Calculation of Spin-off Merger Ratio

Transcription

1 Hyundai Hyundai Calculation of Spin-off Merger Ratio Summary of Merger Ratio Valuation Report (Samil PricewaterhouseCoopers, as of )

2 Disclaimer This document is provided for informational purposes only, and is not intended as an offer or solicitation to purchase or sell securities or related financial products, or to solicit voting rights. Hyundai Mobis and Hyundai Glovis (each, the Company ; collectively, the Companies ) make no representation or warranty whatsoever on the accuracy, completeness or reliability of the information contained herein. The contents of this document are subject to change without notice and may also change in case the assumptions or standards on which such contents are based are different. Neither Company is obligated to change, amend or correct the contents of this document. This document contains certain forward-looking statements, and such forward-looking statements are made based on management s current expectations, beliefs or plans, as well as assumptions made by, and information currently available to, management. The Companies do not have any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please note that in no event shall the Companies, their affiliates, and their employees, agents and advisors be responsible for any damages or losses that may arise in connection with the contents of this document.

3 Overview of Spin-off Merger 2 : pre spin-off 97 mil. shares () post spin-off 76.9mil. shares () + post-merger 59.8 mil. shares (61.5%) Existing : 37.5 mil. shares () post merger 37.5 mil. shares (38.5%) shares allocated to the spun-off business are exchanged for post-merger shares; no change in overall shareholder value for current shareholders (but dilution occurs for shareholders). Current (pre spin-off) Spin-off shares allocated into shares of post spin-off and spun-off business Merger Spun-off business is exchanged for shares of post-merger Shareholding Structure (97.3 mil. shares) (37.5 mil. shares) (76.9 mil. shares) (20.4 mil. shares) Share split 1) (Spin-off ratio : 0.21) Share exchange (Merger ratio : 2.9 (76.9 mil. shares) 61.5% (59.8 mil. shares) 38.5% (37.5 mil. shares) Post spin-off Spin-off Post spin-off Post merger (Merger : refer to page 4) 23.8 tril. KRW 5.8 tril. KRW 14.5 tril. KRW 9.3 tril. KRW 14.5 tril. KRW 15.1 tril. KRW (Market Cap.as of Mar. 27th) (Market Cap. = Merger ) (Market Cap. Merger ) (Merger ) (Merger + Market Cap.) Shareholder Shares 97mil. shares () 23.8 tril. KRW ( 23.8 trillion) Post spin-off 76.9 mil. shares () + Spin-off 20.4 mil. shares () 23.8 tril. KRW (post spin-off 14.5 tril. + spin-off biz. 9.3 tril.) Post spin-off 76.9 mil. shares () + post merger 59.8 mil. Shares (61.5%) 23.8 tril. KRW (post spin-off 14.5 tril. + post merger 9.3 tril.) Shareholder Shares Post-merger 38.5% 5.8 tril. KRW 5.8 tril. KRW 5.8 tril. KRW ( 5.8 tril.) ( 5.8 tril.) (post-merger 5.8 tril.) 1) The spin-off ratio is calculated based on a net asset ratio and is used to determine the number of shares divided into the spun-off business. The spin-off ratio does not affect share structure or overall shareholder value. For the avoidance of doubt, no shares are actually transferred to shareholders. Shareholder value is analyzed assuming that market cap. of both companies does not change. : Market cap. as of March. 27 th, : Standard Market (merger value)

