HYUD - Hyundai preferred

[TwoCitiesCapital]

Keeps going down. 3,5 divy yield now so might be easier for some to hold than before.

 

Who knows. It was trading in the $30s in the not-too-distant past. I can't fathom why it would trade in that range, but it has and might again. I'll just keep adding...

[AJB96]

I recently wrote a report on Hyundai and I thought I'd share it with the board.

 

Summary:

 

Numbers as of July 10th 2015

 

Share price:

Common (005380): ₩125,000

Preferred (005389): ₩81,000

 

Market cap:

Common ₩33,940 billion

Preferred ₩21,993 billion

 

Net auto cash and liquid securities per share: ₩66,936

Book value of finance arm: ₩18,050

2014 net income per share: ₩27,055

Book value per share: ₩212,341

 

Hyundai is a good business trading at an incredible price. Since 1999, book value has grown by 14.8% per year (despite cash and securities making up a significant portion of assets over this period). Back in 1999, Hyundai produced some of the worst quality cars in the industry and had global market share of only 2.6%. Today, the quality of its cars is industry leading according to JD Power and market share has grown to 10% worldwide in a very short amount of time. Toyota executives have said Hyundai is their most feared competitor. All of this success has been achieved with margins that have averaged much higher than peers. Hyundai has a sustainable cost advantage which is rare in the automotive industry.

 

Hyundai’s stock price has fallen nearly 50% over the past year, in large part due to an overpriced acquisition of land among other factors. This widely publicized decision by management certainly resulted in an impairment of business value. However, it has also caused the stock to trade at an incredibly cheap valuation. Hyundai preferred currently trades for ₩81,000 or just 3 times 2014 net income of ₩27,055 per share. Additionally, Hyundai has ₩66,936 per share in net cash and securities and a finance arm with a book value of ₩18,050 per share.  When the net cash and securities are added to the book value of the finance arm – investors are getting the auto business for free. The key question becomes when will this value be realized? Hyundai has consistently increased its dividend. In 2014, management raised the dividend 50% and did a small share buyback. Additionally, in the Q2 ’15 earnings release, management committed to raising the payout ratio to 25-30%. This will result in an annual yield of 10% on the preferred.

 

There are many factors that have weighed on the business and stock price recently. 1) The land purchase. 2) Low fuel prices are boosting sales for SUVs (a segment that Hyundai barely addresses yet) at the expense of fuel efficient cars. This has caused Hyundai’s sales to fall even though their share of the car market has increased in many markets such as the US. Hyundai has begun focusing more on the crossover and SUV segment with products such as the 2016 Tucson. 3) The won has remained strong against many other currencies which has given an advantage to certain competitors such as the Japanese automakers. 4) The world automobile market is below trend with many areas of the world doing very poorly including Europe, Russia, South America and more recently China.

 

In addition to Hyundai’s cheap valuation and history of success, there are many tailwinds for the business going forward. 1) The automobile replacement cycle is just beginning in the US. Auto sales in the US were below trend from 2008-2013, resulting in a large amount of pent up demand. Automobile sales have lagged the trend line by 14-26 million units and automobiles are the oldest they’ve ever been in the US at 11.4 years. Additionally, the automobile industry is doing poorly in virtually every market outside of the US. Hyundai is poised to benefit if the world automobile market improves. 2) Hyundai is also moving upscale which will increase margins if they are successful. 3) The quality of their cars is now industry leading. According to the 2015 JD Power Initial Quality study, Hyundai now ranks ahead of the Japanese automakers. 4) Although the land purchase for the new headquarters was bad for shareholders, the subsequent outcry may have been the impetus needed for management to take shareholder friendly actions such as increasing the dividend payout ratio. 

Hyundai_Motors_Preferred_final.pdf

[misterkrusty]

for those of you in the U.S., would you mind telling me what % withholding tax you've been paying on dividends received from Hyundai Motors, or from any other Korean company?  also, kindly disclose if you hold your shares in an IRA or not (sometimes foreign gov'ts do treat IRA-held securities differently - e.g. Canada)

 

Poking around on the web I've seen multiple sources claiming the tax to be 27.5%, yet a friend who owns some Hyundai preferreds in an IRA tells me his dividends have been taxed at a 22% rate.  So maybe that 27.5% number is out of date.

 

Thanks

M

[TwoCitiesCapital]

for those of you in the U.S., would you mind telling me what % withholding tax you've been paying on dividends received from Hyundai Motors, or from any other Korean company?  also, kindly disclose if you hold your shares in an IRA or not (sometimes foreign gov'ts do treat IRA-held securities differently - e.g. Canada)

 

Poking around on the web I've seen multiple sources claiming the tax to be 27.5%, yet a friend who owns some Hyundai preferreds in an IRA tells me his dividends have been taxed at a 22% rate.  So maybe that 27.5% number is out of date.

 

Thanks

M

 

My posco shares withhold at 22% in my taxable account.

[Bains-m]

Does anyone have any insight into Mohnish Pabrai's position sizing and average cost price of his Hyundai preferred position??

 

The only evidence I have found of his position is the Barons article

 

http://www.barrons.com/articles/buffett-disciple-mohnish-pabrai-on-bank-of-america-citi-google-and-hyundai-1418128642

 

I can't find any filings (Korean stock not in 13f) no other information and I can't see this position in Aquamarine funds annual report as Guy tends to have a lot of similar position to Pabrai?

 

Any thoughts/insight would be appreciated

[Bains-m]

PS any thoughts on why the class 3 preferred shares are trading at a discount to the other preferred with no significant difference in the dividend payout historically

[Bains-m]

Series I Series II Series III

 

2000 500 550 600 550

2001 1350 1450 1550 1450

2002 850 900 950 900

2003 1000 1050 1100 1050

2004 1150 1200 1250 1200

2005 1250 1300 1350 1300

2006 1000 1050 1100 1050

2007 1000 1050 1100 1050

2008 850 900 950 900

2009 1150 1200 1250 1200

2010 1500 1550 1600 1550