Hyundai: On The Road To Leadership In Future Mobility
Summary
- While Nikola is rolling trucks downhill, Hyundai Motor is already delivering hydrogen-powered trucks.
- Vehicle electrification and mobility innovation allows the company to differentiate its brands from the rest of the traditional OEMs.
- Higher market share in SUVs and luxury vehicles will provide a tailwind for profitability.
- Low leverage gives Hyundai the opportunity to continue to invest at times when peers cut costs and scale back production.
Source: evcentral.com
Hyundai Motor Company (OTCPK:HYMLF) has been among the best performing auto manufacturers since I last wrote about it in July, explaining why the company could benefit massively from disruption trends in the industry.
Since I wrote my thesis, the stock has appreciated by more than 40%, compared to 24% appreciation of First Trust Global Auto ETF (CARZ).
Data by YCharts
Although the price appreciation was rather extreme over the last few months, and risks for the global economy and auto industry remain extremely high, it might not be the best time to accumulate stock if investment horizon is less than a year. However, as I will show below, the stock remains attractive on a long-term basis as Hyundai's management is firing on all cylinders and positioning the company to be among the future leaders in mobility.
Firing on all cylinders
Similar to General Motors (GM), Hyundai is executing well in all areas of future mobility - fuel cells, electrification, autonomous driving, and Mobility as a Service (MaaS) platforms.
To begin with, Hyundai is among the OEMs that believe hydrogen has an important role to play in future of transportation, even though it is not as exciting as batteries at the moment.
Source: Hyundai Investor Presentation
Not only does the company's management believe in the future of hydrogen and fuel cells, but it is already one of the world's leaders in the space. While Nikola (NKLA) is rolling truck downhills, Hyundai is already shipping its first fuel cell-powered trucks to Switzerland, with the aim to capture the massive European market.
Hyundai Motor Company on Sunday said the first 10 Hyundai XCIENT Fuel Cells, the world’s first mass-produced fuel cell heavy-duty truck, were on their way to Switzerland.
Source: fuelcelltrucks.eu
Source: hyundai-hm.com
By the end of the year, Hyundai expects to have capacity for around 11,000 fuel cell-powered vehicles with the aim to rapidly expand its capabilities and reach half a million by 2030.
Source: Hyundai Investor Presentation
The company is even one of the few collaborating with the U.S. government on the development of efficient fuel cells.
Through its Joint Venture with Aptiv (APTV), Hyundai is also positioned among the leaders in the autonomous driving space.
Hyundai along with Kia Motors will collectively contribute $1.6 billion in cash and $400 million in research and development resources and others, valuing the joint venture $4 billion.
Source: theverge.com
In just two years, Hyundai moved from nearly the bottom of the rankings to one of the leaders in the space - close to Intel-Mobileye (INTC), GM Cruise, and Waymo.
Sources: plasticstoday.com & cnet.com
Although fully autonomous vehicles are perhaps years away, adding certain autonomous driving capabilities play an important role in brand differentiation, allowing OEMs to charge higher prices. Autonomous driving capabilities are also a must-have feature for premium and luxury vehicles.
Finally, Hyundai is moving fast to electrifying its vehicles and has quietly become one of the world's largest EV players.
Source: pulsenews.co.kr
More important than these transitional number above, Hyundai has significant competitive advantage in the EV space in South Korea while, at the same time, it has secured the key component for its EVs - the batteries by forging key partnerships for future expansion and collaboration. I cover all that in more detail here.
Based on all that and the company's marketing efforts in recent years, the Hyundai and Kia brands have been repositioned over the recent years as EV-focused brands. Their smaller market share in Developed Markets has also helped to reduce their association with internal combustion engines, while the newly launched IONIQ brand will be used as a platform for the company's future mobility platforms.
Source: hyundai.com
Over the last year only, Hyundai and Kia brands climbed the digital brand rankings for best-performing auto brands - from Kia appearing at number 10 in 2019.
Source: gartner.com
To Hyundai climbing all the way to number 5 and Kia moving up a notch to number 9 in 2020.
Source: gartner.com
As management has been executing well in on its strategy, both Hyundai and Kia brands collectively grew at more than 4% annually over the past 10 years, while many global OEMs struggled with declining sales.
Source: author's calculations based on data from Hyundai's annual and quarterly reports
Thus, the company has expanded its market share in key developing markets, such as the U.S. and Europe, with the former poised to become Hyundai's largest market in the coming years.
