20161207-三星证券-HMG_corporate_governance_3.0__Time_to_decide_124页_4mb

Sector Update Summary

Core Content

This document provides an analysis of the Hyundai Motor Group (HMG) and its subsidiaries, focusing on corporate governance reforms and business restructuring. It outlines the financial performance, strategic moves, and challenges faced by the group, particularly in light of anti-tunneling regulations and economic democratization trends in South Korea.

Key Companies and Target Prices

• Hyundai Motor (005380 KS, KRW136,500)

  • Target price: KRW190,000 (39.2% upside)

• Kia Motors (000270 KS, KRW38,000)

  • Target price: KRW46,000 (21.1% upside)

• Hyundai Mobis (012330 KS, KRW255,000)

  • Target price: KRW350,000 (37.3% upside)

• Hyundai Via (011210 KS, KRW68,900)

  • Target price: KRW80,000 (16.1% upside)

• Hyundai Glovis (086280 KS, KRW154,000)

  • Target price: KRW200,000 (29.9% upside)

Main Points

1. HMG's Business and Governance Overhaul

• The HMG's combined market cap has dropped by 45.8% since 2011 due to declining sales and rising inventories.
• Structural issues such as market-share losses in Korea and China and the shift to EVs and self-driving vehicles are critical and need to be addressed.
• The three-year golden opportunity is seen as a window for HMG to restructure its business and governance.

2. Corporate Governance Reforms

• Economic democratization is a growing trend in South Korea, pushing for stricter anti-tunneling regulations and the dismantling of circular shareholdings.
• HMG is expected to be the only major chaebol among the top ten that retains circular shareholdings, which could be a burden in the coming years.
• The Chungs (MK and ES Chung) are likely to reduce their stake in Glovis due to tighter anti-tunneling rules, which could impact the group's financial structure.

3. Financial Challenges and Opportunities

• HMC, Kia, and Mobis have seen a sharp decline in free cash flow (FCF) due to weak new-car cycles and rising inventories.
• HMG plans to invest KRW11t–12t over the next five years in building a Global Business Center (GBC) and three factories, along with resolving a wage dispute at Kia.
• Recurring R&D costs and capex are expected to total KRW8t annually, further impacting cash flow.

4. Investment Strategies

• Mobis and HMC are highlighted as top picks due to potential stock buybacks and governance-related discount dissipation.
• Glovis is still considered an attractive investment, as its value as a logistics firm may not yet be fully reflected in its share price.

5. Governance and Shareholder Agreements

• Agreements with minority shareholders are becoming increasingly important in governance reforms.
• Proxy advisory firms are playing a key role in shaping shareholder voting behavior.
• The GBC is expected to be a key component of the restructuring, with the goal of improving efficiency and enabling better decision-making.

Key Financial Metrics

Key Risks and Solutions

Risks

• Industry structural factors: Declining market shares in Korea and China, and the shift to EVs and self-driving vehicles.
• Socio-political factors: Tightening anti-tunneling regulations and the push for economic democratization.

Solutions

• Holding company structure: This will allow for more efficient decision-making, better resource allocation, and compliance with anti-tunneling laws.
• Financial restructuring: Measures to strengthen the competitiveness of HMC, Kia, and Mobis and reduce cash outflows.
• Shareholder agreements: The need for agreements with minority shareholders to ensure a fair governance overhaul.

Investment Outlook

• The three-year restructuring period is expected to bring about significant changes in the HMG structure.
• The GBC construction is a major investment, with expected completion by 2021.
• The GBC is expected to generate KRW500b in annual cash flow, which could be reinvested in M&As or new businesses.
• Glovis may be valued between a parts maker and a logistics firm, and is still considered an attractive investment.

Summary of Governance Reforms

• The Chungs are expected to reduce their stake in Glovis and may contribute to the GBC in-kind.
• The GBC will serve as a central hub for HMG affiliates and may be incorporated into a holding company.
• The GBC is expected to be a world-class facility, including a 105-storey main building, exhibition and convention centers, and hotel and office space.

Key Takeaways

• HMG is under pressure to restructure due to financial and structural challenges.
• Governance reforms are critical for the group's long-term competitiveness.
• The GBC is a key component of the restructuring, with potential for increased value and efficiency.
• Mobis and HMC are expected to benefit the most from the restructuring.
• Glovis is still an attractive investment, despite the regulatory pressures.