Investment Case for Hyundai Mobis Preferreds

Hyundai-Mobis-Preferred-29JAN2013-Christopher-Detweiler-v04.pptx 1

Investment case for Hyundai Mobis Company preferreds Executive Summary

Hyundai Motor Group (Group) competes in a growing market, is well-run, and is winning• Main members of Group are Hyundai Motor Co., Kia Motor Corp., Hyundai Mobis Co.• Group operates mainly in passenger car market, which will grow 1-4% p.a. over next 10 years• Group has talented management that has achieved ambitious goals over the past decade• Group doubled its share of the global passenger car market from 5 to 10% in past ten years

Hyundai Mobis Company (Mobis) is the best way to profit from the Group's success• Mobis profits from Hyundai and Kia annual volumes, but also total car population• Mobis financials on per-share basis significantly better than Motor's• Mobis preferred now selling below liquidation value, while Motor still above its liquidation value • Mobis preferred liquidation value rose so rapidly that it just surpassed market value

No good reason for (Mobis) Korean preferred shares to be so much cheaper than common• Mobis "old-type" preferreds trading at large discount to common – but not always the case• Three possible reasons for large discount of Korean preferreds – none of them makes sense• Most plausible explanation for preferred discount is volume/speculation "reflexivity"• Anecdotal evidence supports volume/speculation "reflexivity" thesis and catalyst for reversal

A

B

C


Agenda

Hyundai Motor Group competes in growing market, is well-run, & winning

Hyundai Mobis is best way to profit from the Group's success

No good reason for Mobis preferred to be so much cheaper than common

A

B

C


Agenda




A

B

C


Main members of Hyundai Motor Group controlled by Chung Mong-Koo through crossholdings – Mobis is core

Ow

ned

by

Ow

ns

Hyundai Motor Company(Market cap: USD1 49B)

Hyundai Motor Company(Market cap: USD1 49B)

Affiliated shareholders• Hyundai Mobis Company

– 20.78%• Chung Mong-Koo

– 5.17%Institutional shareholders• Nat. Pension Service Korea

– 6.75%• Other institutions (all < 2%)

– 9.79%

Affiliated companies• Kia Motor Corp.

– 33.88%• Hyundai Eng. & Con.

– 20.95%

Kia Motor Corporation(Market cap: USD 21B)Kia Motor Corporation(Market cap: USD 21B)

Affiliated shareholders• Hyundai Motor Company

– 33.88%• Chung Eui-Sun

– 1.73%Institutional shareholders• Nat. Pension Service Korea

– 6.01%• Other institutions (all < 4%)

– 9.87 %

Affiliated companies• Hyundai Mobis Company


– 5.23%• Hyundai Steel

– 21.29%

Hyundai Mobis Company(Market cap: USD 24B)

Hyundai Mobis Company(Market cap: USD 24B)

Affiliated shareholders• Kia Motor Corp.

– 16.88%• Chung Mong-Koo

– 6.96%• Hyundai Steel2

– 5.66%Institutional shareholders

• Nat. Pension Service Korea– 7.01%

• Other institutions (all < 5%) – 13.52 %

Affiliated companies• Hyundai Motor Company


– 8.73%

1. Exchange rate as of 20.Jan.2013 – 1 USD = 1058 KRW. 2. Chung Mong-Koo owns the second largest holding of Hyundai Steel (after Kia): 12.52%.Note: Percentages of ownership refer to shares issued NOT shares outstanding.Source: Annual reports, financial reports, Bloomberg.


Group's main market of passenger cars will continue growing by between 1.2% to 4.2% per annum over next decade

Group's main market is passenger cars – accounting for 95% of salesGroup's main market is passenger cars – accounting for 95% of sales

In conservative scenarios, global passenger car market to grow 1.2% to 4.2% p.a. over next 10y

In conservative scenarios, global passenger car market to grow 1.2% to 4.2% p.a. over next 10y

0

2,000

4,000

6,000

2011 Ex-factory vehicle unit sales ('000)

8,000

KIA all vehicles

6,295(95%)

HMC/KIA non-

passenger cars

HMC/KIA passenger

cars

6,597(100%)

HMC/KIA all

vehicles

2,538(38%)

4,059(62%)

HMC all vehicles

302

4.2% p.a.

2022

100,000

20102001 2004 2007

40,000

20,000

0

201920162013

60,000

Global passenger car production ('000)

80,000

Population growth scenario3

Historical production

Momentum scenario1

China crash scenario2

4.2%

3.3%

1.2%

10Y CAGR

1. Assumes same CAGR as last 10 years. 2. Assumes China real estate crash causes dip similar to 2009 crisis, then further CAGR from 2001-2009. 3. Assumes market grows only with population.Source: HMC and KIA 2011 annual reports and investor presentation; Proprietary scenario modeling.