4 Spin-off Structure 3 21% of Net assets (74% of total assets, 51% of total liabilities), 34% of revenues, and 54% of pre-tax income of pre spin-off are allocated to the spun-off business. Allocation of Assets Liabilities Allocation of Profits Assets and liabilities are allocated to the spun-off business to meet relevant Korean tax law qualifications. - Only assets and liabilities related to the spun-off business can be allocated (in principle, non-operating assets and shares cannot be allocated to the spun-off business) - Significant taxes may arise if not properly allocated which would harm corporate and shareholder value (corporate tax for on capital gains generated by the spin-off, and income tax for shareholders on deemed dividends) (Pre Spin-off) Remaining Spun-off Remarks Cash Equivalents 6, , % 2, % Divided by total asset ratio Fixed or Intangible Assets Investment Securities Accounts Receivable, etc. 6, , % 1, % Allocated to relevant biz. 7, , Retained in remaining biz. 4, , % 2, % Allocated to relevant biz. Total Assets 25, , % 6, % Loans Payable % % Allocated to relevant biz. Trade Payable, etc. 3, , % 1, % Allocated to relevant biz. Total Liabilities 4, , % 2, % (+) Treasury Shares Adjusted Net Assets , , % 4, % As of Dec. 31, 2017, Stand-alone, in bil. KRW Treasury shares (338.8 bil.) retained in remaining biz. Due to the nature of its business, the spun-off business has relatively smaller assets attributed to its operations. After-sales parts : logistics; Module : logistics + assembly Actual profits are allocated directly to its attributed business. Profits of remaining biz.: investment 1) + subsidiaries + domestic parts biz. 1) Gain on equity method valuation from Hyundai Motor Company, Hyundai E&C, etc. (11 domestic cos., 5 overseas cos.) Profits of Hyundai IHL, GIT, and overseas subsidiaries (2 domestic cos., 33 overseas cos.) Profits of spun-off biz.: module biz. 3) + after-sales parts biz. 3) 3) Profits generated from domestic business (domestic + export) Pre spin-off Investment Parts Remaining Module A/S Parts Spin-off 66% 34% Revenues 1) Operating Profits % 5.8% 2.1% 2.1% -0.7% 31.5% 10.2% Pre-tax Income 46% 54% ) % 7.8% 2.1% 4.7% -0.8% 32.3% 10.4% 1) Consolidated revenues of < revenues of remaining biz. + revenues of spun-off biz. (due to the intercompany transactions, etc.) Consolidated profits of profits of remaining biz. + profits of spun-off biz. (due to adjustments of unearned profits) 3) Gains on equity method valuation from Hyundai Motor Company, etc. As of Dec. 31, 2017, Consolidated, in tril. KRW

5 Merger Ratio 4 Per Share Merger Ratio : Spun-off : = 2.92 : 1 For each share of allocated to the spun-off biz., exchange with 2.92 new shares of (59.8 mil. new shares) For each share of, exchange 0.61 new shares of ( = 59.8 mil. new shares 97.3 mil. # of issued shares) Merger Ratio FSCA (Financial Service and Capital Markets Act) Spun-off Business Valuation Method Intrinsic Market Merger Earnings (60%) 12.4 tril. KRW Standard Market Price 1) 154,911 KRW Asset (40%) 4.5 tril. KRW No. of Issued shares 37.5 mil. Merger 9.3 tril. KRW Merger 5.8 tril. KRW Merger Ratio 61.5% 38.5% Shares mil. (allocated) mil. Per share merger 452, ,911 KRW Per share Merger Ratio ) Arithmetic average of closing price for the preceding one month, one week, and the most recent closing price For purposes of the calculation of the merger ratio, shares of (97.3 mil.) are allocated to 76.8 mil. shares of post spin-off and 20.5 mil. shares of spin-off biz. Shares of, following spin-off merger 1 Share Spin-off Shares of post spin-off 0.79 allocation Share of spunoff biz allocation X Merger Ratio 2.92 Merger Shares of post spin-off 0.79 allocation Share of postmerger 0.61 allocation No. of actual total issued shares of 97.3 mil. x 0.61 (spin-off merger ratio) = New shares of post-merger to be distributed to shareholders 59.8 mil. The merger ratio involving listed companies in Korea is calculated in accordance with the formula set forth in the Financial Service and Capital Markets Act (the FSCMA ) Mergers involving listed companies Merger ratio calculated in accordance with the FSCMA (Article of Enforcement Decree of FSCMA) - Merger between listed companies Market value : Market value - Merger between listed company and unlisted company Market value : Intrinsic value In a spin-off merger of business lines, there is no market value (i.e., stock price) for the spunoff business, which stipulates that the statutory formula for the merger ratio between a listed company and an unlisted company would apply (Article of Enforcement Decree of FSCMA) Calculation Details Company Method Formula (Listed Company) Business Spunoff from (Unlisted Company) Market Intrinsic A + B + C A. Avg. closing price (weighted by daily actual trade volume) for the immediately preceding one month B. Avg. closing price (weighted by daily actual trade volume) for the immediately preceding one week C. The most recent closing price (March 27) (Asset 1) x 40%) + (Earnings x 60%) 1) Net Asset value at the end of recent business year ± statutory adjustments Calculated based on a fair and reasonable method (generally apply a discounted cash flow method that discounts future estimated cash flows) 3

