Research and Media Commentary

Last Updated March 11, 2019

Media

“Pressured by Singer’s Elliott Management Corp., Hyundai Motor Group and its subsidiaries have announced shareholder returns including buybacks and dividends. And for the first time, the company recently hosted a conference where executives actively communicated with investors, Kim Jin-Woo, an analyst at Korea Investment & Securities, wrote in a note entitled ‘Now we can finally communicate with them.’”

–Heejin Kim, Sohee Kim, Bloomberg: Korea Traders Can Thank Activism for Newfound Corporate Largesse, March 6, 2019

“Carmaker [Hyundai] is benefiting from attentions of activist investor”

–FT Lex: Hyundai/Elliott: Gangnam trial, February 27, 2019

“South Korean companies, notorious for low dividends and cash hoards, are becoming more generous. Thank activists and changes in corporate governance for it.”

–Heejin Kim, Sohee Kim, Bloomberg: Korea Traders Can Thank Activism for Newfound Corporate Largesse, March 6, 2019

“Chung also has room to be more generous, though. Mobis is sitting on $6.6 billion of net cash. Its proposed 2 percent divided yield is lower than the average at South Korea’s top companies, CLSA analysts reckon, as well as at rivals such as Japan’s Denso.”

–Robyn Mak, Reuters: Reckless steering, February 27, 2019

“Some local fund managers have started mimicking Elliott. Platform Partners Asset Management Co., a Seoul-based fund, said it earned returns of between 10 percent to 30 percent last year by pushing Macquarie Group Ltd. to cut management fees. In February, family-controlled conglomerate Hanjin Group said it would strengthen management transparency and increase shareholder returns following calls from a homegrown activist, while the NPS is debating whether to also ask for changes.”

–Heejin Kim, Sohee Kim, Bloomberg: Korea Traders Can Thank Activism for Newfound Corporate Largesse, March 6, 2019

“The US activist has challenged everything from a skinny dividend to plans for headquarters in Seoul’s swanky Gangnam district. Mostly, Elliott has been winning, to the delight of other shareholders.”

–FT Lex: Hyundai/Elliott: Gangnam trialFebruary 27, 2019

That still leaves a stash of cash on the table: The company had net cash of 7.4 trillion won at the end of 2018. Over the next three years, it plans to hold a “contingency cash reserve” of 3.5 trillion won and spend 4 trillion won on futuristic growth plans including 200 billion to 400 billion won of equity investments in new tech startups (read: 5G, sensors, biometrics, hydrogen fuel cell, etc.) and 3 trillion to 4 trillion won of M&A.”

Anjani Trivedi, Bloomberg: Hyundai’s Latest Plan Lacks That New Car Smell, February 27, 2019 

“The two companies do have a lot of surplus cash: Mobis’s net cash comes to $6.6 billion, around a third of its market value. Likely in response to Elliott’s accusations that it is sitting on idle money, Hyundai Motor on Wednesday rolled out a five-year plan to invest $41 billion.”

–Jakcy Wong, The Wall Street Journal: Elliott’s Slow-Burn Proxy War With Hyundai, February 27. 2019

“Hyundai Mobis Co.’s latest plan brings to mind one image: a damp squib. Again.”

Anjani Trivedi, Bloomberg: Hyundai’s Latest Plan Lacks That New Car Smell, February 27, 2019

“Hyundai Motor’s payout ratio has lagged behind peers such as Daimler and Ford”

–FT Lex: Hyundai/Elliott: Gangnam trialFebruary 27, 2019

“The South Korean chaebol’s auto-parts unit released an outline Tuesday evening to “maximize” shareholder value. It’ll do anything but that.”

–Anjani Trivedi, Bloomberg: Hyundai’s Latest Plan Lacks That New Car Smell, February 27, 2019

“Then there’s the board structure.  The company said it plans to appoint two new independent directors. Granted, both nominees bring international experience to the table: Karl-Thomas Neumann in autos and car parts, and Brian D. Jones in finance. But the remaining seven are all Korean with limited diversity in experience, and four are already company executives. The board’s ratio of independent directors, and its size, is below global peers.”

