Article / 19 June 2014 at 8:56 GMT

Hyundai Motor jumps to top equity pick in emerging markets

Head of Equity Strategy / Saxo Bank
  • Hyundai up 21% annualised since 1998
  • EBIDTA margin well above industry average
  • 12-month return forecast of 22% on the stock


By Peter Garnry


Hyundai Motor has been a poster child for the industrial miracle in South Korea. In the 1990s if you asked Japanese car manufacturing executives about who they were most afraid of they would all have said the South Koreans. This fear subsequently became reality and South Korean's car manufacturers such as Hyundai Motor are taking market share every year.

Top pick in emerging markets
Hyundai's stock price says it all. It's risen 21 percent annualised since 1998. Growth has been above the industry average with revenue growing from USD 57.5 billion in 2005 to USD 79.8 billion in 2013. However, growth has slowed recently and revenue growth declined to 4.5 percent year-on-year in Q1 2014.

One of the big drivers behind the share price has been the expanding EBITDA margin up from 8.1 percent in 2005 to 12.4 percent in 2013 above the industry average of 9.9 percent. Of the major global car manufacturers Toyota Motor still has the highest margin at 13.8 percent. 

Hyundai Motor share price the past five years
Hyundai Motor share price
Source: Bloomberg

Our latest big call on emerging markets was on May 8, when we highlighted Banco do Brasil as our most bullish call in emerging markets. The stock is up 10 percent since our call. As a result, Hyundai Motor is now topping our conviction list on emerging market equities.
Our quant model has a 12-month return forecast of 22 percent with an uncertainty indicator of -5, signalling that the model is significantly less optimistic than the consensus opinion. This may be negative for the share price in the short term as expectations are too high, but the return forecast is very high and for the long-term investor Hyundai Motor looks very attractive at these levels.
Hot stuff: Hyundai's limited edition Veloster RE:FLEX a hit in US showrooms. Pic: Hyundai
The stock trades at 12-month forward P/E of 6.3x which is too low given the underlying growth rate in revenue and cash flow. The catalyst for the share price is the South Korean car market that seems to have bottomed out now and is returning to growth in 2014. North America should also add to growth this year with new models being brought to the market. Finally, sales in China looks strong and here Hyundai Motor is less affected than their Japanese competitors that are suffering from the geopolitical disputes between China and Japan.
Peter Garnry is head of equity strategy at Saxo Bank. Click here for more of his articles.
-- Edited by Clare MacCarthy
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Quant Corner - Emerging Market equities


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