6 Earnings of Business Spun-off from _ Estimated Operating Profit 5 Revenues of module and after-sales parts businesses primarily from HMC/KMC, therefore is highly dependent on the production (sales) volume of HMC/KMC Revenue : KRW 14.0 trillion in trillion in 2022 (CAGR 2.1%) : Sales volume of HMC / KMC (CAGR 2.3%) Operating Profit : KRW 1.4 trillion in trillion in 2022 (Operating Profit Margin :10.2% in % in 202 Module Business A/S Parts Business Business Spun-off from (Total) Actual Estimated In bill. KRW, or thousand units CAGR 17~22 H/KMC production 1) 7,890 7,790 7,129 7,233 7,487 7,774 7,910 7, % Revenues 10,041 10,012 9,282 9,795 9,900 10,283 10,250 10, % Gross Margin Operating Profit % 4.6% 5.9% -0.7% 1.3% 2.7% 4.2% 4.0% 3.9% H/KMC UIS 53,491 56,621 59,109 61,990 64,760 67,214 69,354 71, % Revenues 4,391 4,579 4,728 4,626 4,701 4,891 4,948 5, % Gross Margin 1,728 1,904 1,966 1,811 1,828 1,959 1,965 1,970 Operating Profit 1,252 1,406 1,490 1,313 1,312 1,424 1,409 1,389 % 28.5% 30.7% 31.5% 28.4% 27.9% 29.1% 28.5% 27.8% Revenues 14,432 14,591 14,011 14,421 14,601 15,175 15,198 15, % Gross Margin 2,480 2,790 2,199 2,243 2,410 2,721 2,720 2,736 Operating Profit 1,711 1,998 1,427 1,438 1,575 1,857 1,821 1,799 % 11.9% 13.7% 10.2% 10.0% 10.8% 12.2% 12.0% 11.6% 1) H/KMC production : IHS Markit forecast (as of Feb. 2018), excluding production volume not subject to module supply from business spun-off from H/KMC UIS (units in service) : Number of H/KMC global registered vehicles as calculated by Polk (as of Feb. 2018), excluding vehicles not subject to after-sales parts supply from business spun-off from Module Business A/S Parts Business H/KMC Production and UIS Revenues Operating Profit HMC/KMC production expected to increase 2.3% annually - Production decreased during the past two years, due to a slump in the Chinese market - Production is expected to gradually recover with sales in the Chinese market recovering, sales in America increasing, and commencement of operations in a new factory in India Sales volume : HMC/KMC production by region x SoW of by region (A/S : considered change in segment mix, inflation rate and new car effect) revenues expected to increase 2.6% annually (similar to HMC/KMC production growth) Operating profit expected to recover to 4% by 2020 at which point HMC/KMC is expected to recover past sales volume, and maintain such levels thereafter - Gross margin in 2017 declined due to a sharp decline in H/KMC sales volume (-8.5%) - Gross margin expected to recover gradually to historic levels by ) EIU(Economist Intelligence unit) forecast, (as of March 2018) HMC/KMC UIS expected to increase 3.8% annually - Compared with the past 5 years (6.4% between 13 and 17), UIS growth expected to slow - Future UIS growth (CAGR): Domestic: 2.0%, Overseas: 4.4% Domestic (53%) : HMC/KMC M/S decline, UIS growth slow down (+0.5% annually) Exports (47%) : UIS in US / EU / India continues to increase (+1.8% annually) revenues expected to increase 1.1% annually (limited growth due to domestic UIS slowing and strong KRW) Cost of sales: Considered KRW change on average COGS ratio for the past 2~5 years Due to strong KRW, operating profit margin projected to be 28% (decrease of 3~4%p)

7 Earnings of Spin-off Business _ Free Cash Flow 6 Free Cash Flow Earnings During the projection period, present value of FCF increases from 0.68 tril. in 2018 to 0.74 tril. in 2022 (5 year aggregate : 4.17 tril.) In bil. KRW Operating Profit 1,438 1,575 1,857 1,821 1,799 Earnings value of the spun-off business : 12.4 tril. KRW In bil. KRW (-) Provision for income taxes NOPLAT* 1,053 1,152 1,357 1,331 1,315 (+) Depreciation Module biz A/S parts biz (-) CAPEX Module biz A/S parts biz (-) Change in Net WC FCF 727 1,112 1,264 1,315 1,265 PVIF PV of FCF PV of FCF during the projection period 4,167 PV of the terminal value 6,617 Operating 10,785 (+) Non-operating Asset 2,040 (-) Net Debt 399 Equity (Earnings ) 12,426 5 year aggregate 4,167 * NOPLAT : Net Operating Profit Less Adjusted Taxes CAPEX: Considered factors such as changes in production line upon launching of new models, investments in logistics systems, etc. Change in net working capital: Considered average turnover rate of working capital (accounts receivables, inventory, trade payables) for the module and after-sales parts businesses Terminal : used the Gordon Growth Model (terminal growth rate 1.0%) - Considerations included the long-term growth rate of Korean economy and the mature stage of the automotive industry Non-operating asset value - Cash KRW 2.5 tril. safety cash 1) (KRW 0.5 tril.) + membership (0.03 tril.) 1) (cost of sales + SG&A, excluding depreciation + investment) for 15 days Net Debt: loans payable secured by trades payable

