Hyundai Mobis: The Spinoff/Merger Is Not an Integral Part of HMG Governance Reform

Hyundai Mobis Cancels Its Plans for the Spin-Off & Merger with Hyundai Glovis

Hyundai Mobis May 29 EGM Vote Counting Simulation

Elliott Advisors Proposes More Concrete Corporate Governance Measures for the Hyundai Motor Group

Elliott Vs. Hyundai Battle with Korea FTC's Weird Refereering

Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

<p>As May 29 approaches with Mobis on the road, the Mobis spinoff is something that seems to be on many investors' minds.  Since <a href="https://www.smartkarma.com/profiles/354" target="_blank" data-smartkarma-citation="accounts:354">Sanghyun Park</a> and <a href="https://www.smartkarma.com/profiles/342" target="_blank" data-smartkarma-citation="accounts:342">Douglas Kim</a> have written in detail about the factual events surrounding the proposal, we will not go into those details in this note ( see <a href="https://www.smartkarma.com/insights/mobis-glovis-pair-trading-re-preview" target="_blank" data-smartkarma-citation="insights:20280">Mobis-Glovis Pair Trading Re/Preview</a>, <a href="https://www.smartkarma.com/insights/hyundai-mobis-may-29-egm-vote-counting-simulation" target="_blank" data-smartkarma-citation="insights:20283">Hyundai Mobis May 29 EGM Vote Counting Simulation</a>, and <a href="https://www.smartkarma.com/insights/elliott-advisors-proposes-more-concrete-corporate-governance-measures-for-the-hyundai-motor-group" target="_blank" data-smartkarma-citation="insights:19637">Elliott Advisors Proposes More Concrete Corporate Governance Measures for the Hyundai Motor Group</a>).   </p><p>Suffice it to say that there is much discussion about the Hyundai Motor Group in the Korean equity market right now.  Activist investors have become perplexed at why the Korean government which has been pro-Chaebol reform has not jumped on the bandwagon to help force Hyundai-Kia into a HoldCo structure.  A lot of this, in our opinion, has to do with the government trying to strike a balance between not allowing <em>Chaebol</em> families to run amok while trying to preserve the competitiveness of a national industry so long as the industrial organization (as opposed to shareholding structure) of the Group is consistent with global industry practice norms (ie, do GM, Ford, Toyota and BMW all do similar things?  See <a href="https://www.smartkarma.com/insights/hyundai-motor-case-of-conflict-between-investment-horizons-of-activist-investors-automotive-oems" target="_blank" data-smartkarma-citation="insights:19636">Hyundai Motor: Case of Conflict Between Investment Horizons of Activist Investors &amp; Automotive OEMs</a>).</p><p>We ran a few simple numbers to look at whether there is merit to some of the assumptions of the anti-spinoff camp in this note.  We will go with what the numbers say without regard for who is for activists and who is not (see <a href="https://www.smartkarma.com/insights/hyundai-mobis-a-few-thoughts-on-pwc-s-valuation-of-the-spinoff-entity-w606-472-or-w78-543" target="_blank" data-smartkarma-citation="insights:18921">Hyundai Mobis: A Few Thoughts on PWC's Valuation of the Spinoff Entity - W606,472?...or W78,543?</a> in case the reader gets the impression that this author is a corporate PR conduit).  </p><p>Here are our some of thoughts:</p><div class="content-highlight"><h2>Conventional Korean Market Wisdom</h2><ul><li>A/S Parts is high margin value-add.  Without it, Mobis is nothing.</li><li>Modules are higher margin than what people thought after going through the PWC valuation exercises</li><li>Core Parts make no money when you simply subtract A/S Parts &amp; Module Revenues and OP from the Parent entity in PWC's valuation model - doing this, Core Parts comes out as a Dog.</li></ul><h2>Actual Industry Dynamics that may run contrary to Conventional Korean Market Wisdom:</h2></div><ul><li><div class="content-highlight">A/S Parts used to be a high margin value-add for Mobis in 2004.  As the HM Group has been pouring more money into developing an IP base (which is why Mobis was created to be a cash machine), in the next 2-3 product cycles (again, 10-15 years) value accretion will have to take place at the intellectual property level.  This is the risk on this stock, in our view (and risks can be positive and/or negative) as IP will drive topline growth in the future.</div></li><li><div class="content-highlight">Core Parts go into modules - that is why there is a consolidation adjustment factor that mysteriously remains after subtracting the A/S Parts and Module segment figures from parent P&amp;L on a historical basis.  Investors should adjust for this factor when they evaluate Mobis' forward looking margins because identifying what Core Parts margins are will be key to determining the long term viability of Mobis as an investment.</div></li><li><div class="content-highlight"><strong>Core Parts margins should be in double digit territory as a general rule of thumb in the global supplier space, which is conventional industry wisdom, but not necessarily current Korean stock market convention.  </strong></div></li><li><div class="content-highlight">Given low equity base in the post-spinoff entity, Mobis is likely to return to double digit ROE territory by FY2019 if the spinoff proposal is approved at the shareholder meeting on May 29.</div></li></ul><p><strong>In our opinion, passing the proposal will not be value destructive in and of itself.  It is only if Mobis fails in its quest to become an IP-centric supplier then will there be value destruction, but that would be business risk, not <em>Chaebol</em> risk.</strong></p>

