor and the

Chinese government on all levels of business and production. Management must make a

deliberate effort to adapt to this environment for the two companies to be successful.

However, Hyundai has already invested in four other plants in China and will have

invaluable knowledge obtained through those investments to benefit their biggest

investment in this venture with Beijing Motor. Consequently, Hyundai’s attraction for

investor’s in the US and abroad will increase substantially. In our previous valuation of

Hyundai Motor Corp, we determined that the company was undervalued. Their

operations in China and other emerging markets will only increase their firm value,

contributing to the stability and attractiveness of the firm for investors.

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Exhibit 1:

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Exhibit 2:

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31

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