Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

<p>There is a peculiar disonnect between the Hyundai Motor Group's reality versus what sellside research has been rehashing every few years to broke stocks:  Hyundai Motor Group needs to go to a HoldCo structure because that will strengthen ES Chung's grip on the Group after his father passes the baton, or so the basic story goes.  Since the appointment of Sang Jo Kim as Head of Korea's Fair Trade Commission last summer, that old story has been rehashed and redistributed in new package as part of the Korean market's renewed fascination with Holding Companies.  Here are a few items we see as problematic in this line of thought as it applies to the HM Group:</p><ol><li>The HoldCo thesis for the HM Group originated in Yoido in the mid-2000s when ES Chung was still unproven as Crown Prince.  The Korean stock market assumed that he was just an incompetent 3rd generation Chaebol brat who needed to inherit equity to retain influence over the group, so the story was spun independent of any input from the Chung family.  </li><li>In the ensuing decade, ES Chung turned around Kia Motors (he should in fact be seen as Korea's answer to Carlos Ghosn) and drove the adoption of the fluidic sculpture design for the Hyundai bade that proved to be wildly successful.  Such initiatives earned genuine respect for his leadership from the ranks of the HM Group's professional managers, independent of his father's influence.  We believe quite strongly there is no pressing financial need for the Chung family at present to create a HoldCo structure purely from an inheritance standpoint.  It can wait, if it must be done.</li><li>The foremost concern of the current Korean government is job creation, corporate governance as defined largely by dividend payouts and fairer growth opportunities for SMEs. </li></ol><p>Korean courts have recently ruled that an individual's strengthening of control over a group was in fact lawful in the case of the Samsung C&amp;T-Cheil Industries merger in 2H17.  It would not be easy for even a strengthened FTC to push through a forced HoldCo creation  purely with the intention to weaken Chung family's perceived control over the group at this stage in our view.  So long as the group maintains a steady march toward higher dividend payouts, SME incubation and funding, and compliance with other government policy that govern fair supplier relationships, the HM Group stands a good chance of avoiding going the HoldCo route in our view.  </p>

There is a peculiar disonnect between the Hyundai Motor Group's reality versus what sellside research has been rehashing every few years to broke stocks:  Hyundai Motor Group needs to go to a HoldCo structure because that will strengthen ES Chung's grip on the Group after his father passes the baton, or so the basic story goes.  Since the appointment of Sang Jo Kim as Head of Korea's Fair Trade Commission last summer, that old story has been rehashed and redistributed in new package as part of the Korean market's renewed fascination with Holding Companies.  Here are a few items we see as problematic in this line of thought as it applies to the HM Group:The HoldCo thesis for the HM Group originated in Yoido in the mid-2000s when ES Chung was still unproven as Crown Prince.  The Korean stock market assumed that he was just an incompetent 3rd generation Chaebol brat who needed to inherit equity to retain influence over the group, so the story was spun independent of any input from the Chung family.  In the ensuing decade, ES Chung turned around Kia Motors (he should in fact be seen as Korea's answer to Carlos Ghosn) and drove the adoption of the fluidic sculpture design for the Hyundai bade that proved to be wildly successful.  Such initiatives earned genuine respect for his leadership from the ranks of the HM Group's professional managers, independent of his father's influence.  We believe quite strongly there is no pressing financial need for the Chung family at present to create a HoldCo structure purely from an inheritance standpoint.  It can wait, if it must be done.The foremost concern of the current Korean government is job creation, corporate governance as defined largely by dividend payouts and fairer growth opportunities for SMEs. Korean courts have recently ruled that an individual's strengthening of control over a group was in fact lawful in the case of the Samsung C&amp;T-Cheil Industries merger in 2H17.  It would not be easy for even a strengthened FTC to push through a forced HoldCo creation  purely with the intention to weaken Chung family's perceived control over the group at this stage in our view.  So long as the group maintains a steady march toward higher dividend payouts, SME incubation and funding, and compliance with other government policy that govern fair supplier relationships, the HM Group stands a good chance of avoiding going the HoldCo route in our view.  

Hyundai Motor Group: That HoldCo Speculation Again?!