As May 29 approaches with Mobis on the road, the Mobis spinoff is something that seems to be on many investors' minds.  Since Sanghyun Park and Douglas Kim have written in detail about the factual events surrounding the proposal, we will not go into those details in this note ( see Mobis-Glovis Pair Trading Re/Preview, Hyundai Mobis May 29 EGM Vote Counting Simulation, and Elliott Advisors Proposes More Concrete Corporate Governance Measures for the Hyundai Motor Group).   Suffice it to say that there is much discussion about the Hyundai Motor Group in the Korean equity market right now.  Activist investors have become perplexed at why the Korean government which has been pro-Chaebol reform has not jumped on the bandwagon to help force Hyundai-Kia into a HoldCo structure.  A lot of this, in our opinion, has to do with the government trying to strike a balance between not allowing Chaebol families to run amok while trying to preserve the competitiveness of a national industry so long as the industrial organization (as opposed to shareholding structure) of the Group is consistent with global industry practice norms (ie, do GM, Ford, Toyota and BMW all do similar things?  See Hyundai Motor: Case of Conflict Between Investment Horizons of Activist Investors &amp; Automotive OEMs).We ran a few simple numbers to look at whether there is merit to some of the assumptions of the anti-spinoff camp in this note.  We will go with what the numbers say without regard for who is for activists and who is not (see Hyundai Mobis: A Few Thoughts on PWC's Valuation of the Spinoff Entity - W606,472?...or W78,543? in case the reader gets the impression that this author is a corporate PR conduit).  Here are our some of thoughts:Conventional Korean Market WisdomA/S Parts is high margin value-add.  Without it, Mobis is nothing.Modules are higher margin than what people thought after going through the PWC valuation exercisesCore Parts make no money when you simply subtract A/S Parts &amp; Module Revenues and OP from the Parent entity in PWC's valuation model - doing this, Core Parts comes out as a Dog.Actual Industry Dynamics that may run contrary to Conventional Korean Market Wisdom:A/S Parts used to be a high margin value-add for Mobis in 2004.  As the HM Group has been pouring more money into developing an IP base (which is why Mobis was created to be a cash machine), in the next 2-3 product cycles (again, 10-15 years) value accretion will have to take place at the intellectual property level.  This is the risk on this stock, in our view (and risks can be positive and/or negative) as IP will drive topline growth in the future.Core Parts go into modules - that is why there is a consolidation adjustment factor that mysteriously remains after subtracting the A/S Parts and Module segment figures from parent P&amp;L on a historical basis.  Investors should adjust for this factor when they evaluate Mobis' forward looking margins because identifying what Core Parts margins are will be key to determining the long term viability of Mobis as an investment.Core Parts margins should be in double digit territory as a general rule of thumb in the global supplier space, which is conventional industry wisdom, but not necessarily current Korean stock market convention.  Given low equity base in the post-spinoff entity, Mobis is likely to return to double digit ROE territory by FY2019 if the spinoff proposal is approved at the shareholder meeting on May 29.In our opinion, passing the proposal will not be value destructive in and of itself.  It is only if Mobis fails in its quest to become an IP-centric supplier then will there be value destruction, but that would be business risk, not Chaebol risk.

현대모비스: 분할안 통과 시, 분할 후 수익 및 ROE 개선 가능성