Hyundai Home Shopping Case Study Demonstrating the Need for More - - PowerPoint PPT Presentation
Hyundai Home Shopping Case Study Demonstrating the Need for More - - PowerPoint PPT Presentation
Hyundai Home Shopping Case Study Demonstrating the Need for More Effective Stewardship by the NPS IMPORTANT DISCLOSURES This presentation is published by Dalton Investments LLC solely for informational purposes and is not, and may not be
Jan 2019 Page 1
IMPORTANT DISCLOSURES
This presentation is published by Dalton Investments LLC solely for informational purposes and is not, and may not be construed as, investment, financial, legal, tax
- r other advice.
This presentation has been compiled based on publicly available information (which has not been separately verified by Dalton Investments) and does not: (i) purport to be complete or comprehensive; (ii) constitute an agreement, offer, a solicitation of an offer, or any advice or recommendation to enter into or conclude any transaction or take or refrain from taking any other course of action (whether on the terms shown herein or otherwise); or (iii) constitute proxy solicitation or any other similar form of activity, or any advice or recommendation to take or refrain from taking any action or do or refrain from doing any act which would otherwise constitute proxy solicitation or any other similar form of activity. The market data contained in or utilized for the purposes of preparing this presentation is (unless otherwise specified) as at the end of trading hours on December 31, 2018. Changes may have occurred or may occur with respect to such market data and we are not under any obligation to provide any updated or additional information or to correct any inaccuracies in this presentation. The information herein contains “forward-looking statements.” Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “submits,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could” or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe objectives, plans or goals are forward-looking. Any forward-looking statements are based on current intent, belief, expectations, estimates and
- projections. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict
and that could cause actual results to differ materially. Accordingly, you should not rely upon forward-looking statements as a prediction of actual results and actual results may vary materially from what is expressed in or indicated by the forward-looking statements. Many of the statements in this presentation are our beliefs, which are based on its own analysis of publicly available information. Any representation, statement or
- pinion expressed or implied in this presentation is provided in good faith but only on the basis that no reliance will be placed on any of the contents herein. You
should obtain your own professional advice and conduct your own independent evaluation with respect to the subject matter herein. We expressly disclaim any responsibility or liability for any loss howsoever arising from any use of or reliance on this presentation or its contents as a whole or in part by any person, or
- therwise howsoever arising in connection with this presentation.
In respect of the information and materials which have been prepared by us and contained herein, in the event of any inconsistency between the English language version and the Korean language version, the meaning of the English language version shall prevail.
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IMPORTANT DISCLOSURES
This document is provided for informational purposes only, and does not constitute a solicitation of any shares in any investment vehicle managed by Dalton Investments LLC. Such solicitations can only be made to qualified investors by means of the private placement memorandums, which describe, among other things, the risks of making an investment. Additionally, this presentation does not constitute investment advice of any kind. All of the information in this document relating to Dalton Investments LLC or its affiliates (collectively, “Dalton” or the “Firm”) is communicated solely by Dalton, 1601 Cloverfield Boulevard, Suite 5050 N, Santa Monica, CA 90404, regulated by the U.S. Securities and Exchange Commission (SEC). SEC registration does not imply SEC endorsement. No representation or warranty can be given with respect to the accuracy or completeness of the information, or with respect to the terms
- f any future offer of transactions conforming to the terms hereof. Certain assumptions may have been made in the analysis which resulted in any information and
returns/results detailed herein. No representation is made that any results/returns indicated will be achieved or that all assumptions in achieving these returns have been considered or stated. Additional information is available on request. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on market conditions. Unless otherwise indicated, figures presented are preliminary, unaudited, subject to change and do not constitute Dalton’s standard books and records. Any estimates, projections or predictions (including in tabular form) given in this communication are intended to be forward-looking statements. Although Dalton believes that the expectations in such forward-looking statements are reasonable, it can give no assurance that any forward-looking statements will prove to be
- correct. Such estimates are subject to actual known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from
those projected. These forward-looking statements speak only as of the date of this communication. Dalton expressly disclaims any obligation or undertaking to update or revise any forward-looking statement contained herein to reflect any change in its expectations or any change in circumstances upon which such statement is based.
