Li Lu Intrinsic Value — Hyundai Department Store

Overview

Before We Start

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

Now — He Knows It’s Cheap For Sure.

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

How Li Lu Determines Intrinsic Value

Valuation — The Math

Summary Of Valuation:

What Happened?

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

Why Did Li Lu Sell?

Value As The Catalyst

Simplifying Li Lu’s Valuation

Part 2

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)

Definitions:

Book Value

Working Capital

EBIT (Pre-Tax Profit)

Why Does Li Lu Use EBIT?

Resources:

Want To Learn How To Calculate Intrinsic Value?

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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.

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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.

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