Improve Hyundai Home Shopping (Hyundai) Normalize Capital Allocation - - PowerPoint PPT Presentation

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Improve Hyundai Home Shopping (Hyundai)

Normalize Capital Allocation

Jan 2019 Page 1

This presentation is published by Dalton Investments solely for informational purposes and is not, and may not be construed as, investment, financial, legal, tax or 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 (wheth er 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 otherw ise 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 ma y 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, witho ut 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 varia tions 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, expectat ions, 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 actua l 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 b y 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 opinion expressed or implied in this presen tation 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 evaluati

• n 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 otherwise 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, th e meaning of the English language version shall prevail.

Disclaimer

Jan 2019 Page 2 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 of 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

• bligation 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.

Jan 2019 Page 3

Executive Summary

Our Recommendations to the Directors of Hyundai Home Shopping (“Hyundai”)

Normalize Capital Allocation and Align Interests

• Buyback and cancel shares (preferred) and/or increase dividends;
• $200M and $165M one-off for Hyundai and its de facto subsidiary Hyundai HCN (“HCN”), respectively – which is

approximately half of each company’s net cash equivalents

• Even if Hyundai pays out approximately $200M, it is estimated that Hyundai still would have approximately $200M of

net cash equivalents and that Hyundai annually would generate approximately $180M of operating cash flow

• Even if HCN pays out approximately $165M, it is estimated that HCN still would have approximately $165M of net

cash equivalents and that HCN annually would generate approximately $85M of operating cash flow

• Hyundai is the largest shareholder of HCN with an approximately 38% ownership, and other Hyundai Department

Store affiliates additionally hold an approximately 30% ownership

• If HCN pays out $165M, it is estimated that Hyundai’s share of the payout would be approximately $63M
• Increase annual, regular total payout ratio to 60-80% for Hyundai and 80-100% for HCN
• If the company faces a good investment opportunity that can create “economic value added” even after already making

significant investments, the company may obtain the necessary capital through other means, such as the usage of remaining net cash equivalents, issuance/exchange of stock and/or capital increase or adopting a temporary and flexible approach with capital return to shareholders (share repurchase and cancellation)

• Pay 40-70% of senior management’s annual compensation in restricted shares to align interests of management with

those of minority shareholders;

• Evaluate senior management’s performance primarily based on “economic value added”; and
• Split and merge companies to unlock value and streamline. (But this cannot substitute better capital allocations).

Jan 2019 Page 4

Table of Contents

• Background: Where did the Value Go?
• Root Cause: Poor Capital Allocation
• Our Recommendations

Jan 2019 Page 5

Since Listing in 2010*, Hyundai’s Shareholders Have Lost Approx. 17% (Share Price Change + Dividend Yield)

Source: Bloomberg; *From Sep. 13, 2010 to Nov. 30, 2018

₩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%

Jan 2019 Page 6

…..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, etc. *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, etc.

Jan 2019 Page 9

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, etc. *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 10

We Believe Hyundai is Valued at Approx. 60% Discount to Its Estimated Intrinsic Value*

Source: Korea Supervisory Service DART – Quarterly Reports, etc. *We did not apply a holding discount because Hyundai has de facto control in most of the cases and also has the capacity to narrow the discount (e.g., spin-off). Selling at premium may be possible because some appear undervalued (e.g., below the tangible book value). Moreover, calculating a holding discount can be very arbitrary.

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Market Value Intrinsic Value

Hyundai Home Shopping Estimated Intrinsic Value vs Market Value ($ M, as of Nov. 30, ‘18)

MV Net Cash (Equivalent) Hyundai HCN Net Cash Stake Hyundai HCN Stake Handsome Stake Hyundai Rental Care Stake Other Affiliate Stakes Core Business Value

• Parent Net Cash Equivalents (₩ 827B)
• Includes cash (₩ 29B), short term

financial assets (₩ 733B), available-for- sale financial assets (₩ 34B), treasury stocks (₩ 31B) and debt (0)

• Hyundai HCN Net Cash Stake (₩ 130B)
• Hyundai Home Shopping owns 35%
• Hyundai HCN has net cash equivalents

(₩ 356B) and treasury stocks (₩ 12B)