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Hyundai Green Food and Hyundai Livart Identified as Targets for Dividend Improvement by the NPS
Source: Maeil Business; CEO Score Daily; Korea Financial Supervisory Services DART – Semiannual Reports
Hyundai A&I Hyundai Department Store Hyundai Green Food Chung, Ji-Sun Chung, Kyo-Sun Hyundai Shopping Hyundai Home Shopping Hyundai Livart Everdigm Hyundai HCN Handsome Hyundai Rental Care
Hyundai Department Store Group (As of 1H ‘18)
73% 17% 13% 23% 25% 16% 100% 40% 1% 45% 35% 35% 100% 12%
Jan 2019 Page 4
But We Believe Hyundai Home Shopping (Hyundai) Has Greater Potential for Improvement
Source: Korea Financial Supervisory Services DART – Semiannual Reports
Hyundai A&I Hyundai Department Store Hyundai Green Food Chung, Ji-Sun Chung, Kyo-Sun Hyundai Shopping Hyundai Home Shopping Hyundai Livart Everdigm Hyundai HCN Handsome Hyundai Rental Care
Hyundai Department Store Group (As of 1H ‘18)
73% 17% 13% 23% 25% 16% 100% 40% 1% 45% 35% 35% 100% 12%
Jan 2019 Page 5
Since Listing in 2010*, Hyundai’s Shareholders Have Lost Approx. 17% (Share Price Change + Dividend Yield)
Source: Bloomberg *Sep. 13th, 2010
₩80,000 ₩100,000 ₩120,000 ₩140,000 ₩160,000 ₩180,000 ₩200,000 9/13/2010 9/13/2011 9/13/2012 9/13/2013 9/13/2014 9/13/2015 9/13/2016 9/13/2017 9/13/2018
Hyundai’s Share Price (Sep. 13, 2010 to Nov. 30, 2018)
Total Shareholder Return
- 17.0%
Price Change
- 23.5%
Assuming Dividends Reinvested in the Security 6.5%
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…..While Hyundai Has Been Making Profits
100% 70% 40%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Market Value Right After Listing (Sep. 13th, 2010)** Cumulative Net Income from 2010 4Q to 2018 3Q
Cumulative net income of 70% since listing*
Net cash equivalents*** Cumulative Net Income since listing Source: Bloomberg; Korea Financial Supervisory Service DART-Annual Reports. *From Sep. 13, 2010 to Nov. 30, 2018 **MV was approx. $1.4B ($1 = ₩1,120 applied for the entire presentation) based on share price of ₩130,500 at Sep. 13, 2010. ***We estimate that most has not been used.
If net cash (40%) and cumulative net income (70%) were paid out to shareholders, total return would have been > 100%
Jan 2019 Page 7
Korea National Pension Service Has Suffered Estimated Losses of $22M (-14%) Over the Last 6 Years
First holding date of recent major ownership
- Oct. ‘12
Current position (% of outstanding number of shares) 12.0% Estimated average cost basis per share 122,191 Current share price (as of Nov. 30th, 2018) 99,800
₩80,000 ₩100,000 ₩120,000 ₩140,000 ₩160,000 ₩180,000 ₩200,000 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 12/4/2012 12/4/2013 12/4/2014 12/4/2015 12/4/2016 12/4/2017
NPS’ holding of Hyundai Home Shopping
Position (Left) Share Price (Right)
Source: Bloomberg; Based on Nov. 30, 2018; Gain/Loss = ((Current share price – Estimated average cost basis per share) x Current number of share holdings) + (Dividend per share of each year from first year of purchase to 2017 x number of share holdings at each Sep. 30 from first year of purchase to 2017)), If first year purchase was done after Sep. 30, applied Dec. 31 number of share holdings for that year.
