Hyundai Motor to invest 45 trillion won in R&D

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Hyundai Motor to invest 45 trillion won in R&D

Hyundai Motor will invest 45.3 trillion won ($40.5 billion) into research and development for the next five years to ramp up corporate value, the automaker said during a meeting with shareholders, analysts and credit rating firms held Wednesday in Seoul.

It also unveiled its target operating profit ratio of 7 percent by 2022 for its auto business division. It is the first time the company has revealed its exact profit target.

The announcements come as the automaker hopes to appease its shareholders by showing them how it plans to achieve profitability and product competitiveness in the mid to long term.

U.S. activist hedge fund Elliott Management, which is estimated to have around a 3 percent stake in Hyundai Motor and 2.6 percent stake in Hyundai Mobis as of August last year, has sent proposals to both companies requesting higher dividend payments and recommending outside directors, according to filings by Hyundai affiliates on Tuesday.

The fund has been aggressively pushing Hyundai for the last year, even leading to the group dropping its original corporate governance reform plan.

The investment is at the center of Hyundai’s plan to raise corporate value and ultimately beef up shareholder returns. Considering the average annual investment by Hyundai Motor on R&D and on nurturing future growth engines amounted to roughly 5.7 trillion won during the last five years, the new plan promises a 58 percent increase in annual investments.

Of the proposed 45.3 trillion won, 30.6 trillion won will be used for R&D for new cars and general facilities improvement. As SUVs are increasingly becoming popular globally, the Korean company plans to increase its SUV lineup through R&D. While the carmaker had four types of SUVs in 2017, it will double that number by 2020, including models from its luxe brand Genesis.

The remaining 14.7 trillion won will be spent on developing futuristic mobility technologies like autonomous driving, car sharing and fuel-cell technology, Hyundai said.

The company also introduced plans to achieve its proposed 2022 operating profit to sales ratio target for its auto business, a more direct appeal to shareholders.

The auto company said it will keep releasing competitive new cars to recover market share in the United States and China, the two markets it has been struggling in recently. To expand sales, it is looking into entering emerging markets in Southeast Asia as well. To increase profitability, it will increase the sales portion of more profitable car types like SUVs and high-end Genesis cars.

Hyundai said its return on equity (ROE) target is 9 percent by 2022. Return on equity is calculated by dividing net income by shareholders’ equity to show how effectively the management is using company assets to make profits.

A 9 percent ROE would mean the company made 900 million won in profit with 10 billion won of assets.

While the car company’s ROE reached 18.6 percent in 2013, it kept falling and hit 1.9 percent last year.

Korea’s largest carmaker by sales also promised to payout 30 percent to 50 percent of its free cash flow as dividends in a statement on Wednesday.

“We will actively work toward increasing shareholder benefits by recovering the competitiveness and profitability of our business through the mid- to long-term strategy,” said Lee Won-hee, president of Hyundai Motor.

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