Anjani Trivedi, Bloomberg: Hyundai’s Latest Plan Lacks That New Car Smell, February 27, 2019

“Driving a hard bargain could backfire on Hyundai. The South Korean conglomerate’s auto-parts business has offered less than half the $2.2 billion in dividends wanted by pushy U.S. hedge fund Elliott Management. Meanwhile, Hyundai’s carmaker rejected another of the activist’s proposals. These stingier options may ultimately cost it investor support when it comes to a broader restructuring.”

–Robyn Mak, Reuters: Reckless steering, February 27, 2019

“Let’s take a look at Mobis’s latest plan, which addresses some of the issues Elliott raised in its initial “Accelerate Hyundai” proposal. To build “firm trust with shareholders,” the company said it will return 2.6 trillion won ($2.33 billion) over the course of three years. Of this, 1.1 trillion won will come in the form of dividends; 1 trillion from a share buyback; and another 500 billion from the cancellation of treasury shares.”

Anjani Trivedi, Bloomberg: Hyundai’s Latest Plan Lacks That New Car Smell, February 27, 2019

“…the Hyundai campaign will test whether Korea has made strides in becoming more welcoming toward activist investors — as promised by the government”

–Scott Deveau and Heejin Kim, Bloomberg: It’s Singer vs Hyundai Part II as Activist Launches Proxy Fight, February 27, 2019

“Last year, the South Korean group was forced to abandon a dynastic $8.8bn deal and cancel stock for the first time in a decade. Now Elliott is calling for a combined $6.3bn dividend and five new board members. Hyundai nixed both calls, but is giving ground."

–FT Lex: Hyundai/Elliott: Gangnam trialFebruary 27, 2019

“The plan boosts the buyback amount from 188 billion won a year. Those shares won’t be canceled but used for various other things (it’s unclear precisely what). The treasury-share cancellation amount, meanwhile, is the same as previously announced. Basically, the unit is returning 1.1 trillion won of cash dividends over three years, which doesn’t equate to much more than it hands out right now – 380 billion won annually. All in all, the returns are incremental at best.”

Anjani Trivedi, Bloomberg: Hyundai’s Latest Plan Lacks That New Car Smell, February 27, 2019

“If the younger Chung really wants to show he’s heralding a new era, it’s worth making a bolder statement. Even if Mobis’s latest resolutions get passed in March, investors shouldn’t get too excited. Meeting shareholders like Elliott in the middle will be key to showing change is actually afoot. But what matters most is delivering on the group’s larger and more difficult restructuring. So far, it’s looking like more of the same.”

Anjani Trivedi, Bloomberg: Hyundai’s Latest Plan Lacks That New Car Smell, February 27, 2019

Research (Mobis)

Mobis’ capex needs seem heavier than our expectation: What surprised us was the company’s capex plan: Mobis said it will need a minimum capex of KRW4tn over the next three years (or 60% increase over 2016-18 cumulative capex of KRW2.5tn) due to capacity expansion for EV/FCEV parts as well as localisation of core parts production in India, North America and other EM.”

–Nomura, February 26, 2019

 “While we believe the share buyback and initial cancelation this year (2m shares, won459bn) as positive, the cancelation of the new treasury shares still remains as uncertainty. The biggest uncertainty lies with the other DPS option the company is giving to the investors. If investors choose to receive Won26,399 DPS for 2018, the company will cancel all of the shareholder return plan.”

–UBS, February 26, 2019

“ …this may be a pre-cursor that Mobis would be at the center of upcoming group restructurings; [2] the first-ever appointment of “non-Koreans” as BOD member (independent) may be the most eye-catching mgmt. changes.”

–Citi, February 26, 2019

the announcement includes both positive and negative messages (positive: increase in share buyback, negative: higher-than-expected capex burden).”

–Nomura, February 26, 2019

“In addition, considering the previous Hyundai Motor Group (HMG) restructuring deal was not supported by Mobis shareholders, we believe HMG is likely to resume the new restructuring deal in 2019E with terms more favourable to Mobis’ shareholders, which could trigger its valuation premium over OEMs.”

