# Case Study — Finding The Intrinsic Value of Hyundai Department Store

## Step 1: Li Quizzes The Students On Company Data

• The price per share is \$12
• There are around 5.5M shares (just round it — the actual number was 5.6)
• So 12 X 5.5 is roughly 65M
• Pre-tax earnings are \$31M
• This gives us a PE of 2 (\$65M / \$31M)
• Net income is \$25M
• He makes a quick evaluation of book value at \$240M

## He Dives Deeper On Book Value (Second Pass)

• He says they can’t count on the goodwill, so leave it out
• They have \$70M in working capital
• They have \$180M in fixed assets
• So that’s \$250M in book value

## He Dives Deeper On Book Value AGAIN (Third Pass)

• Of the \$180 million in fixed assets, they own 100% of a hotel recorded at \$30 million book, 13% of a department store, recorded at \$13 million book
• They find that the department store has a market cap of \$600 million, so 13% of that is \$80M
• They find that the department store’s book value is understated by \$50 million and they own three cable companies and some real estate

## He Looks Into The Department Store (Fourth Pass)

• He looks at the department store and finds it has the same profile
• It trades right around cash value, around 2 P/E and they own a lot of assets
• They are the second largest cable operator
• He understands the business model — the department stores in Korea are different to the ones we have in the US. It is more like a shopping mall where they charge based on their merchants revenues.

## He Sums It All Up

• Adding everything up, you pay \$60 million dollars,
• You get \$70 million in cash
• There is no debt
• You get \$100 million in stock
• You get \$30 million in a hotel (which hadn’t been evaluated in the last ten years, with Korean property prices going up)

## He Inspected The Assets In Person — Does A Very Deep Dive (Fifth Pass)

• He found the hotel hadn’t been evaluated/assessed in the last ten years
• He went to Korea and inspected the hotels and the department stores
• Checking the recent property transaction in the neighbourhood, he found the true value was three or four times the book value
• So this gave him another \$150M in asset value

## Why It’s Cheap

• He gets around \$320M of assets (\$70M cash + \$100M in stock + 150M in the hotel + department stores = \$320M)
• He knows it will cost him \$60M for the entire business
• He also gets \$30M in annual profits

# Why Did Li Lu Notice This Stock?

• They have \$70M in working capital
• They have \$240M in book value
• They have \$31M in EBIT
• It’s selling for \$60M

# Li Lu’s Advice To The Students

• Don’t just say a stock is cheap, explain why it’s cheap
• Don’t use a calculator
• Focus on market cap (not price per share)
• Don’t count on goodwill as an asset
• Think of yourself as an owner of the entire business. As the owner, you wouldn’t think about per-share numbers. Instead, look at the market cap. Don’t look at book value per share, just look at book value of the entire business.
• Use common sense and logic
• He never hires anyone who went to business school or who worked in asset management
• If you can, inspect the assets in person (ex. Li said “I went to Korea and inspected the hotels and the department stores”)
• You can value a business by looking at what you have to pay, and what you get (assets and liabilities and earnings)
• Also identify trends in your favour (ex. Korean property prices going up)
• He really understood the assets were underpriced and did his homework to ensure he was correct about that
• In this example, Li Lu valued the earnings as the previous years’ pre-tax earnings (EBIT)

# Want To Learn How To Calculate Intrinsic Value?

--

--

--

## More from Value Bob

I am an investor and an entrepreneur and am passionate about value investing. I believe being an entrepreneur helps me as an investor, and vice versa.

Love podcasts or audiobooks? Learn on the go with our new app.

## Value Bob

I am an investor and an entrepreneur and am passionate about value investing. I believe being an entrepreneur helps me as an investor, and vice versa.