Hyundai Engineering IPO fails as investors worry and wonder

Hyundai Enginering office in central Seoul [HYUNDAI ENGINEERING]

Hyundai Engineering's initial public offering failed in the face of a weak market and concern about construction-related companies. Some analysts are also blaming investor skepticism about the intent and timing of the stock sale.

The construction company, the sixth largest in the country, was scheduled to begin trading Feb. 15 on the Korea Exchange.

Management confidently started marketing the shares despite the collapse of stock prices globally in the first month of the year and the poor performance of initial public offerings sold in Korea in 2021.

The Kospi is down almost 20 percent from its June 2021 peak.

Hyundai Engineering spoke optimistically about future technologies — such as small modular nuclear reactors — and alluded to the support it would be getting from related companies.

"Continuous revenue generated from the group helps us prepare for market volatility and achieve solid finance," Hyundai Engineering said in a statement.

Hyundai Engineering & Construction owns 38.62 percent of Hyundai Engineering, and Hyundai Glovis 11.67 percent.

Analysts forecast a market cap after listing of between 4.63 trillion won ($3.9 billion) and 6.05 trillion won, leaving Hyundai Engineering as the largest construction company in Korea by value.

The market didn't agree with the marketing, and institutional book building last month suggested weak demand and weak pricing, with the company likely to go public at the low end of the 57,900-won-to-75,700-won range.

"We filed a report to withdraw under the agreement with the underwriters after considering several factors, like the company not being able to get properly valued," said Hyundai Engineering in a regulatory filing on Jan. 28. It said that the market conditions were too poor.

The company could still go public, but no date has been set for a rescheduled offering.

Troubled IPO Market

Korea's 2021 IPO boom quickly turned into an IPO bust as companies greatly oversubscribed ended up doing poorly once they started trading on the exchange, with some falling below their offering prices.

Kakao Pay, which listed at 90,000 won in November, is now down 48 percent from its December peak of 248,000. SK Bioscience, which listed at 65,000 won in March, is down 55 percent from its 362,000 high, achieved last summer. Krafton, which went public at 498,000 won in August, is now down 49 percent from its November high and is trading below its IPO price.

By early 2022, investor sentiment started to weaken, and Hyundai Engineering sought to list into an unwelcoming market.

The state of the construction market added to the challenge of going public.

The book building for Hyundai Engineering took place two weeks following the collapse of an apartment building under construction in Hwajeong-dong, Gwangju. HDC Hyundai Development is the contractor leading that project, and the company is not related to Hyundai Engineering, but the tragedy has affected their entire sector.

HDC Hyundai Development's stock tumbled 49 percent in January, while Hyundai Engineering & Construction and Samsung Engineering fell 19 percent since the incident.

Poor marketing of the offering may also have had something to do with the failure of the IPO. Analysts say that bankers may have used inappropriate comparables to value Hyundai Engineering, and the price may have been too rich given the fundamentals and the potential.

Other factors

Beyond simple matters of pricing and timing, some analysts suggest that the unusual structure of the sale may have sent the wrong signals to the market.

In the offering, most of the funds raised would have gone to shareholders rather than to the company. Of the total 16 million shares to be offered, 75 percent would be existing shares and 25 percent would be new shares.

Assuming that the deal was priced at the lower end of the range, Hyundai Motor Group Chairman Euisun Chung would have received 309.3 billion won in proceeds, his father 82.3 billion won and Hyundai Glovis 116.6 billion won.

Chung owns 11.72 percent of Hyundai Engineering.

The company itself would have raised only 231.6 billion won to fund its operations and its ambitious plans for the development future technologies and businesses.

In recent IPOs, far fewer existing shares have been sold. For LG Energy Solution, only 20 percent of the shares sold were from shareholders, and for SK Bioscience, a third of the shares were from shareholders.

"Hyundai Engineering's total sale of old shares was very high even compared to that of other companies," said Park Se-ra, an analyst at Shinyoung Securities.

What the shareholders of Hyundai Engineering would do with the proceeds has not been disclosed, but press reports suggest that the money might be used for the payment of the future inheritance taxes or to buy shares in other companies.

To inherit his father's 5.33 percent stake in Hyundai Motor and 7.15 percent of Hyundai Mobis, Chung would have to pay around 2.5 trillion won in inheritance tax, according to local media reports.

Chung was to sell 7.27 percent of Hyundai Engineering, which would have landed him around 400 billion won if the company's IPO price had been at the high end of the range.

Under the current structure, Hyundai Mobis owns 21.4 percent of Hyundai Motor, which controls 33.9 percent of Kia. Hyundai Mobis is 17.3 percent owned by Kia. Funds raised from the offering of Hyundai Engineering could be used to clean up this structure and move the companies so they are more uniformly under the influence of Hyundai Mobis.

Chung owns 0.32 percent of Hyundai Mobis and his father 7.15 percent, and the money raised from the IPO could have been used to buy more shares in company, which would help them maintain influence in the event of a restructuring of the group.

The family "seems to have failed to get a market approval on its plan to push for corporate governance restructuring," said Won Chae-hwan, a finance professor at Sogang Business School.

Trying again

Hyundai Engineering is noncommittal on its IPO plans.

"We don't have a short-term plan to go public again," said Hwang Ui-taek, a spokesperson for Hyundai Engineering. But Hwang said the company is "reviewing" whether to try again.

Hyundai Engineering is able file for the IPO again without further examination by the Korea Exchange within six months since it received a green light on the preliminary examination. Hyundai Engineering received the approval on Dec. 6, so it can file for an IPO by June 6 without additional examination.

"I believe Hyundai Engineering will ultimately go public due to the inheritance tax issue," said Won. "It won't be difficult for Hyundai Engineering to retry going public. But I don't think it will happen in the first half of this year due to the poor market conditions caused by numerous factors, including inflation and unstable oil price."

The family also has the option of raising cash through the sale of stock in Hyundai AutoEver, a mobility software provider. Chung owns 7.33 percent of the company.

Hyundai AutoEver was merged with Hyundai MnSoft and Hyundai Autron in 2020. Hyundai MnSoft provides navigation software and Hyundai Autron, which develops semiconductors, is involved in the automotive electric and electronic control fields.

A Nasdaq listing of Boston Dynamics, which focuses on creating robots with advanced mobility, dexterity and intelligence, has also been mentioned by local media.

Boston Dynamics emerged from Massachusetts Institute of Technology in 1992 and was acquired by Google in 2013 and SoftBank in 2017. It is 30 percent owned by Hyundai Motor, 20 percent by Hyundai Mobis, 20 percent by Chung and 10 percent by Hyundai Glovis.

BY JIN MIN-JI [jin.minji@joongang.co.kr]