• Hyundai HCN Stake (₩ 182B)
• Hyundai HCN’s operation valued at ₩

400K per cable subscriber with 1.3M

• subscriber. This equals to 9x ‘17 FCF
• Handsome Stake (₩ 326B)
• Hyundai Home Shopping owns 35%
• Applied share price of Nov. 30th, 2018
• Hyundai Rental Care Stake (₩ 111B)
• Applied book value (3Q ‘18)
• Core Business (₩ 1,332B)
• Applied 12x on Parent ‘17 NOPAT of ₩ 111B

60%

Net cash Equivalents & equity stakes

Jan 2019 Page 11

Table of Contents

• Background: Where did the Value Go?
• Root Cause: Poor Capital Allocation
• Our Recommendations

Jan 2019 Page 12

Hyundai’s Overall Capital Efficiency Declined Severely Despite Core Business Strength

106%

Hyundai**

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 13

Hyundai’s Core Business Needs Very Little Capital to Operate and Grow

Source: Bloomberg; Korea Financial Supervisory Service DART – Annual Reports, etc.; Hyundai IR Materials

1% 18% 100%

0% 20% 40% 60% 80% 100% 120% CapEx OP Net Revenue

Hyundai Operating Profit and CapEx as % of Net Revenue (Average from ‘08 to ’17, Parent)

₩0 ₩500 ₩1,000 ₩1,500 ₩2,000 ₩2,500 ₩3,000 ₩3,500 ₩4,000 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Hyundai Gross Revenue vs Fixed & Intangible Assets (KRW B, Parent)

Net Revenue Fixed & Intangible Assets

Jan 2019 Page 14

Since 2012, Hyundai Has Invested approx. $1B in Non-Core Businesses

Source: Korea Financial Supervisory Service DART – Annual Reports & Public Filings, etc.

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Investments

Hyundai Home Shopping’s Major Non-Core Investments ($ M)

Hanwha L&C Thailand Vietnam China Hyundai HCN Hyundai Rental Care Handsome

Jan 2019 Page 15

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 16

Hyundai’s Acquisition of 35% Stake of Handsome (a fashion company) Has Performed Poorly

$0 $50 $100 $150 $200 $250 $300 $350 $400 Handsome Share Price

After 7 years, current market value of Handsome Acquisition shows $86M (23%) loss

Acquisition Price (Feb. '12) MV (Nov. 30th, '18)

Source: Bloomberg; Korea Financial Supervisory Service DART – Annual Reports, etc. *Cumulative

• 100%

5% 4% 3% 4% 5% 5% 4%

• 120%
• 100%
• 80%
• 60%
• 40%
• 20%

0% 20% '12 Feb '12 '13 '14 '15 '16 '17 '18 3Q*

Equity Income Return from Handsome Stake contributed 3%-5% ann.

Initial investment Equity income

• $86M

3-5% return is too low

Jan 2019 Page 17

Hyundai Had to Write Off 90% of Its China Joint Venture (JV) Business; JVs in Vietnam and Thailand Have Lost Money

$0 $2 $4 $6 $8 $10 $12 $14 China JV Stake

Hyundai Home Shopping’s China JV Value ($ M)

Initial Investment ('11) Current Book Value ('18 3Q)

Had to write-off $10M due to business difficulty

Source: Korea Financial Supervisory Service DART – Annual Reports, etc. *Cumulative

• $8
• $6
• $4
• $2

$0 '15 '16 '17 '18 3Q*

Equity Income from Thailand JV Stake ($ M)

Initial Investments Equity Loss

• $15
• $10
• $5

$0 '15 '16 '17 '18 3Q*

Equity Income from Vietnam JV Stake ($ M)

Initial Investments Equity Loss

Jan 2019 Page 18

$135M Investment in Hyundai Rental Care — Pre-tax IRR* is Estimated at a Modest 9%

1,000 2,000 3,000 4,000 5,000 6,000

# of Domestic Rental Accounts as of

• Sep. 30, 2018 (1,000)
• 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

Initial Investments Return (Reflects Hyundai's Forecast) Looks like a long time to pay

• back. Even if we assume a
• ptimistic 20% return on initial

investment annually from 2025 for the 20 years thereafter, the total 30-year pre-tax IRR will be

• nly 9%. But this might not be

possible with intensifying competition, and it may become harder to generate “value.”

