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(LEAD) Hyundai Motor justifies KEPCO land purchase amid stock dive

All Headlines 15:52 September 19, 2014

(ATTN: UPDATES with more details, comments in paras 5-6, 12; ADDS paras 21-22)
By Lee Joon-seung

SEOUL, Sept. 19 (Yonhap) -- While investors and markets were still digesting the whats and whys of Hyundai Motor Group's purchase of land for more than three times the assessed value, the global automotive giant argued Friday its decision was a calculated one to fuel growth, dismissing market concerns that the conglomerate may have confused its priorities and undermined its long-term global competitiveness.

Hyundai Motor, the world's fifth-largest automotive group in terms of sales, submitted a winning bid of 10.55 trillion won (US$10.11 billion) for the 79,345 square meters of land that currently houses the main headquarters of the state-run Korea Electric Power Corp. (KEPCO) in Gangnam, the wealthy southern part of Seoul.

The offered sum is more than three times the assessed value of 3.33 trillion won and way above the 5-6 trillion won that most market watchers expected Hyundai Motor, or its bidding rival Samsung Electronics Co., to pay for the piece of real estate.

(LEAD) Hyundai Motor justifies KEPCO land purchase amid stock dive - 2

The "exorbitant" price, as well as the money going into paying necessary taxes and actually build the landmark Global Business Center (GBC) that real estate developers say could cost another 10 trillion won, caused stock prices of Hyundai Motor Co., Kia Motors Corp. and Hyundai Mobis, which formed a consortium to buy the land, to nosedive Thursday after the bidding results were announced.

The share price of Hyundai Motor tumbled 9.17 percent, the steepest single-day decline in three years for the company on Thursday. Kia Motors sank 7.8 percent and Hyundai Mobis dropped 7.89 percent during the same trading session.

On Friday, the stock market showed signs of recovering from the previous shock by gaining 0.30 or 6.08 points to 2,053.82. Hyundai Motor and Hyundai Mobis surrendered 1.52 percent and 1.56 percent, respectively, to end the day at 195,000 won and 253,000 won per share. Kia shares, however, edged up 0.92 percent to close up 500 won to 54,900 won.

"The aggregate value of listed stocks of the three companies dropped 8.41 trillion won after the purchase announcement, with Hyundai Motor's falling the most at over 4.4 trillion won," financial market researcher FN Guide said.

Brokerage firms downgraded or have hinted at adjusting the target or appropriate share prices of the three group affiliates to reflect potential risks and opportunity costs.

Hana Daetoo Securities Co. estimated that the land purchase caused the appropriate price for Hyundai Motor Co.'s shares to be marked down 2-10 percent. Korea Investment & Securities Co. said it was lowering the appropriate share price for car parts maker Hyundai Mobis to 320,000 won from 360,000 won, with I'M Securities & Investment Co. saying some sort of downgrade for the affiliates is likely.

Market watchers say the purchase won't really affect the financial stability of the three companies belonging to South Korea's No. 2 family-run business group, yet they acknowledge that Hyundai Motor overpaid to clinch the deal.

Cash and cashable assets held by the three companies are estimated at 29.48 trillion won, up 21.3 percent from 24.3 trillion won tallied for June of 2013, according to CEO Score, an online corporate productivity evaluation site.

Hyundai Motor and Kia, the country's two largest automakers, reported net profits of 8.99 trillion won and 3.81 trillion won each for the whole of last year, with Hyundai Mobis' bottom line alone hitting 3.39 trillion won.

"The amount of cash they have is more than enough to pay for the land, and there is a possibility that Hyundai will pay KEPCO as soon as possible instead of paying it in three installments so that it can take control of the property for immediate development," a market watcher said, commenting on the condition of anonymity.

Ryu Yen-hwa, a researcher of automobile industries at I'M Securities & Investment, said Hyundai Motor Group will not come under pressure for lack of funds. He added that since 30 affiliates of the conglomerate will take part in the building of the GBC, any financial issues that may arise will be short-lived.

On the other hand, he said Hyundai and Kia, like all carmakers, are at a crossroads in a cutthroat business environment where rivals are doing all they can to raise the value of the products they make and are launching new vehicles to stay ahead of the pack.

"By pouring money into land, Hyundai will invariably have fewer resources to invest in research and development and the launching of new vehicles," the analysts stressed. This, he said, could upset the fundamentals of the group if handled badly.

This view was echoed by another market watcher, who argued that the money would have been better spent on the launching of new car models that are more fuel efficient or concentrating on the development of eco-friendly green cars that have considerable potential for growth.

"Even a company as large as Hyundai will be forced to reallocate resources and personnel into the land development project that can hurt its core business areas," the expert, who declined to be identified, said.

He said the money spent is 5.7 times larger than what Hyundai and Kia spent on R&D last year, and roughly equivalent to the money that could have gone to developing 23 new car models like the 2015 Sonata midsize sedan. The carmaker said it spent three years and 450 billion won to make the car.

On the other side of the argument, Korea Investment & Securities analyst Suh Sung-moon said the real estate move could greatly improve the brand equity of the automotive conglomerate and even translate into considerable earnings down the road, especially if land prices go up.

Moody's Investor Service said earlier in the day that it has retained its Baa1 long-term credit rating, its lower medium-investment grade for the three companies under the wing of Hyundai Motor Group, citing their ample liquidity.

"Hyundai Motor Group's strong balance sheet -- with each of the three companies' significant cash holdings and robust free cash flow-generating abilities -- will enable it to fund this sizable transaction without any material stress on their financial profiles," said Chris Park, a senior vice president for Moody's.

Reflecting this view, a senior Hyundai Motor executive stressed that the bidding price was the result of careful consideration that included the future value of the property and the group's current financial position. He said that Hyundai had made some "bold" moves that were deemed foolhardy at the time but turned out well. He cited the takeover of Hyundai Engineering and Construction Co. for 5 trillion won in 2010, and the 2006 decision to build an integrated steel mill that costs trillions of won.

"Land prices in Gangnam have risen an average of 9 percent annually in the past decade, and getting all the conglomerate's affiliates under one roof could result in 250 billion won worth of savings in rent," he pointed out. The executive said that the development of the property will naturally be drawn out, reducing any burden on companies.

Another benefit, he said, is that the business group could in the future hold its global dealers conference in Seoul instead of arranging it abroad. The company plans to make its own version of the Volkswagen's Autostadt car theme park and exhibition center to attract a considerable number of tourists, he said.

The executive said upwards of 100,000 people would visit the center to generate some 1.3 trillion won in earnings annually. Besides the theme park, Hyundai is expected to build a skyscraper office tower, hotel and convention center on its property as well as shopping arcades.

(LEAD) Hyundai Motor justifies KEPCO land purchase amid stock dive - 3

This plan fits perfectly into the Seoul municipal government's scheme to turn the KEPCO land and the adjacent Convention and Exhibition Center into a hub for the meetings, incentives, conference and exhibition (MICE) industry.

Municipal policymakers also envision refurbishing the nearby main Olympic stadium into a concert hall for performances by Hallyu artists, as well as developing the Seoul Medical Center and Korea Appraisal Board building as international business and MICE support facilities.


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