Jan 2019 Page 8
Minority Shareholders Own Approx. 60% of Hyundai
41% 32% 27%
Hyundai Ownership Estimate (As of Dec. 31, 2018)
Foreign Investors Korean Investors Hyundai Department Store Group
Minority Shareholders
Source: FN Guide – Company Guide; Korea Financial Supervisory Service DART – Quarterly Report.
Jan 2019 Page 9
Hyundai’s Overall Capital Efficiency Declined Severely Despite Core Business Strength
106% 15% 10%
Hyundai** Hyundai Green Food Hyundai Livart
Return on Capital Employed*
(5 year Average, Estimated, ‘13-’17, Parent)
Source: Bloomberg *Return on capital employed = Net Operating Profit After Tax / (Account Receivables + Inventories – Account Payables + Fixed Assets + Intangibles excluding goodwill) **For Hyundai, Net Working Capital (Account Receivables + Inventories – Account Payables) was negative and therefore calculated excluding NWC
Core business generates ≥ 100% return 0% 10% 20% 30% 40% 50% 60% 70% 80% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Hyundai Return on Equity (Parent)
Jan 2019 Page 10
Hyundai’s Large Non-Core Investments Show Mediocre Returns
Source: Korea Financial Supervisory Service DART – Annual Reports, public filings; Hyundai IR; Dalton Estimates *Cumulative
- 100%
5% 4% 3% 4% 5% 5% 4%
'12 Feb '12 '13 '14 '15 '16 '17 '18 3Q*
Equity Income Return from Handsome Stake ($375M Investment)
Initial investment Return
3-5% return is too low
- 40%
- 60%
- 4%
- 14%
- 16%
- 13%
- 7%
0% 2% 4% 7% 10%13%
'15 '16 '17 '18E '19E '20E '21E '22E '23E '24E '25E
Hyundai Rental Care ROI Projection ($135M Investments)
Initial Investments Return (Reflects Hyundai's Forecast)
Long time to payback and future return is not high even with Hyundai’s projections
- 100%
6% '18 '19E
Hanwha L&C ROI Projection ($330M Investments)
Initial Investments Return (Reflects Hyundai's Forecast)
Paid above valuations of comparable companies
Jan 2019 Page 11
Hyundai’s Assessment of Investment Opportunities Appear to be Based on Beating the Bank Deposit Rate
*During 1:1 calls with Hyundai. Its affiliate, Hyundai Department Store, also stated that it generally targets approx. 5% ROE for new investments.
Hyundai’s Comment on Investment Return Target “We target to generate returns at least equal to or greater than bank deposit interest rate for our new investments.” Hyundai Home Shopping*
- However, business projects, especially non-core & new projects, require much higher cost
- f equity
- No debt in most cases
If Return on Investment < Cost of Capital
Value Destruction!
Jan 2019 Page 12
Hyundai’s Acquisitions Viewed by (Some) Analysts as Negative for Hyundai Shareholders but Positive for Affiliates
Analysts’ Comments on Hyundai’s Investments
Which companies will benefit from Hanwha L&C acquisition? If acquisition happens, Hyundai Livart will be the company that will see the biggest long-term fundamental improvement…..This acquisition should be also positive to Hyundai Green Food…..
- Aug. ‘18
Hanwha Securities “Negative on Hanwha L&C acquisition for Hyundai Home Shopping shareholders…Handsome acquisition was needed really for Hyundai Department Store Group and it wasn’t going to create lot of synergy with Hyundai Home Shopping…in reality, Hyundai Home Shopping was used as a cash dispenser for the group.”