Source: author's calculations based on data from Hyundai's annual and quarterly reports
Source: author's calculations based on data from Hyundai's annual and quarterly reports
With its wide choice of alternatives to traditional ICE vehicles and brand new SUVs, Hyundai Motor has also become one of the best performing OEMs in the U.S. - year to date, over the third quarter and in the month of September.
Source: seekingalpha.com
Improving Valuation
Although Hyundai is firing on all cylinders and experiencing higher growth than its peers, the stock is still trading below the peer average.
Source: prepared by the author, based on data from Seeking Alpha and Yahoo Finance
The key driver of Hyundai's P/B multiple on a time series basis is the company's Return on Invested Capital (ROIC), which at the moment is near decade low.
Source: author's calculations based on data from Hyundai's annual and quarterly reports
The reason why ROIC has fallen so much is twofold - lower operating profitability in combination with lower asset turnover as the company has been investing in new technologies and expanding more aggressively overseas.
Source: author's calculations based on data from Hyundai's annual and quarterly reports
Although ROIC is likely to remain low due to lower returns on electric vehicles at the moment, Hyundai is making a bold move into higher margin large SUVs and a significant push in the luxury space with its Genesis brand.
The Tucson and Kona SUVs have been very successful in the U.S. so far, while the Palisade paves the way for a meaningful entrance into the mid-sized SUV market.
In the high end space, Hyundai has so far had more mixed results with its newly launched Genesis brand.
Source: goodcarbadcar.net
Although sales have not been very impressive so far, Hyundai is planning to expand its offering in 2021 to include its first-ever SUV and that the third Genesis SUV will be an electric one.
Source: genesis.com
Thus, as profitability of Hyundai's EVs improves and the company takes higher market share in the SUV and luxury space, it is well-positioned to improve its operating profitability going forward.
Leverage, which has fallen significantly in the beginning of the last decade, is slowly picking up. The initial fall to the low levels of 2013 played a crucial role in Hyundai's performance as it allowed the company to increase its capital expenditures and other investments at a time when profitability is falling and its peers are struggling in their restructuring efforts.
Source: author's calculations based on data from Hyundai's annual and quarterly reports
The role that Hyundai's low debt levels played is also evident from the chart below, which shows the company's negative free cash flow being subsidized by the company's increased leverage.
Source: author's calculations based on data from Hyundai's annual and quarterly reports
In spite of the fact that free cash flow was mostly in the negative territory over the recent years, Hyundai did not dial down its capital expenditures. On the contrary, the company has nearly doubled its capital spend on property, plant & equipment and intangible assets.
Source: author's calculations based on data from Hyundai's annual and quarterly reports
And although this strategy is not sustainable over the long term, Hyundai's lower leverage in comparison to its peers could provide just enough headroom for the company to successfully execute on its strategy and increase margins.
* including financial arm
Source: author's calculations based on data from companies' annual and quarterly reports
Conclusion
Hyundai appears to be among the leaders in the key future mobility segments - autonomy, electrification, and fuel cells. From one of the least differentiated from competition, the company's brands are not only capitalizing on future technologies but also expanding market share in key geographical and product segments.
Given Hyundai's low leverage, the company also seems to have enough resources available to continue spending on its fuel cell and autonomous driving technologies, while also retaining its leadership in the EV space. At the same time, operating profitability has likely reached its bottom levels as it's entering the high margin SUV and luxury segments in a more meaningful way.
This article was written by
Vladimir Dimitrov is a former strategy consultant with a professional focus on business and intangible assets valuation. His professional background lies in solving complex business problems through the lens of overall business strategy and various valuation and financial modelling techniques.
Vladimir has also been exploring the concept of value investing and in particular finding companies with sustainable competitive advantages that also trade below their intrinsic value. He supplements his bottom-up approach with a more holistic view of the markets through factor investing techniques.
Vladimir made his first investment in farmland right out of high school in 2007 and consequently started investing through mutual funds at the bottom of the market in 2009. In the years that followed he has been focused on developing his own investment philosophy and has been managing a concentrated equity portfolio since 2016. Vladimir is LSE Alumni and a CFA charterholder .
All of Vladimir's content published on Seeking Alpha is for informational purposes only and should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions.
Analyst’s Disclosure: I am/we are long GM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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