SEOUL -- Hyundai plans to strengthen its Kia unit after handing control of the division to a son of its group chairman, an appointment analysts say signals big plans for a neglected brand.
While investors have often shied away from Korean groups that appear to be putting the interests of their controlling families first, the choice of 36-year-old Chung Eui-sun as president of Kia Motors Corp. has been applauded.
Shares in Kia, the country's number two automaker, rose as much as 10 percent after the appointment was announced late last month. They have gained 35 percent in 2005, more than triple the broad market's gain and far outstripping a 2 percent rise in parent Hyundai Motor Co.
"Kia is on the fastest track to success among Hyundai affiliates. It is bound to receive plenty of favors from the group to bolster profits," said Suh Sung-moon, an analyst at Dongwon Securities.
Chung's father is Hyundai Motor Group Chairman Chung Mong-koo, whose family controls the Hyundai group of engineering-to-logistics companies.
Hyundai Motor owns 38.7 percent of Kia after rescuing it in 1998 in the aftermath of the Asian financial crisis, but investors have long regarded the smaller company as a poor relation.
"Chung's promotion is intended to strengthen responsible management," said a Hyundai Motor official. "It's also to show Hyundai's commitment to growing Kia Motors as a top global maker together with Hyundai Motor."
Analysts said that commitment might involve the Hyundai group supplying auto parts at cheaper prices, carrying research and development costs and letting Kia get the first pick in selecting new models.
Kia's shares had been on a tear even before news of the appointment because of enthusiasm over its new models, an improving Korean economy and rising sales in Europe and China. Its market capitalisation of $5.3 billion is now more than a third of Hyundai Motor's $14.7 billion.
Some analysts sound a cautious note, however, citing an exports-hampering rise in the won, high steel prices and a risk of a delayed local economic recovery.
"Kia's fundamentals are improving. A domestic recovery, robust overseas sales and Chung's move is making it a mouth-watering bet," said Choi Yong-kyu, a fund manager at KEB Commerz Investment Trust.
Kia, which controls 23 percent of the home market, is expected to grow net profits 3.3 percent in 2005 to 713.6 billion won, according to Reuters Estimates, although analysts are going over their numbers again after Kia recently revised up its 2004 figures. A bigger leap is seen in 2006, with profits rising to 876.9 billion won.
Adding to the enthusiasm over the shares, the Kia president bought a 1 percent stake in his company in early February.
"There is a high possibility that junior Chung will build up more stakes in Kia to strengthen his control of the firm," said Suh, who has bumped up his price target for Kia to 19,000 won, a 28 percent premium to Wednesday's price.
SHIFT IN FOCUS
Analysts say Kia could follow in the footstep of auto parts maker Hyundai Mobis Co., whose shares have jumped more than 10 fold over the past four years with the help of a group strategy to make the company profitable.
"The group's focus seems to be shifting to Kia. Kia is our 12-month top pick," Young Chang, head of research at UBS, said in a recent report.
Hyundai says its plans for growing Kia won't extend to a full takeover because of the two companies' distinct brand images. But some analysts raise the intriguing possibility that Chung Mong-koo may be planning to pass control of the group to his son by making Kia the ultimate holding company for Hyundai.
"Market participants are discussing the possibility of Kia being a holding company for Hyundai Motor Group after E.S. Chung's equity purchase of Kia," said Kim Hak-ju, an analyst at Samsung Securities.
"I think he needs a big company with enough free cash flow to control all the affiliates. At the current share price Kia looks the most attractive for E.S. Chung."