News of Hyundai Engineering IPO Fuels Rally
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Rally fueled by news of Hyundai Engineering IPO
— On Apr 13, Hyundai Glovis stock closed up 2.8%, going as high as 3.6% during trading hours, on news of Hyundai Engineering preparing for its IPO. Factors that could affect the company’s enterprise value include (1) growth of the hydrogen transportation market, (2) the development of technology enabling the reuse of automotive batteries, (3) growth of the PCTC business and (4) the allowance of conglomerates to enter the retail market for used cars.
Hyundai Glovis’ 11.7% stake in Hyundai Engineering valued at KRW1.2tn
— At end-2020, Hyundai Glovis owned 11.7% of Hyundai Engineering. According to Asia Business Daily (Apr 13), the stake is valued at KRW1.2tn (vs. Hyundai Glovis’ Apr 13 market cap of KRW6.9tn)
Enterprise value factors
— We believe the following factors may affect Hyundai Glovis enterprise value: — (1) Growth of hydrogen transportation market: Domestic hydrogen demand for power generation is forecast to grow at 10y CAGR of 23.2%, reaching 2mn tons per year by 2030. The proliferation of hydrogen vehicles should result in hydrogen consumption growing at 10y CAGR of 48.6%. Hyundai Glovis is a member of the Hydrogen Fusion Alliance, which was launched by the Ministry of Land, Infrastructure and Transport in 2020 to facilitate the use of hydrogen energy. While other alliance members, such as CJ Logistics and Coupang, are committed to the use of hydrogen vehicles for package deliveries, Hyundai Glovis is focused on the development of platforms for hydrogen supply network management, development of transport ships for hydrogen and the operation of hydrogen tube trailers, potentially giving the company an unrivaled edge in the hydrogen transportation market.
— (2) Development of technology enabling reuse of automotive batteries: Along with LG Energy Solution and KST Mobility, Hyundai Glovis is conducting feasibility studies on battery rentals for EV taxis and the reusability of used batteries. As related technologies continue to advance, the residual value of batteries will rise, allowing Hyundai Glovis to lower lease prices for its EV battery-leasing business. The total battery capacity of Hyundai/Kia green cars sold in Korea is forecast to grow from 5.9GW in 2020 to 154GW in 2030 (CAGR of 36.4%; assuming 10y battery lifespan).
— (3) Growth of PCTC business (PCC ships): Hyundai Motor Group ships its vehicles abroad via Korea’s two largest PCTC firms—Hyundai Glovis and EUKOR Car Carriers. Hyundai Glovis’ share in Hyundai Motor Group shipments started at 10% in 2009 (vs. EUKOR’s 90%) and has been at around 60% since 2018. We believe the share could increase even further. Based on 2020 data, in terms of PCTC revenue, Hyundai Glovis stands at KRW1.7tn and EUKOR at KRW1.3tn. The two companies’ combined PCC fleet capacity stands at 810k CEU, which is larger than that of world’s largest PCTC firm, NYK, at 620k CEU. As of 2020, Hyundai Motor Group accounted for an estimated 45% of Hyundai Glovis revenue and 31% of EUKOR revenue.
— (4) Allowance of conglomerates to enter retail market for used cars: In the past, Hyundai Glovis expressed its intention to enter the retail market for used cars but was unable to move forward because the business remained on the Ministry of SMEs and Startups’ list of businesses exclusive to SMEs. The designation was to be removed in February 2019 but was objected to by the Korean Commission of Corporate Partnership. Recently, lawmakers proposed a bill prohibiting conglomerates from entering the used car market for 10 years after list removal. We note that Hyundai Glovis is already in the business of wholesale used cars, which generated KRW503.1bn in revenue for the company in 2020.