Korean Corporate Governance Forum
Hyundai Motor 'Value-up Plan' appears solid but still has room for improvement, grade A-
"A comprehensive strategy for better balance sheet management and disposal of non-core assets
like the Samsung-dong land and KT shares should be outlined"
Despite its position as one of the world's leading automotive companies, Hyundai Motor Group has yet to secure a spot among the top 10 global automotive and components companies, as measured by the MSCI ACWI Auto and Components Index. Even after a sharp rise in its share price this year, Hyundai Motor, particularly its preferred share, is still considered one of the most undervalued automakers worldwide. Common shares are undervalued, at only 0.68x PBR, reflecting an excess capital on its balance sheet. This major undervaluation based on book value implies potential for significant shareholder returns.
Hyundai Motor's Value-up Program, unveiled on August 28th, demonstrates the management team's thoughtful approach. While we commend the effort, our forum has given it a grade of A- as there’s a room for improvement on its balance sheet management. Many local CEOs mistakenly equate "value- up" with "more dividends and share buybacks" only. Hyundai Motor's CEO, Jae-hoon Jang, has demonstrated a more holistic view of the value-up by sharing a 10-year sales growth and investment plan with detailed shareholder return policies, signaling a focus on long-term total shareholder return (as measured by Total Shareholder Return (TSR)). Capex, R&D, and M&A are key drivers of long- term growth. Hyundai Motor has committed to investing a substantial W121 trillion, equivalent to twice its current market capitalization, in capex, R&D, and M&A over the next decade. Based on this, the company projects a 32% increase in global unit sales, or 4% annually, from 4.21 million units last year to reach 5.55 million units by 2030. Despite facing challenges from FX fluctuations and serious competition from Tesla and Chinese EV makers in the software-defined vehicle market, Hyundai Motor may anticipate achieving high single-digit EPS growth by increasing annual sales volume by 4% and raising average selling prices.
The market is already aware of the 2024 shareholder return plan, which includes quarterly dividends, a minimum dividend payout ratio of 25%, and a cancellation of treasury shares equivalent to 3% of total shares over three years. The 2025-2027 targets, such as a minimum dividend of W10,000 per annum, a total shareholder return (dividends and share buyback as % of net profit) of at least 35%, and a 3-year average ROE of 11-12%, are broadly in line with expectations, in our view. A positive development is the company's pledge to repurchase(and cancel) W4 trillion worth of a shares over the next three years, equivalent to an average of 2% annually. Additionally, the company's pledge to address the preferred share discount issue and its intent to address it through buyback and cancellation of much cheaper preferred shares, is particularly noteworthy. On February 4th, our forum urged Hyundai Motor's board and management to cancel all preferred shares, which carry a higher cost of capital, as a means of lowering capital cost. With a combined market capitalization of W14 trillion for all three types of preferred shares, and considering the significant discount to common shares, the optimal use of the W4 trillion would be to cancel these preferred shares through a share buyback program.
Hyundai Motor's failure to secure an A+ or A0 grade is can be attributed to the ongoing neglect of its poorly managed balance sheet. The lack of any plan to divest idle assets, such as the Samsung-dong land in Seoul (estimated to have cost over W20 trillion including interest expenses which HMC holds 55% equity stake in) and substantial stakes in non-core assets like KT (5% stake), and Hyundai Engineering & Construction (21% stake), is particularly disappointing, especially in light of the opposition from minority shareholders. Given the company's need to invest significant W121 trillion over the next ten years, the company may be forced to sell off prime commercial real estate and/or stakes in other companies at a discount to raise capital, if business environment deteriorates. An earlier strategic approach to improving liquidity and right size the balance sheet would not only provide the necessary cashflow but also enhance shareholder value by expediting the company's re- rating to a PBR of 1.0x.
August 29, 2024
Korean Corporate Governance Forum
Chairman Namuh Rhee
Korean Corporate Governance Forum
Hyundai Motor 'Value-up Plan' appears solid but still has room for improvement, grade A-
"A comprehensive strategy for better balance sheet management and disposal of non-core assets
like the Samsung-dong land and KT shares should be outlined"
Despite its position as one of the world's leading automotive companies, Hyundai Motor Group has yet to secure a spot among the top 10 global automotive and components companies, as measured by the MSCI ACWI Auto and Components Index. Even after a sharp rise in its share price this year, Hyundai Motor, particularly its preferred share, is still considered one of the most undervalued automakers worldwide. Common shares are undervalued, at only 0.68x PBR, reflecting an excess capital on its balance sheet. This major undervaluation based on book value implies potential for significant shareholder returns.
Hyundai Motor's Value-up Program, unveiled on August 28th, demonstrates the management team's thoughtful approach. While we commend the effort, our forum has given it a grade of A- as there’s a room for improvement on its balance sheet management. Many local CEOs mistakenly equate "value- up" with "more dividends and share buybacks" only. Hyundai Motor's CEO, Jae-hoon Jang, has demonstrated a more holistic view of the value-up by sharing a 10-year sales growth and investment plan with detailed shareholder return policies, signaling a focus on long-term total shareholder return (as measured by Total Shareholder Return (TSR)). Capex, R&D, and M&A are key drivers of long- term growth. Hyundai Motor has committed to investing a substantial W121 trillion, equivalent to twice its current market capitalization, in capex, R&D, and M&A over the next decade. Based on this, the company projects a 32% increase in global unit sales, or 4% annually, from 4.21 million units last year to reach 5.55 million units by 2030. Despite facing challenges from FX fluctuations and serious competition from Tesla and Chinese EV makers in the software-defined vehicle market, Hyundai Motor may anticipate achieving high single-digit EPS growth by increasing annual sales volume by 4% and raising average selling prices.
The market is already aware of the 2024 shareholder return plan, which includes quarterly dividends, a minimum dividend payout ratio of 25%, and a cancellation of treasury shares equivalent to 3% of total shares over three years. The 2025-2027 targets, such as a minimum dividend of W10,000 per annum, a total shareholder return (dividends and share buyback as % of net profit) of at least 35%, and a 3-year average ROE of 11-12%, are broadly in line with expectations, in our view. A positive development is the company's pledge to repurchase(and cancel) W4 trillion worth of a shares over the next three years, equivalent to an average of 2% annually. Additionally, the company's pledge to address the preferred share discount issue and its intent to address it through buyback and cancellation of much cheaper preferred shares, is particularly noteworthy. On February 4th, our forum urged Hyundai Motor's board and management to cancel all preferred shares, which carry a higher cost of capital, as a means of lowering capital cost. With a combined market capitalization of W14 trillion for all three types of preferred shares, and considering the significant discount to common shares, the optimal use of the W4 trillion would be to cancel these preferred shares through a share buyback program.
Hyundai Motor's failure to secure an A+ or A0 grade is can be attributed to the ongoing neglect of its poorly managed balance sheet. The lack of any plan to divest idle assets, such as the Samsung-dong land in Seoul (estimated to have cost over W20 trillion including interest expenses which HMC holds 55% equity stake in) and substantial stakes in non-core assets like KT (5% stake), and Hyundai Engineering & Construction (21% stake), is particularly disappointing, especially in light of the opposition from minority shareholders. Given the company's need to invest significant W121 trillion over the next ten years, the company may be forced to sell off prime commercial real estate and/or stakes in other companies at a discount to raise capital, if business environment deteriorates. An earlier strategic approach to improving liquidity and right size the balance sheet would not only provide the necessary cashflow but also enhance shareholder value by expediting the company's re- rating to a PBR of 1.0x.
August 29, 2024
Korean Corporate Governance Forum
Chairman Namuh Rhee