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This Presentation (i) is from and is published by Elliott Associates, L.P. (“EALP”) and Potter Capital LLC (“Potter”), both of which are Elliott affiliates; and (ii) supplements the letter and presentation from EALP
and Potter to the directors of Hyundai Mobis Co., Ltd., Hyundai Motor Company, and Kia Motors Corporation, dated 23 April 2018 (the “Letter”). Capitalized terms used in this Presentation shall unless
otherwise defined bear the meanings ascribed to them in the Letter. Many of the statements in this Presentation as well as in the Letter are the opinions and/or beliefs of EALP and/or Potter, which are based
on their own analysis of publicly available information. Any statement or opinion expressed or implied in this Presentation and the Letter is provided in good faith but only on the basis that no investment
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EALP, Potter, Elliott and/or any of their respective affiliates (i) may at any time in the future, without notice to any person (other than as required under, or in compliance with, applicable laws and regulations),
increase or reduce their holdings of any Hyundai group entity’s shares or other equity or debt securities (including such securities and derivative products directly and/or indirectly related to such securities
including, for example, KOSPI 200 Index) and/or may at any time have long, short, neutral or no economic or other exposure in respect of any Hyundai group entity’s shares or other equity or debt securities;
and/or (ii) may now have and/or at any time in the future, without notice to any person (other than as required under, or in compliance with, applicable laws and regulations), establish, increase and/or decrease
long or short positions in respect of or related to any Hyundai group entity’s shares or other equity or debt securities (including such securities and derivative products directly and/or indirectly related to such
securities including, for example, KOSPI 200 Index), in each case irrespective of whether or not all or any of the Accelerate Hyundai Proposals or the HMG Restructuring Plan are or are expected to be
implemented.
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Why are we here?
• Elliott is a significant shareholder in Hyundai Mobis Co., Ltd. (“Mobis”), Hyundai Motor Company (“HMC”) and Kia Motors Corporation (“Kia”),
collectively the Hyundai Motor Group (“HMG”), holding over 1.5% common shares in each of the companies
• HMG announced a plan for business restructuring after market close on 28 March 2018 which involv es Mobis spinning off its domestic module and
after-sales servicebusinesses and merging the spun-off businesses with Glovis (“HMG Restructuring Plan” or the “Plan”)
• Mobis has communic ated in its materials that this restructuring is needed to (i) sever existing circular shareholdings, and (ii) eliminate potential ris ks
arising from existing affiliate transactions 1
• However, the spin-off merger by itself does nothing to resolve the existing circular shareholding
Mobis
Mobis
(post spin-off)
Glovis
Glovis Hyundai Steel Hyundai Steel
(post merger)
• Post spin-off merger, a share swap between the principal shareholders’ stake in Glovis and Kia’s stake in Mobis is required to sever the main
circular shareholding. However, thePlan is devoid of a transparent process to realize fair value for Kia’s stake in Mobis
• The Plan to merge Mobis’s spun-off business with Glovis is not supported by sound business rationale and the valuation of Mobis ’s spun-off
business is based on a questionable set of assumptions that results in its significant undervaluation
3
Why are we here?