Group's management, controlled by Chairman Chung Mong-Koo, has good track record of achieving very ambitious goals

Chairman followed through on improbable goal of becoming top-five car maker – albeit 4 years late

Chairman followed through on improbable goal of becoming top-five car maker – albeit 4 years late

Group also achieved its ambitious quality improvement goal – this time only 3y lateGroup also achieved its ambitious quality improvement goal – this time only 3y late

"Within five years, we will become one of the world's top five carmakers." -Chung Mong-Koo, New HMC Chairman, 2000

"Hyundai needs to eclipse Toyota's quality within five years."-Chung Mong-Koo, 2001

OICA Global Vehicle Production Rank 2000 Rank Producer Volume

1 GM 8'133'375 2 Ford 7'322'951 3 Toyota-Daihatsu-Hino 5'954'7234 VW 5'106'7495 DaimlerChrysler 4'666'640 6 PSA-Peugeot-Citroen 2'879'422 7 Fiat-Iveco 2'641'444 8 Nissan 2'628'783 9 Renault-Dacia-Samsung 2'514'897

10 Honda 2'505'256 11 Hyundai-Kia 2'488'321

OICA Global Vehicle Production Rank 2009Rank Producer Volume

1 Toyota 7'234'439 2 GM 6'459'053 3 VW 6'067'208 4 Ford 4'685'394 5 Hyundai-KIA 4'645'776 6 PSA 3'042'311 7 Honda 3'012'637 8 Nissan 2'744'562 9 Fiat 2'460'222

10 Suzuki 2'387'537 11 Renault 2'296'009

JD Power Initial Quality Study 2001Rank Brand Problems

1 Lexus 852 Jaguar 1083 Acura 1184 BMW 1195 Saab 1216 Toyota 121... ... ...33 Hyundai 19234 Isuzu 19235 Land Rover 20736 Mazda 20937 Suzuki 23438 Kia 267

JD Power Initial Quality Study 2009Rank Brand Problems

1 Lexus 842 Porsche 903 Cadillac 914 Hyundai 955 Honda 996 Mercedes 1017 Toyota 101... ... ...15 BMW 11216 Kia 112... ... ...36 Land Rover 15037 MINI 165

Note: The JP Power Initial Quality Study counts the average number of problems reported (per 100 vehicles) by new car buyers in first 90 days of ownership.Source: International Organization of Motor Vehicle Manufacturers (OICA); JD Power & Associates; USA Today.


Group doubled share of global passenger car market in 10y by increasing production 3x faster than other manufacturers

4,223(8%)

2,185(5%)

2009

5,247(9%)

80,000

2010

6,118(10%)

2,378(5%)

2011

+4.2% p.a.

40,853

20,000

40,000

2,088(5%)

60,000

2006

45,856

2001

2,004(4%)

42,170

2002

42,621

Global passenger car1 production ('000 units)

20052004

2,276(5%)

44,435

20082003

0

51,602

2007

61,703

56,30160,344

2,292(4%)

51,075

2,435(4%)

2,727(6%)

55,846

Other manufacturers

Hyundai-Kia

1. Defined by the OICA as: "Motor vehicles with at least four wheels, used for the transport of passengers, and comprising no more than eight seats in addition to the driver's seat."Source: International Organization of Motor Vehicle Manufacturers (OICA).

10Y CAGR

4.2%

3.7%

11.4%


Agenda




A

B

C


Mobis profits from annual Hyundai and Kia volumes, but also from sum of all used Hyundai and Kia cars in world

Even if Hyundai/Kia production volumes only grew by 4.2% for next 10 years...

Even if Hyundai/Kia production volumes only grew by 4.2% for next 10 years...

Auto production parts business• In 2011, 80% of Mobis revenue came from

the sale of auto parts for production of Hyundai and Kia cars1, but only 55% of Mobis operating income came from the segment

• 2011 operating margin in this segment is 7%

...the total Hyundai/Kia car population would grow by 9.5% p.a.

...the total Hyundai/Kia car population would grow by 9.5% p.a.

After-sales parts business• In 2011, 20% of Mobis revenue came from

the sale of after-sales parts for repair of Hyundai and Kia cars, but 45% of Mobis operating income came from the segment

• 2011 operating margin in this segment is 22%

# cars produced

15,000,000

10,000,000

5,000,000

0

4.2% p.a.

12.5% p.a.

2022e2020e2018e2016e2014e201220102008200620042002

# cars in operation

80,000,000

60,000,000

40,000,000

20,000,000

0

9.5% p.a.

