Hyundai Motor Company chairman Chung Mong Koo may soon be headed for prison, stripping South Korea's largest car manufacturer of an executive who has presided over an expansion that has more than quadrupled its size. The company's shares may even outperform those of Japanese car makers this year.
Hyundai has lifted sales and profits and rolled out higher-priced models such as the Grandeur sedan and Veracruz four-wheel-drive since Chung's conviction for embezzlement in February.
Economic growth will help drive second-half sales higher in Hyundai's home market, its most profitable, according to analysts.
Choi Se Jin, an analyst at UBS Hana Asset Management in Seoul, said: "I don't see much downside risk for Hyundai for now."
Hyundai's sales will gain 7 percent this year, according to the average of 30 analyst estimates. Its stock has climbed 14 percent this year, the only gain among Asia's five biggest car makers, and analysts reckon the shares could rise as much as 52 percent this year.
In the 12 months after the chairman was arrested in April last year, shares in the Seoul-based company dropped 30 percent.
Chung spent two months in jail and was barred from travelling abroad after being released on bail. Profit declined 35 percent last year due to delays in the opening of new factories overseas and the development of new models.
As sales and profit rebound, concern about the outcome of Chung's legal troubles is waning. The chairman is appealing his conviction, which led to a three-year prison sentence. His next court hearing is scheduled for August 27.
"I don't care about it too much," said Lee Geun Youn, a fund manager at Tong Yang Investment Trust Management in Seoul. "It won't have much impact on the shares."
Hyundai's revenue may be driven higher as economic growth spurs Koreans to spend more money on cars.
Government data indicate that South Korea's economy, Asia's third-biggest, will extend its 17-quarter growth streak. The economy expanded 1.7 percent in the second quarter, the fastest pace in 18 months, and consumer confidence rose in June to the highest level in 15 months.
Record stock prices are also increasing personal wealth, helping sales of pricier models.
South Korean sales of the Grandeur, which starts at 25 million won (R193 000), rose 20 percent in the second quarter from a year earlier. Hyundai also sold 4 565 Veracruz 4x4s, which were introduced in October and start at 32 million won.
"These high-end models are driving up the average selling price, improving profitability," said Cho Soo Hong, an analyst at Hyundai Securities, which is not affiliated with Hyundai Motor.
On July 26 Hyundai reported a 52 percent jump in second-quarter profit, driven by 16 percent growth in local sales and a higher average selling price. The operating margin widened to 7.1 percent.
The profit increase was the first in six quarters and the first since the arrest of Chung, the second-richest man in South Korea, who took the helm at Hyundai in December 1998.
In February Chung and three other executives were convicted of diverting company funds and using them for illegal political donations, undeclared employee bonuses and to attract an international expo to the city of Yeosu.
He was also convicted of breach of duty for causing damage to affiliates by forcing them to support other, weaker subsidiaries and by selling shares in an unlisted unit to himself and his son below market price.
While Chung has admitted embezzling, his appeal lawyers are arguing against portions of the breach-of-duty charges and asking for a suspended sentence so he can continue running the company.
"We are at a crossroads to becoming a global top auto maker. We need chairman Chung to navigate the company," said company spokesperson Jake Jang. "The final verdict is up to the court."
Investors thought the firm was prepared for the chairman's absence should he serve a prison sentence, said Kwak Tai Ho, a fund manager at Kyobo Investment Trust Management in Seoul. "The effect of the trial's outcome should be short-lived," Kwak added.
Hyundai's labour union and the increasing value of the won may pose greater threats to its results.
The 43 000 member union has staged strikes every year since 1994. In June it staged two-day partial strikes to protest a US-Korean trade agreement, causing Hyundai to lose output of 4 893 vehicles, worth 69.4 billion won.
Won strength threatens to cut export earnings and its cars's price competitiveness against Japanese rivals. The won hit its strongest level since 1997 on July 25.
Hyundai's shares have risen even as the won has strengthened this year. Still, they have underperformed the benchmark Kospi index, which has surged 29 percent.
"After the market's dizzying rally this year, clients are asking us to buy undervalued stocks," said Michael Na, an analyst at Daewoo Securities. "Big names like Hyundai that haven't participated in the run-up could go further."
Na predicts the stock will rise to 103 000 won in the next six months from 76 900 won this week.
Hyundai Securities' Cho said the stock might rise even if the Kospi fell. "Confidence in Hyundai is being restored." - Bloomberg