• In reality, the HMG’s Restructuring Plan has many of the characteris tics of a similar transaction that Elliott voiced significant concerns about three
years ago: the merger between Samsung C&T and Cheil Industries
• As was the case with Samsung C&T’s management, HMG management has failed to act in the best interest of the companies and their respective
shareholders with this Plan. The HMG Restructuring Plan continues the Group’s poor track record of deals , which have been value dilutive for the
shareholders (e.g. KEPCO land purchase, and acquisitions of Hyundai E&C and Green Cross Life)
• With the support of many domestic and international shareholders, Elliott unveiled its Accelerate Hyundai Proposals on 23 April 2018 to make
recommendations on how the HMG Restructuring Plan could be improved by adopting a holding company structure
− A holding company structure is more tax effic ient and sustainable in the long run. Elliott agrees that the leasing business is integral to HMG’s
auto business and supports a restructuring that will enable the Group to retain control of the leasing business that is legal and within the confines
of current regulations
− Elliott also believes a holding company structure can be achieved via a further demerger of the financial subsidiaries. Hyundai Capital does not
have to be a subsidiary of HMC and Kia for it to support the Group’s auto business
• Elliott also proposed actionable targets for balance sheet optimization, improved shareholders returns, and board structures and article
amendments that would ensure best-in-class corporate governance for the Group
• Since then, HMG has announced token measures on share buybacks and cancellation of some existing treasury shares. While Elliott believes this
is a positive development, more significant measures are needed to address the long-unresolved is sues at the Group that have led to significant
valuation discounts and underperformance at each Mobis, HMC and Kia
• Elliott supports a fair restructuring of HMG that treats all shareholders equally, and the current HMG Restructuring Plan is neither fair nor
comprehensive enough to receive its support
4
The HMG Restructuring Plan has many of the characteristics seen in the merger between
SC&T and Cheil Industries
Merger between Samsung C&T and Spin-off merger between Mobis and
Cheil Industries (July 2015) Hyundai Glovis (May 2018)
• The merger ratio of 0.35 C heil Industries shares for 1 • The s pin-off terms val ue Mobis’s s pun-off business at
All these factors combined results in a heavily
Samsung C&T share significantly undervalued Samsung 6.2x P/E (ex-c ash) despite it being si gnificantly more
discounted valuation and an unfair merger ratio
C&T, valuing it effectively at -0.06x P/B profitable than Glovis (8.6x P/E)
Notes: 1. Page 21 of Samsung C&T – Cheil Industries Merger Investor Presentation June 2015.
2. Page 4 of Hyundai Mobis-Hyundai Glovis Calculation of Spin-off Merger Ratio (Summary of Merger Ratio Valuation Report).
5
The Samsung C&T - Cheil merger was voted through but at significant costs to
independent minority shareholders
• The merger between Samsung C&T and Cheil Industries proceeded despite shareholder opposition, and Samsung C&T share price has languis hed
since the merged entity relisted on 15 September 2015. Samsung C&T has underperformedKOSPI by 49% since then
• Current analyst consensus estimate Samsung C&T’s revenue to reach KRW 32 trillion by 2020 as compared to Samsung C&T’s original target of
KRW 60 trillion (47% shortfall) and operating profit to reach KRW 1.3 trillion by 2020 as compared to Samsung C&T’s original target of KRW 4
trillion (68% shortfall)
130
+27%
120
110
-49%
100
90
80
-22%
70
60
9/15/2015 12/15/2015 3/15/2016 6/15/2016 9/15/2016 12/15/2016 3/15/2017 6/15/2017 9/15/2017 12/15/2017 3/15/2018
SC&T KOSPI
6
HMG has a poor track record of deals that have been value dilutive for shareholders
• We have seen multiple examples in the past of capital being spent at HMG that have been value dilutive for shareholders, leading to analy sts and
shareholders voicing significant concerns.
• HMG’s purchase of land in Gangnam dis tric t from KEPCO in 2014 is one such example. There have been many other bad deals including the
Group’s acquisition of Hyundai E&C at significant premium to market, and Mobis’s acquisition of Green Cross Life.
Purchase of land in Gangnam district (2014) • Acquisition price of KRW 10.6 trillion (US • Analysts had voic ed significant concerns
$9.8 billion) represents 217% premium over the purchase:
over the land’s appraisal value of KRW
It does raise concerns about the company’s
3.3 trillion, and is reported to be double strategy for the use of shareholder capital as
the offer made by the second highest the money could have easily been used to
bidder, Samsung Electronics make buy backs, raise dividends, build
factories, or increase R&D outlay. The new
• The investment represents 18%, 16%, headquarters building itself is unlikely to yield
12% of current market cap for HMC, Kia, any meaningful economic value until 2022
Hyundai Mobis, respectively1 Deutsche Bank, September 18, 2014
• Share price dropped by 8 to 9% for each We read the event of HMG paying W10.6trn
for a landsite for a new HQ as multiple de-
of HMC, Kia and Mobis on the day rating catalyst; this is not ROE accretive
following the announcement (September investment… The KRW10.6trn price tag for
18, 2014) 79K square-meters (or cUS$135K per unit)
was well beyond the market’s expectation
• It has been more than 3 years since the (cKRW4trn). Further, we estimate cKRW5-
purchase but there has been limited 6trn of additional development cost incl. HQ
bldg., so our back-of-the-envelope total capex
progress on developing the site with
is ~KRW15-6trn; it cost KRW1.1-1.2trn to build
meaningful construction yet to start given a factory of 300K units capacity, so the amount
delays in relevant approvals is equivalent to 4.2-4.5mn capacity
Citi, September 19, 2014
Source: Company fillings, news and research reports. Exchange rate applied: 1 USD to 1,073 KRW
Notes: 1. HMC, Kia and Hyundai Mobis contributed KRW 5.8 trillion, KRW 2.1 trillion, and KRW 2.6 trillion, respectively to the total acquisition price of KRW 10.6 trillion.