- Oct. ‘18
Yuanta Securities
Jan 2019 Page 13
Hyundai Has Abundant Cash on Its Balance Sheet
Source: Bloomberg; Korea Financial Supervisory Service DART – Quarterly Report *Includes cash, short-term financial assets, marketable available-for-sale financial assets, treasury stocks and debt, 35% stake in Hyundai HCN net cash equivalents; Recent $330M Hanwha L&C acquisition amount is not excluded
880 1041 1457
200 400 600 800 1,000 1,200 1,400 1,600 Net Cash Equivalent Market Cap Total Equity (Book Value)
Hyundai Net Cash Equivalent*, Market Cap & Total Equity (Book Value), (Nov. 30, 2018, $ M)
Jan 2019 Page 14
Hyundai’s Payout Ratio is Extremely Low Compared to US peers, Liberty Interactive (LI) and Home Shopping Network (HSN)
Source: Bloomberg *Now Qurate Retail
10% 28% 71% 4% 11% 44% 121%
0% 20% 40% 60% 80% 100% 120% 140% Hyundai Home Shopping GS Home Shopping Home Shopping Network Liberty Interactive
Average Total Payout Ratio (dividend + share repurchase out
- f net income) to Shareholders from ’10-’17
Dividend Share Repurchase
Net income already reflects investments thus High Payout Ratio ≠ Low Investments
4% buyback without cancellation = Not a direct return to shareholders
*
Jan 2019 Page 15
LI and HSN, Controlled by John Malone, a Renowned Capital Allocator in the US, Who Has Richly Rewarded All Shareholders
Value of $1 during John Malone (TCI*)’s Tenure
Source: Center for Research in Security Prices (CRSP) and TCI annual reports *John Malone was CEO of TCI from 1973 to 1996; TCI was acquired by AT&T in 1999
Jan 2019 Page 16
High Payout Ratios Do Not Rule Out Investments
Source: Bloomberg; Korea Financial Supervisory Service DART – Annual Report
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Common Equity ('18 3Q) Zulily (Cash & Stock) HSN (Stock)Trip Advisor (Cash)
Liberty Interactive Major Non- Core Investments (2010 to 2018, $ M)
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 Common Equity ('18 3Q) Handsome (Cash) Hanwha L&C (Cash) Hyundai Rental Care (Cash)
Hyundai Major Non-Core Investments (2010 to 2018, $ M)
Jan 2019 Page 17
Hyundai is Valued at Less than the Sum of its Net Cash Equivalents and Equity Portfolio
Source: Bloomberg; Korea Financial Supervisory Service DART – Quarterly Reports. *Enterprise Value / Earnings Before Interest, Tax, Depreciation & Amortization; Subtracted all net cash equivalents and equity stake values on parent basis to calculate Enterprise Value
- 3x
- 2x
- 1x
0x 1x 2x
Hyundai Parent EV/EBITDA* Valuation (‘18 Nov. 30)
0% 20% 40% 60% 80% 100% 120% 140% Market Value Estimated Net Cash Eq. & Stakes Value
Hyundai Market Value vs Estimated Net Cash
- Eq. & Equity Stakes
Value (‘18 Nov. 30)
Net Cash Eq. Stakes Value
Valued at Negative Value. LESS THAN FREE! 0.5x 0.7x 0.9x 1.1x 1.3x 1.5x 1.7x 1.9x 2.1x 2.3x 2.5x
Hyundai Price to Book Ratio
Jan 2019 Page 18
Hyundai’s Management Compensation has Held Steady or Increased despite Declining Shareholder Value
514 653 641 1038 $0 $200 $400 $600 $800 $1,000 '14 (10 months) '15 '16 '17
Hyundai Professional CEO’s Annual Compensation
Source: Bloomberg; Korea Financial Supervisory Service DART – Annual Reports.
₩80,000 ₩100,000 ₩120,000 ₩140,000 ₩160,000 ₩180,000 ₩200,000
Hyundai Share Price
Jan 2019 Page 19
Dalton’s Proposals
To implement the Stewardship Code effectively, we propose that the NPS take the following actions as a large shareholder of Hyundai
- Identify Hyundai as a target company for increasing dividends/share
repurchases
- Guide Hyundai to maximize long-term “economic value added” for all
shareholders
- Check capital allocations that prioritize the interests of affiliates and corporate
groups over those of company’s shareholders
- Recommend share repurchases/cancellations over dividend payouts when the