8 Earnings of Spin-off Business _ WACC 7 WACC Calculation Peers WACC = (Cost of Equity (Ke) x Equity Ratio) + (After-tax Cost of Debt x Debt Ratio) Ke = Risk Free Interest (Rf) + Risk Premium (Rm - Rf) x βl* * Risk of a firm to the volatility of the market (levered) Selected seven companies out of Global Top 100 OEM suppliers in 2016 (Source: Automotive News), considering comparable business profile Risk Free Interest (Rf) 2.47% Risk Premium (Rp) 11.38% Levered Beta (βl) Korea 10 year government bond yield as of end of 2017 (Source : Bloomberg) Risk premium of domestic market as of end of 2017 (Source : Bloomberg) Considered average βu of industry peers ( as of end of 2017; source : Bloomberg) and target debt ratio Magna International Inc. Levered Beta (βl) Debt 1) Market Cap. 1) Target Debt Ratio (D/E) Tax Rate Unlevered Beta (βu) 3) , % 26.50% Faurecia SA , % 34.43% Cost of Equity (Ke) = [ Rf + Rp x βl ] 16.82% Plastic Omnium % 34.43% Cost of Debt (Kd) 3.73% Average yield of 3 year non-guaranteed corporate bond (with credit rating of ) as of end of 2017 Tax Rate (t) 27.50% Domestic corporate tax rate from 2018 After-tax Cost of Debt = [ Kd x (1 - t) ] 2.70% Target Debt Ratio [Debt(D) / Equity(E)] 42.85% Equity Ratio [ E / (D + E) ] 70.0% 70% = 1-30% Capital structure of industry peers as of end of 2017 (Source : Bloomberg) Debt Ratio [ D / (D + E) ] 30.0% 30% = 42.85% / ( %) WACC 12.58% Hyundai WIA % 24.20% Martinrea International Inc % 26.50% CIE Automotive S.A % 25.00% Tower International % 40.00% Average 42.85% * Source : Bloomberg 1) As of end 2017, in bil. KRW Marginal corporate tax rate of country of industry peer as of end of ) Calculated based on peers βl and capital structures, using Hamada Model Levered Beta(βL) Unlevered Beta(βu) = [1+ 1 Tax Rate x Debt Equity ]

9 * This is for reference purpose only and does not represent any opinion of the independent valuation firm, Samil PwC for the valuation. [Appendix] Fairness of Merger Ratio 8 The merger value ratio is the ratio of the value of the businesses spun-off from to the value of pre-merger. The ratio fairly encapsulates the profitability (earnings) and the cash generation capabilities (EBITDA) of both businesses. - Merger Ratio consolidated earnings ratio consolidated EBITDA ratio Due to the nature of its business, the spun-off business has relatively smaller assets, resulting in a higher net asset value ratio. Analyst estimates of 7 major Korean securities companies following our board resolutions shows a higher merger value, but the estimated merger value ratio is similar to our announced ratio. Considering the profitability and cash generation capabilities of the both businesses, as well as market estimates, we believe that the announced share allocation is fair to shareholders of each of and as it fairly reflects the relative value of the spun-off business to the post-merger. ( ) : Implied (in trils. of KRW other than percentages and ratios) multiple Spun-off from % % Merger 9.3 (Intrinsic ) 61.5% 5.8 (Standard Market Price) 38.5% Earnings (2017 consolidated) 1.10 (PER : 8.43x) 61.7% 0.68 (PER : 8.52x) 38.2% EBITDA (2017 consolidated) % % Net Asset (2017 consolidated) 4.54 (PBR : 2.0x) 53.2% 3.99 (PBR : 1.4x) 46.8% Analyst Estimates, following the board resolution (PER) 14.9 (Avg. PER : 13.5x) 61.2% 9.4 (Avg. PER : 13.9x) 38.8% Daishin Securities (15.0x) Mirae Asset Daewoo Securities (14.5x) Samsung Securities 1) 15.1 (13.7x) 9.5 (13.9x) DB Financial Investment 1) 16.9 (15.3x) 10.2 (15.0x) Shinhan Investment 1) 17.2 (15.6x) - Eugene Investment and Securities 1) 14.4 (13.1x) - Hana Financial Investment 11.0 (10.0x) 7.5 (11.0x) 1) Inversely calculated based on estimated merger value, etc.