7
Shortcomings of the HMG
Restructuring Plan
8
The proposed spin-off merger lacks clear business logic
1. After the spin-off, the remaining Mobis will own the core parts business, overseas module manufacturing and overseas after-sales services
businesses as well as investments in affiliates (HMC, Hyundai E&C, etc.)
2. Meanwhile, the spun-off Mobis that is to be merged with Glovis will own the domestic module and domestic after-sales services businesses and
KRW 2.5 trillion of cash and equivalents
• We are not convinced by the business rationale provided to support separating the module manufacturing and after-sales servic es businesses
from the international subsidiaries in the same business lines
• The segregation of the domestic operations from international operations for these two businesses creates a risk of weakening their competitive
positioning and resulting diseconomies of scale
• No business rationale was provided for KRW 2.5 trillion of cash and equivalents assumed to be in the spun-off entity to be merged with Glovis .
Splitting cash and equivalent based on asset split (excluding investment securities) is not a business rationale
3. As Mobis’s shareholder, we find splitting the highly profitable and cash generative after-sales services business and merging with a logis tics
company (Glovis) not convincing
• We found no comparable precedents for an after-sale service business combining with a logistics company; nor has HMG provided any case
study to persuade us otherwise
• Mobis has yet to present any quantifiable synergies for combining Glovis and Mobis’s module manufacturing and after-sales services businesses
9
The mid- to long-term vision for remaining Mobis is at best unconvincing
• Mobis announced its mid- to long-term vis ion for the remaining Mobis on 26 April 2018, in whic h the Management provided the market with very
ambitious revenue growth targets with limited specifics on execution
• Management guided for remaining Mobis ’s overall revenue to ris e from KRW 25 trillion in 2018 to KRW 44 trillion by 2025 (implied CAGR of 8%)
through organic growth
• However, giv en HMG’s own growth outlook and Mobis’s progress on its expansion to non-captiv e customers so far, much more details are
needed for shareholders to assess the feasibility of such growth targets
• The Company has also failed to explain why the spin-off merger is necessary for Mobis to achieve these targets in its mid- to long-term vision
• Analysts consensus estimate standalone Mobis’s revenue to reach KRW 41 trillion by 2020, representing 3 year CAGR of 5%
• Management has failed to make a convincing case on why spinning out a highly cash generative domestic after-sales services business
(together with KRW 2.5 trillion of cash) is necessary for them to achieve expansion in Mobis’s core parts and future tech businesses
• Meanwhile, Glovis’s 2025 vis ion after merging with Mobis is to reach revenue targets of KRW 40 trillion by 2025, effectiv ely relying on the
acquisition of the spun-off business to fuel growth
• Analysts consensus estimate standalone Glovis’s revenue to reach KRW 18.5 trillion by 2020, representing 3 year CAGR of 4%
10
The independent valuation of Mobis’s spun-off business is based on a questionable set of
assumptions
• According to the relevant Korean capital market rules, the intrinsic value of Mobis’s spun-off business (which is used for determining the merger ratio) is
based on a prescribed formula of 1 : 1.5 net asset value to profit value
• Given the rigidity of the rules, we will withhold the critique that ONE times price-to-book for an asset-light business (mostly after-sales service) generating
24% ROE is far too low (resulting in net asset value of only KRW 4.5 trillion vs. PwC’s profit value of KRW 12.4 trillion)
• However, even the assumptions behind the profit value of KRW 12.4 trillion (based on a DCF valuation by Samil PwC) have significant technical
discrepancies worth highlighting:
• Bloomberg’s ERP estim ate for Korea is very volatile – it incr eased from
8.45% in 2Q17 to 11.38% in 4Q17 in just 2 quarters
• Based on revised assumptions of 2.5% perpetual growth rate and 11.0% - 11.3% WACC (i.e. 9.6% - 9.9% ERP), the profit value of Mobis’s spun-off
business would be KRW 15.0 ~ 15.5 trillion
• The profit value implies a 62% ~ 67% premium to the current proposed valuation of KRW 9.3 trillion
Source: PwC’s valuation report published on 28 March 2018 and market data.