–Credit Suisse, February 26, 2019

“The only new news, we think, was the share buyback amount increasing to KRW1tn (4.8% of market cap) from KRW188bn previously. However, this will be done over the next three years (annually 1.6% of total shares if the buybacks are evenly distributed) and timing of the share buybacks are not confirmed.”

–Nomura, February 26, 2019

However, we would have liked to see a financial matrix (e.g. ROIC/ hurdle-rate) for the capex/ R&D for future technology and potential M&A.”

–Citi, February 26, 2019

Research (HMC)

“Although sharing midterm biz target (7%/ 9% OPM/ ROE in 2022) was a notable change in terms of the communications, nevertheless, we think it may be too ambitious given tough competition in the auto industry, heavy investment burden (W45trn over the next 5- yrs) and increasing cost-burden from contents-per-car/ xEV. Also, we would have liked to see more “encouraging” or “convincing” capital management policies (e.g. ROIC/ hurdle-rate for “future tech investment, a majority of incremental investment/ clearer path or guidance of cash-return policies).”

–Citi, February 27, 2019

“Hyundai to increase the investment in the fuel cell value chain: This came as a surprise to us as Hyundai mentioned that it will not only produce fuel cell electric vehicles (FCEV) but also produce/deliver hydrogen as well as operate charging stations.”

–Nomura, February 28, 2019

“Aggressive operating targets: Unlike Hyundai Mobis which focused on shareholder return policies yesterday (link), HMC took a different route, focusing on its operating targets and guiding for auto OP margin of 7% and ROE of 9% by 2022. However, we believe that management’s answers/roadmap to achieving these targets were quite mundane, essentially reiterating profitability improvements…”

–Morgan Stanley, February 27, 2019

Overall, we think its strategy to enhance the capabilities of its SUV and luxury brands, EV and autonomous driving vehicles is not surprising, while we feel that it may need a focused approach towards its key initiatives.”

–Nomura, February 28, 2019

“we also view 9% ROE may be too ambitious, typically in that investments for ‘future tech’ may be burdensome for asset-turnover/ margins for the time being. HMC may need more ‘aggressive’ capital returns to achieve ROE targets, which is also ‘controversial’ on the roadmap of heavy investment in coming years.”

–Citi, February 27, 2019

“Yet, considering HMC’s R&D and capex investment guidance of W8-9 tn in 2019E-23E (vs W5-6 tn in 2014-18), its OPM guidance exceeded our expectation.”

–Credit Suisse, February 27, 2019

We believe that the company needs to provide more details for investors to have a conviction on these aggressive targets.”

–Nomura, February 28, 2019

“To our surprise (and unlike Mobis), HMC did not provide any revisions to its shareholder return policies – reiterating its dividend payout policy of 30-50% of FCF. While we acknowledge the difficulty in balancing growth and shareholder returns for any OEM in the current market environment, we feel that its message of growth over returns was loud and clear.”

– Morgan Stanley, February 27, 2019

“With a 1-2yr view on profitability largely in-line with our limited expectations, the market will likely focus on the shareholder return messaging. We expect some disappointment in this regard with the company pointing to liquidity needs in excess of current net cash.”

– Deutsche Bank, February 27, 2019

“Management did not clarify on investor queries over the viability of fuel cell economy"

–Nomura, February 28, 2019

“Unlike market’s expectation, triggered by Hyundai Mobis (Mobis), quantified share buyback or share cancellation plans were not discussed.”

–Credit Suisse, February 27, 2019

“There were no aggregate volume targets in the plan.”

– Deutsche Bank, February 27, 2019

We are not clear about the overall R&D/investment burden of this plan for Hyundai in the near-term.”

–Nomura, February 28, 2019

“We have often criticized a “push” business strategy where the production plan drivers the sales plan and not the other way around; this is how the company destroyed hard-earning brand value with excessive discounts and fleet sales in some key markets, namely China and US. While the company has come off of the worst of this there is still far to go, in our opinion.”

–DB, February 27, 2019