Hyundai has begun taking the advice of a major stakeholder

Hyundai needs to lift its stock’s forward price-earnings ratio of 5.2  (Photo: Bloomberg)
Hyundai needs to lift its stock’s forward price-earnings ratio of 5.2 (Photo: Bloomberg)


It’s good that the carmaker is doing some of what Elliott had asked

The world’s third-largest automaker, Hyundai Motor Company, made some heavy-hitting announcements this week. The most significant of these, though, is a far more mundane one.

The South Korean carmaker has said it will spend as much as $5 billion to make electric-car batteries in the American state of Georgia, close to its electric vehicle (EV) plant. The firm also announced an investment of 632.3 billion won (about $474.5 million) in self-driving unit, 42dot.

Adding to the deluge of good news, Hyundai’s operating profit rose 86% from a year ago on the back of increased sales across products and regions, with record margins. The stock was up almost 5%.

Under-appreciated in all of this was the company’s own corporate governance changes—closer to what Paul Singer’s Elliott Management Corporation had wanted Hyundai to do five years ago as part of its activist campaign. The South Korean firm said last week that it would pay out at least 25% of consolidated net income to shareholders four times a year (instead of two) from the end of the next quarter and will cancel 1% of existing treasury stock. For shareholders, this is more meaningful than big announcements about grand-project spending—an old Hyundai habit; just last week, Hyundai said it was working on a lunar exploration rover—that does not promise returns for years to come, or about futuristic plans that may lift sales eventually.

Looks like Elliott was right. In 2018, when it held more than $1 billion of shares across Hyundai and its affiliates, Singer’s firm had called upon the company to streamline its corporate holding structure, cancel treasury shares, return more than 12 trillion won ($11.2 billion) of cash to shareholders and restructure itself as a business. There were also issues around how the group had valued its assets. Like many South Korean chaebols, Hyundai Motor struggled with an inefficient capital structure and the wider group’s tangled holdings that gave the Chung family far more control over the business than their economic interest. Hyundai voted down the dividend-increase proposal, but undertook a paltry stock buyback of around 250 billion won.

So why has Hyundai had a change of heart now? For one, the company’s performance has been far better. At the time Elliott was pushing for those changes, it was facing years of falling operating profit and market share. That gives Hyundai a little more leeway. Its valuation, though, is still sagging: At 5.2 times forward price-to-earnings, its stock trades at a discount to automobile sector peers domestically and in Japan. A stream of positive news, along with cajoling shareholders, could help boost its value.

Financial metrics aside, Hyundai is aligning with Korean President Yoon Suk Yeol’s renewed push to clean up corporate governance in domestic capital markets. These range from detailed plans to increase dividend payouts announced earlier this year by the Financial Services Commission and the ministry of justice to proposals around better disclosure. Regulators have revised guidelines to protect minority investors and empower audit committees, while efforts to raise the number of women on boards have intensified. A draft law seeks to fine companies for greenwashing in a push to bring the country in line with global standards.

In response to the pressure of these top-down policy measures, companies have proactively taken shareholder-friendly moves. Hyundai, a flag-bearer of Korea Inc, needs to be on board and comply to show support. After all, it has received a fair share of the government’s attention in recent months.

The US Inflation Reduction Act passed by America’s Joe Biden administration had initially shut out the carmaker’s EVs—among the best-selling right now in the US—from incentives. Last week, in a sign that steadfast policy lobbying efforts had helped, Hyundai executive vice-president Gang Hyun Seo said all of his firm’s EVs would “probably be able to" benefit from tax credits in the US from 2026 onwards. That’s a big motivator to behave like a corporate stalwart. For Hyundai, this a big step in the right direction—good corporate governance is a way to protect value.

There’s still some ground to cover, though. Returning 25% isn’t particularly generous, and it could do more to restructure its units and merge smaller businesses that would increase value for shareholders, like Elliott had proposed.

To get the valuation boost it needs, South Korea’s Hyundai Motor Company will have to stay the course: If it cannot keep shareholders happy, then ambitious spending projects and continued performance will get harder to sell. 

Anjani Trivedi is a Bloomberg Opinion columnist covering industrials across Asia Pacific. ©bloomberg

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.


Switch to the Mint app for fast and personalized news - Get App