Source: Bridge Economy; Hyundai IR; Korea Financial Supervisory Service DART – Annual Reports, etc.; Dalton Estimates *Internal Rate of Return based on optimistic assumptions

Jan 2019 Page 19

Hyundai Paid $330M to Acquire 100% Stake in Hanwha L&C; We Believe Price Paid is High

Source: Hyundai IR; Bloomberg; Korea Financial Supervisory Service DART – Annual Reports & public filings, etc.; Dalton Analysis; Invest Chosun; The Bell

Hanwha L&C KCC LG Hausys PB (’17) 2.6x 0.5x 0.7x EV/EBITDA (‘18E) 10.5x 0.3x 7.9x

Purchase Price Appears Expensive to Peers Estimated Valuation Comparison (Based on 3Q ‘18 Share Price and trailing 4Q business performances for KCC & LG)

Jan 2019 Page 20

Hyundai Share Price Declined on News of Acquisition of Hanwha L&C

Source: Bloomberg; Korea Financial Supervisory Service DART – Annual Reports *Refer to pg. 12 for return on capital employed **Hyundai and HGF have very different businesses consolidated and therefore have calculated based on the parent

’15 ’16 ‘17

Hanwha L&C

11% 7% 5%

Hyundai Home Shopping** (Parent)

84% 104% 117%

Hyundai Green Food** (Parent)

15% 17% 13%

Hyundai Livart

13% 11% 10%

Hyundai HCN

18% 21% 22% Hanwha L&C est. ROCE lower than Hyundai & Affiliates Estimated Return on Capital Employed*

₩95,000 ₩100,000 ₩105,000 ₩110,000 ₩115,000 ₩120,000 8/1/2018 9/1/2018 10/1/2018

Hyundai Share Price

Rumor of Hyundai acquiring Hanwha L&C Hyundai confirms acquisition of Hanwha L&C “Negative on Hanwha L&C acquisition for Hyundai Home Shopping shareholders…” Yuanta Securities “We don’t manufacture interior materials in-house like Hanwha L&C. We don’t have any plans to do it in-house or acquire such companies” Hanssem (leader in Hyundai Livart’s industry)

Jan 2019 Page 21

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 22

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 23

LI and HSN, Controlled by John Malone, a Renowned Capital Allocator in the US, Have 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 24

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 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 Investments (2010 to 2018, $ M)

Jan 2019 Page 25

Dalton Estimates of Investment Returns from Share Buybacks (and Cancellation)

Source: Korea Financial Supervisory Service DART – Annual Reports, etc. *Estimated returns based on methods described in this presentation. Hanwha L&C return is the expected return based on 2019 estimate, and Handsome stake return is based on current equity income yield.**Pre-tax IRR

150% 9%** 6% 5%

0% 20% 40% 60% 80% 100% 120% 140% 160% Share Repurchase & Cancellation Hyundai Rental Care Stake Hanwha L&C Handsome Stake

Estimated Hyundai Investment Return*

Jan 2019 Page 26

Has Hyundai’s Inadequate Capital Allocation Harmed Share Price Performance?

Source: Bloomberg *Assuming dividends reinvested in the stock **Until Dec. 29, 2017 as it was acquired by LI on Jan. 2, 2018 *** Subtracted all net cash equivalents and equity stake values on parent basis to calculate Enterprise Value ****As of Sep. 30, 2017, because it was acquired by LI on Jan. 2, 2018, and due to data availability

• 40%
• 20%

0% 20% 40% 60% 80% 100% 120% 140% 160% Hyundai HSN** LI (Qurate Retail)

Total Shareholder Return* (Sep. 13, 2010 to Nov. 30, 2018)

• 4.0x
• 2.0x

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x Hyundai*** LI (Qurate Retail) HSN****

EV/EBITDA (As of Nov. 30, 2018)

Jan 2019 Page 27

Broker Research Appears to Support This View

Broker Research Comments on Hyundai Home Shopping

“Share price was weak due to announcing acquisition of an interior company that doesn’t seem to have big synergy with its core business.”