10.4% p.a.

2022e2020e2018e2016e2014e201220102008200620042002

1. And some third-party sales.


More value per share created by Mobis than Hyundai Motor

Hyundai Motor CompanyHyundai Motor Company Hyundai Mobis CompanyHyundai Mobis Company

Net income per share (KRW)

40,000

30,000

20,000

10,000

0

+25% p.a.31,674

Net income per share (KRW)

40,000

30,000

20,000

10,000

0

+22% p.a. 29,850

Revenues per share (KRW)

400,000

300,000

200,000

100,000

0

+21% p.a. 275,155

Revenues per share (KRW)

400,000

300,000

200,000

100,000

0

+11% p.a. 277,733 P/Rev.

Pref.

0.2

Com.

0.7

Free cash-flow per share (KRW)

40,000

20,000

0

-20,000

-40,000

+22% p.a.19,241

Free cash-flow per share (KRW)

40,000

20,000

0

-20,000

-40,000

-13% p.a.

1,730

Dividends per share (KRW)

4,000

3,000

2,000

1,000

0

+11% p.a.

2011

1,8001,750

201020092008200720062005200420032002

0

+8% p.a.

2010

1,750

20032002

1,000

2,000

2006 20072004 2005

1,800

2011

4,000

Dividends per share (KRW)

3,000

2008 2009

Valuationmetrics:

P/E

1.8

Pref.Com.

6.9

Pref.

31.4

Com.

119.1

P/FCF

Div. Yield

Pref.

3.3%

Com.

0.8%

P/Rev.

Pref.

0.4

Com.

0.9

8.1

Pref.

3.2

Com.

P/E

P/FCF

Pref.

5.3

Com.

13.4

Com.

1.8%

Pref.

Div. Yield

0.7%

Valuationmetrics:


Hyundai Motor preferreds selling above liquidation value, while Mobis preferreds trading at liquidation value

Hyundai Motor CompanyHyundai Motor Company Hyundai Mobis CompanyHyundai Mobis Company

4226

Net assets

152

Total liabilities

14

264

Fixed assets

1245

73

31

701

Current assets

6 25

99

4226

Net asset value per share ('000 KRW)

500

400

300

200

100

0

Disc. net

assets

30

Total liabilities

14

264

Disc. fixed

assets

52112556

1

Disc. Current assets

016

79

278145

164

278232

198

Net assets

Minority interests (100%)

Liabilities (100%)

Others (0%)

Invest. in JV & ass. (115-118%)

PP&E (15%)

Other fin. assets (80%)

LT receivables (80%)

LT fin. instruments (100%)

Others (0%)

Inventories (66%)

ST receivables (80%)

ST fin. instruments (100%)

Cash (100%)

300

200

100

0

Disc. net

assets

101

Total liabilities

1

130

Disc. fixed

assets

111

616

Disc. Current assets

1442439

Net assets

159

Total liabilities

Net asset value per share ('000 KRW)

1

130

Fixed assets

94

39

20

Current assets

2021

52

439

131133

99

131153

137

3rd. Pref.

55

Com.

214

Pref.

106

Com.

261

20. Jan. 2013

Note: Hyundai Motor Company owns: 33.88% of Kia Motor Corp., 20.95% of Hyundai Eng. & Con., 26.79% of Hyundai WIA Corp., 29.37% of Hyundai HYSCO Corp., etc.Hyundai Mobis Company owns: 20.78% of Hyundai Motor Company, 8.73% of Hyundai Eng. & Con.Source: Hyundai Motor Company Interim Report 1H 2012, Hyundai Mobis Company 3Q 2012 disclosure, Bloomberg (for market prices of traded securities).


Mobis preferred market price trading below liquidation value for first time in 10Y – such low level not even reached in 2008

150,000

100,000

KRW per share

200,000

2011201020092008200720062005200420032002

+36% p.a.

50,000

0

Latest

Market price of preferred share

Liquidation value of preferred share

20. Jan. 2013


Agenda




A

B

C


Mobis "old-type" preferreds – i.e. non-voting, participating, and non-cumulative – are selling at large discount to common

85,100(50%)

171,000

2008 2010

37,500(59%)

63,291

2011

106,000(41%)

260,500

148,000(51%)

2007

292,000

87,413

0

KRW per share(for preferreds: price also as % of common)

300,000

68,783(79%)

100,000

2006

-43%

-8%

Latest

200,000

186,500(66%)

284,500

2009

46,763(55%)

85,616

2005

55,357(60%)

92,593

2004

32,979(50%)

65,502

2003

30,806(48%)

64,103

2002

28,200(129%)