11
The resulting valuation significantly undervalues MOBIS’s spun-off business…
12
…as compared to Remaining Mobis, Glovis, or Global Peers’ averages
• The following chart shows the implied P/E (ex-cash) of Mobis’s spun-off business as compared to peers’ average of 12.5x. At a more reasonable
DCF valuation of KRW 15.5 trillion as outlined on page 11, the implied P/E of Mobis’s spun-off business would be 11.9x, whic h is in line with peers’
average of 12.5x
• Given that (i) most of the global auto parts peers have a net debt position, and (ii) the lack of business rationale provided to support KRW 2.5
trillion of cash in the spun-off entity, we believe ex-cash P/E is more representative in comparing the valuation of Mobis ’s spun-off businesses
with remaining Mobis, Glovis or global peers
Undervaluation:
10.0x
-40% 9.0x
KRW 6.2 tn
8.0x US $5.7 bn
6.2x
6.0x
4.0x
2.0x
0.0x
Current merger valuation Profit value by PwC Profit value based on more reasonable Remaining Mobis
(W9.3tn) (W12.4tn) assumptions (ex-cash) 1
(W15.5tn)
13
Will Mobis suffer the same fate as Samsung C&T?
105
+2%
100
95 -13%
?
90
28th March 18th April 26th April 2nd May
Mobis and Glovis
announces HMG
Mobis releases further
materials to support the
Mobis presents its
mid-to long-term
Mobis announces
token share buyback
-11%
Restructuring Plan calculation of spin-off vision and cancellation of
merger ratio existing treasury
shares
85
3/28/2018 4/4/2018 4/11/2018 4/18/2018 4/25/2018 5/2/2018 5/9/2018 5/16/2018 5/23/2018 5/30/2018
Mobis KOSPI
14
Conclusion
• An inflexible statutory formula does not replace directors’ fiduciary duty to carefully review and assess the proposed terms and
conditions of the spin-off and merger, with a view to maximizing the company’s interest and in turn shareholder value
• Elliott emphasizes again that the proposed terms of the spin-off and the merger ratio do not ascribe fair value to Mobis’s module
manufacturing and after-sales services businesses
• The unfairness of the transaction is only one of the many factors that have weighed negatively on HMG’s share price
• Measures adopted so far by HMG in relation to shareholder buyback and cancellation of existing treasury shares are token and do not go
far enough to address the broader issues of suboptimal balance sheets, declining shareholder returns and corporate governance that is
below global standards
• HMC’s buyback of KRW 415 billion represents only 7% of KRW 6 trillion of excess cash balance and 1% of its pre-announcement market
cap1
• Mobis’s announced buyback of KRW 187.5 billion over 3 years starting from 2019 or KRW 62.5 billon annually only represents a 2%
increase in payout ratio based on consensus net income, and is only 3% of KRW 6 trillion of excess cash and 1% of pre-announcement
market cap2
• Elliott cannot support the HMG Restructuring Plan on an as-is basis, which fails to treat all shareholders equally
• Elliott calls on the Hyundai Motor Group to revise its proposed transaction to adopt a holding company structure, and to implement a more
comprehensive set of measures that optimize balance sheets, improve shareholder returns policy to be in line with global peers, and reform
its board structure and articles to reflect its status as a leading global automotive brand
15
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