• Nov. ‘18

Eugene Securities “Extremely low valuation with intrinsic price-earnings ratio (market value – net cash – equity stakes) at -1.3x.”

• Nov. ‘18

Hyundai Motor 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 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 “Hyundai Home Shopping should also consider increasing returns to shareholders…”

• Feb. ‘18

Hyundai Motor Securities “While net cash is 50% of its market value, we applied 50% discount to this net cash because of 1) no specific shareholder return policy and 2) weak operating performances by its acquired companies while generating low synergies with its core business.”

• Aug. ‘17

Yuanta Securities “Hyundai Rental Care’s weak operations and shareholder return policy need to be improved.”

• Mar. ‘17

Samsung Securities

Jan 2019 Page 28

Table of Contents

• Background: Where did the Value Go?
• Root Cause: Poor Capital Allocation
• Our Recommendations

Jan 2019 Page 29

Recommendations

• I. Buyback and cancel shares (preferred) and/or increase dividends
• $200M and $165M one-off payout for Hyundai and its de facto subsidiary Hyundai HCN (“HCN”),

respectively – which is approximately half of each company’s net cash equivalents

• Even if Hyundai pays out approximately $200M, it is estimated that Hyundai still would have

approximately $200M of net cash equivalents and that Hyundai annually would generate approximately $180M of operating cash flow

• Even if HCN pays out approximately $165M, it is estimated that HCN still would have

approximately $165M of net cash equivalents and that HCN annually would generate approximately $85M of operating cash flow

• Hyundai is the largest shareholder of HCN with an approximately 38% ownership, and other

Hyundai Department Store affiliates additionally hold an approximately 30% ownership

• If HCN pays out $165M, it is estimated that Hyundai’s share of the payout would be

approximately $63M

• Increase annual, regular total payout ratio to 60-80% for Hyundai and 80-100% for HCN
• If the company faces a good investment opportunity that can create “economic value added”

even after already making significant investments, the company may obtain the necessary capital through other means, such as the usage of remaining net cash equivalents, issuance/exchange of stock and/or capital increase or adopting a temporary and flexible approach with capital return to shareholders (share repurchase and cancellation)

Jan 2019 Page 30

Hyundai Can Easily Manage a $200M One-Off Payout and 60-80% (of net income) Regular Total Payout Ratio (Approx. $100M).

Source: Bloomberg; Korea Financial Supervisory Service DART – Quarterly Reports; Dalton Estimates *Earnings Before Interest, Tax, Depreciation & Amortization

400 150

• 100
• $200
• $100

$0 $100 $200 $300 $400 $500 Net Cash on Hand One-off Payout

Hyundai Estimated Net Cash Equivalents vs Recommended One-off Payout ($, M)

Hanwha L&C and Hyundai Rental Care Hyundai Parent

180 40 100

$0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 EBITDA CapEx Regular Payout

Hyundai Estimated EBITDA vs CapEx vs Recommended Regular Payouts ($, M)

Jan 2019 Page 31

Hyundai is the Largest Shareholder of Hyundai HCN (HCN)

Source: Korea Financial Supervisory Service DART – Quarterly Reports *As of December 31, 2018, Hyundai’s ownership increased to approximately 38%

35%

11% 11%

6% 3% 34% Hyundai HCN

HCN Ownership (As of Sep. 30, 2018)*

Hyundai Hyundai Shopping Hyundai Department Store Hyundai Green Food Kyo-Sun Chung Others

Hyundai Department Store Group (66%)

Jan 2019 Page 32

HCN Also Has Ample Net Cash Equivalents and is Very Undervalued

Source: Bloomberg; Korea Supervisory Service DART – Annual Reports

$0 $100 $200 $300 $400 $500 $600 $700 $800 Market Value Intrinsic Value

Hyundai HCN Estimated Intrinsic Value vs Market Value ($ M, as of Nov. 30, ‘18)

MV Net Cash (Equivalents) Core Business Value Market Value is similar to net cash equivalents. Therefore, you’re getting core business almost for FREE!

