Hyundai Hysco Co. (010520), a steelmaking unit of the Hyundai Motor Group, provided the best risk-adjusted return among peers over the past five years, boosted by its position at the heart of the business grouping that controls South Korea’s biggest carmaker.
The BLOOMBERG RISKLESS RETURN RANKING shows Hyundai Hysco produced a return of 5.6 percent when adjusted for volatility in the five years through Nov. 9, the most among 152 global steel companies with sales of at least $1 billion. Hysco had the highest total return, at 298 percent, and a volatility that was 14 percent below the industry average.
Hysco benefited from the success of Hyundai Motor Co.’s Elantra and Sonata sedans that helped the automaker double market share in the U.S., the world’s second-biggest car market, from 2004 to 2011, data compiled by Bloomberg show. The Ulsan- based company is both a buyer from and a supplier to the Hyundai chaebol, leaving it relatively insulated from short-term swings in raw material markets on the one hand and new car sales on the other.
“Hyundai Hysco has a strong captive buyer,” Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $31 billion, said by telephone on Oct. 23. “Hysco was able to secure stable growth and margins, which helped it perform better than other steelmakers.”
Kumba Iron Ore Ltd. (KIO) of South Africa was No.2 in the group with a risk-adjusted gain of 4.4 percent and South Korea’s Seah Steel Corp. (003030) ranked third with a risk-adjusted return of 3.5 percent. ArcelorMittal, the largest steelmaker, had a negative return over the past five years and ranked 101st.
Hysco also beat shares of Hyundai Motor over the period, which produced a risk-adjusted return of 5.1 percent.
Consolidated net income at Hyundai Motor rose almost fivefold from 2007 through 2011 as it expanded sales in North America and China, the largest auto market. During the same period, Hysco’s consolidated earnings soared more than 13-fold. By contrast, profit at ArcelorMittal fell by more than half and U.S. Steel Corp. (X:US) turned to a loss.
Hysco gets 67 percent of the hot-rolled coil steel it uses as a raw material from affiliate Hyundai Steel Co. (004020), according to Tong Yang Securities Inc. In turn, Hysco supplies about 53 percent of the group’s car sheet, according to BNP Paribas SA estimates, helping keep its trading volatility at 53.2, compared with the average of 61.7 for the 152 steel companies.
“Globally, it is very rare to see a car group with a vertical supply chain that spans from raw-material steel to end- product cars,” Park Byung Chil, a steel analyst with Seoul- based IBK Securities Co., said by phone on Oct. 29.
Hysco is controlled by Hyundai Motor, which has a 29 percent stake, according to data compiled by Bloomberg. Group Chairman Chung Mong Koo, the automaker and affiliate Kia Motors Corp. (000270) own a combined 55 percent of the steelmaker. Hysco’s chief Shin Sung Jae is Chung’s third son-in-law.
The Hyundai Motor Group is South Korea’s second-biggest chaebol, a term that describes the family-run, interlinked business groupings that led the nation’s industrialization after the Korean War. The auto-making group was split off from the main Hyundai Group in 2000. Hyundai Group, which includes Hyundai Elevator Co., is led by Chairman Hyun Jeong Eun, billionaire Chung’s sister-in-law. Chung is the second son of the late Hyundai founder Chung Ju Yung.
“The Hyundai Motor Group’s top priority is cars,” said Shinhan BNP’s Im. “For years, they’ve been trying to internalize the steel business since it is the most important raw material. Well positioned in a sweet spot in the drive, Hysco is the biggest beneficiary.”
Hysco’s position in the middle of the chaebol’s supply chain also helped it beat Hyundai Steel, which produced a risk- adjusted return of less than 0.1 percent over the past five years. Hysco’s estimated sales growth of 6.7 percent for the current year compares with contractions at Hyundai Steel and ArcelorMittal. (MT)
Hysco’s margins, which have contributed to below-average trading volatility, were helped by an oversupply of the hot- rolled coil it buys from Hyundai Steel and undersupply of the cold-rolled sheets it provides to Hyundai Motor to make car bodies, according to Kim Gyung Jung, an analyst at Eugene Investment & Securities Co. Hyundai Steel added two mills in 2010 of 8 million tons, increasing supplies to Hysco.
“As long as Hyundai and Kia produce cars as planned, the operating margin of Hysco will not be volatile,” said Cho Kang Un, a steel analyst with Shinyoung Securities Co.
Hysco’s profit and operating margins have grown steadily from 2007 through 2011. The operating margin more than doubled to 5.3 percent, higher than the industry median of 4 percent, according to data compiled by Bloomberg. The profit margin increased more than six-fold to 3.6 percent, better than the 1.9 percent median of the 152 steelmakers.
“Both Hysco and Hyundai Steel have the captive buyer, but Hysco was able to generate more stable profit,” said IBK’s Park. “Hyundai Steel is more vulnerable and has more exposure to global raw-material and steel markets as it produces products from upstream hot-rolled coils to construction steel.”
The reliance on its carmaker affiliates, while helping Hysco enjoy below-average volatility, also makes the company vulnerable should sales of Hyundais and Kias slow, said Shinyoung’s Cho. The two carmakers face lawsuits in the U.S. after they admitted to overstating the fuel efficiency of some models.
“Hyundai and Kia Motors are not expected to slow down, but if they do, the risk to Hysco is lower prices for their products, which will erode margins,” Cho said. Overstating the mileage on some models “is definitely a critical issue to Hyundai Motor (005380) Group.”
So far, there’s no sign of a slowdown. Hyundai Motor started production this year at its third plant in China, its top market, and Kia’s third China factory is scheduled to come on stream in 2014. Hyundai’s Brazil plant is set for full operation next year and its factory in Turkey is being doubled in size.
The carmakers in September reported record sales in China. The nation’s passenger vehicle market may grow 11 percent this year, the China Association of Automotive Manufacturers estimates.
Hyundai Motor’s auto sales in China more than tripled to 740,000 cars from 2007 through 2011, according to Bloomberg Industries.
To keep pace with the carmakers’ expansion, Hysco plans to open a 1.5 million-ton mill next year, which will give the company “growth momentum”, said Kim Jung Wook, a steel analyst with Hana Daetoo Securities Co., who has a buy rating and a price-estimate of 63,000 won for the stock.
Hyundai Hysco closed yesterday unchanged at 41,750 won, leaving its gain for the year at 19 percent compared with a 3.5 percent advance in the local benchmark Kospi index.
“While the outlook for the global steel industry is still very gloomy even for next year, Hysco’s earnings will grow steadily through at least 2014,” Hana’s Kim said. “Its earnings are good now and will continue to be. The stock, therefore, has more room to go up.”
Hysco’s market share of car sheets for the group’s overseas plants may reach 50 percent and its total share, including the group’s domestic factories, to 63 percent by 2015, according to BNP Paribas analyst Jongik Kwon.
“ Hysco’s earnings are less volatile due to stable roll margin expectation and huge captive demand from the group,” BNP’s Kwon said in a Sept. 14 report. “ Hysco will continue to trade at a premium to other Korean steel companies.”
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