21,800

+1% preferred (012335:KS)

Common (012330:KS)

11y Average:• 62%

Since 2003 Mobis preferreds have persistently sold at discount to common, but now at a record discount

20. Jan. 2013


Preferreds may suffer in cash-out or exchange situation

Preferreds may suffer in cash-out or exchange situation

Preferred shares are much less liquid than common

Preferred shares are much less liquid than common

Less capital appreciation of preferreds over last 10y

Less capital appreciation of preferreds over last 10y

Possible reasons why Mobis (and other Korean) preferreds are selling at such a large discount to common

Arg

um

ents

Co

un

ter-

arg

um

ents

Liquidation• Preferreds only get par value

back in liquidation on preferential basis (before common)

Tender• Korea has no "equal price" rule

for tenders (across different classes or blocks)

Merger• Korea has no "equal price" rules

for merger exchanges; preferred holders cannot vote for fair exchange ratio

Liquidity premium• It is an established theory/fact

that illiquid investments trade at a discount to comparable liquid investments due to the value that some market participants place on being able to trade out of investments in a hurry

• Korean preferred shares are less liquid than common shares and therefore trade at a discount

Capital gains• Preferred shares in Korea have

not appreciated over the past decade as much as their corresponding common shares and therefore most Korean investors prefer to purchase the common, as they expect to continue to achieve greater capital appreciation with them ("it worked in the past")

Liquidation• True, but Korean preferreds also

"participate" fully in liquidation dividend to common

Tender• Shares need not be tendered,

and squeeze-out only possible at 95% minority has put (court valuation)

Merger• Art. 436 Korean Corp. Law: If any

shareholder class would be "prejudiced" by share exchange, ≥1/3 of outstanding shares of class must vote for the exchange

But a 50-400% liquidity premium?• This explanation, while plausible

for small discrepancies in market prices, fails to explain the radical difference between Korean preferred and common shares – with the former frequently trading at 30-40% of the latter, despite equal (or even superior claims to cash-flow)

The fallacy of speculation• This is a typical speculative

attitude: that past rising prices promise future rising prices and that it is therefore advisable to ride the trend and thereby "buy high and sell higher"

• However, the value investor is attracted instead to the securities that have not (yet) risen much in price, as they may offer more value for the price to be paid


Falling liquidity and speculative tendencies appear to be most plausible reason for widening preferred discount

40

Avg. of 10 preferreds (in % of common)

100

80

60

20112009200720052003

79.2

2001

20

0

Latest

39.8

"Reflexivity": Wider preferred discount leads to less interest/trading, leads to less liquidity, wider discount, and so on... Dividend yields at catalyst for reversal?

Source: Bloomberg; annual reports.

200920032001

10 preferreds (in % of common)

250

200

150

100

50

0

20072005 Latest2011

000155

000725

000815

010955

005935

005725

012335

051915

000105

005389

20092007200520032001 Latest

50

2011

0

150

Avg. volume of 10 pref. vs. common(rebased to 2001=100)

100

10 Preferred volume avg.

10 Common volume avg.

Preferred discounts vary widely across companies...Preferred discounts vary

widely across companies......but avg. discount greatly

widened over past 10y...but avg. discount greatly

widened over past 10yAt same time, trading in preferreds plummeted

At same time, trading in preferreds plummeted

"Reflexivity"


Anecdotal evidence supports view that Koreans trapped in volume/speculation "reflexivity", and that there's a catalyst

Korean "investor relations" more like "speculator relations"?

Korean "investor relations" more like "speculator relations"?

Head of Hyundai IR Europe1, says international investors increasingly interested in dividends of preferred shares

Head of Hyundai IR Europe1, says international investors increasingly interested in dividends of preferred shares

QuestionsQuestions

Why are HMC's preferred shares so much cheaper than the common shares, although they pay a higher dividend than the common?

Why is there a large price difference between the 1st and the 3rd class preferred shares, although they are identical securities?

Is the Chung family, or are HMC employees, interested in buying preferred shares – since they pay a higher dividend?

AnswersAnswers

"This is a normal phenomenon in the KOSPI. The perceived value of voting rights in Korea is very high – not only for HMC but for all companies, incl. Samsung Electric."

"The 1st and 3rd preferreds are exactly the same security, but the 1st preferreds are more expensive due to liquidity premium – you pay more to be able to sell more easily."

"The Chung family – like most Korean investors – are not so interested in dividends but in voting rights. But recently I have seen more interest in preferreds from international investors due to the attractive dividend yields"

1. James Jung – telephone conversation on: 15. Jan. 2013.

Documents

Investment Case for Hyundai Mobis Preferreds