50%

Net Cash Equivalents

• Net Cash Equivalents (₩ 368B)
• Includes cash (₩ 8B), short term

financial assets (₩ 348B), treasury stocks (₩ 12B)

• Core Business (₩ 520B)
• Applied ₩ 400K per cable

subscriber with 1.3M cable subscriber

• This equals to 9x ‘17 FCF

Jan 2019 Page 33

HCN is Not Returning Capital to Shareholders but Simply Piling Up Cash

Source: Bloomberg

7% 7% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

HCN Average Total Payout Ratio (2010 to 2017)

Dividend Share Repurchase

7% buyback without cancellation = Not a direct return to shareholders

4.79 46.98 84.03 121.77 175.79 207.99 251.45 284.69 333.04 50 100 150 200 250 300 350 '10 '11 '12 '13 '14 '15 '16 '17 '18 3Q

HCN Net Cash ($, M)

Jan 2019 Page 34

HCN’s Free Cash Flows Have Been Higher Than Net Income

Source: Bloomberg

$0 $10 $20 $30 $40 $50 $60 $70 '10 '11 '12 '13 '14 '15 '16 '17

HCN CapEx vs Depreciation (2010 to 2017, $ M)

Depreciation CapEx $0 $10 $20 $30 $40 $50 $60 $70 $80 '10 '11 '12 '13 '14 '15 '16 '17

HCN FCF vs NI (2010 to 2017, $ M)

NI FCF

• Cable business has front-loaded capex, increasing free cash flow in later years

Jan 2019 Page 35

HCN Can Easily Manage a $165M One-Off Payout and an 80-100% Regular Total Payout Ratio (Approx. $35M)

Source: Bloomberg; Korea Financial Supervisory Service DART – Quarterly Reports; Dalton Estimates *Earnings Before Interest, Tax, Depreciation & Amortization

330 165

$0 $50 $100 $150 $200 $250 $300 $350 Net Cash on Hand One-off Payout

HCN Net Cash Equivalents vs Recommended One-off Payout ($, M)

85 25 35

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 EBITDA CapEx Regular Payouts

HCN Estimated EBITDA vs CapEx vs Recommended Regular Payouts ($, M)

Jan 2019 Page 36

Recommendations

• II. Pay 40-70% of senior management’s annual compensation in

time-vested restricted shares to align interests of management with those of minority shareholders

Jan 2019 Page 37

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 38

Hyundai Management is Compensated Very Differently from Its US peer, Qurate Retail

Qurate Retail’s Management Compensation

Source: Qurate Retail Definitive Proxy Statement

Qurate Retail’s Senior Management appear to receive more than 50% of compensation through stock-based compensation.

Jan 2019 Page 39

Recommendations

• III. Evaluate senior management’s performance primarily based on

“economic value added.”

Jan 2019 Page 40

Evaluate Management Performances on Creation of Value to Shareholders

Source: Korea Financial Supervisory Service DART – Annual Reports

Hyundai’s Comment on Profit Sharing from Annual Report

Profit Sharing: …Annual payments can differ depending on the after-tax profit (based on management accounting) which is our business performance indicator… Hyundai Home Shopping

Should be based on “economic value added”

Economic value added = Capital x (Return on Capital - Cost of Capital)

Jan 2019 Page 41

Recommendations

• IV. Split and merge companies to unlock value and streamline. (But

this cannot substitute better capital allocations).

Jan 2019 Page 42

Illustration of Hyundai & HCN Split and Merger

Hyundai Hyundai Hold Co Hyundai Op Co HCN HCN Hold Co HCN Op Co Hyundai Hold Co Hyundai Op Co

• Net cash equivalent
• Equity stakes
• Net cash equivalent
• Equity stakes
• Core business
• Core business

MERGE 100% 100%

List separately on the market List separately on the market

Jan 2019 Page 43

Hyundai’s Independent Directors have Not Opposed Any Proposals by Management

Source: Korea Financial Supervisory Service DART – Annual Reports, etc.

146

146

20 40 60 80 100 120 140 160 Number of voting items Number of items which every attendant independent director voted for

Not a single opposing vote since 2010

Estimated Number of Hyundai Board of Directors Voting Items which Every Attendant Independent Director Voted For (2010 to 2018 3Q)

Jan 2019 Page 44

Time to Change for the Better

“There are two ways to do something.

The right way, and again.”

Unknown

Our recommendations (I to V) are aimed at improving shareholder returns significantly for ALL shareholders.