Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. he U.S. he U.S. he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Holding companies Growing motivation for holding company conversion 1. End of circular shareholdings For Korean conglomerates, circular shareholdings are no longer a feasible option for maintaining and expanding control over their vast business empires. Under the revision to the Monopoly Regulation and Fair Trade Act (MRFTA), large corporate groups are banned from forming new circular shareholdings or strengthening existing ones. Companies are allowed to keep previously established circular shareholdings, but are encouraged to gradually and voluntarily untie their existing shareholdings (which are required to be publicly disclosed). However, we believe there is a possibility that existing circular shareholdings could also be directly regulated, potentially becoming subject to mandatory removal within a certain period. Ultimately, the unwinding of circular shareholdings should serve as a major catalyst to convert to a holding company. Some of the biggest Korean conglomerates, such as Samsung, Hyundai Motor Group (HMG), and Lotte, have recently been making great efforts to unwind their existing circular shareholdings. By doing so, they may be able to avoid potential policy risks while also making the transition to a holding company structure easier. In our view, adopting a holding company structure is the best or second-best option for conglomerates looking to tighten their managerial control and ensure ownership succession. 2. Opportune time for holding company conversion The government is introducing various policies to facilitate holding company conversion. If the intermediate financial holding company bill passes into law, large corporate groups will be able to convert to holding structures without being forced to dispose of their stakes in their financial subsidiaries. In addition, under the Special Act for Corporate Vitality Improvement (the so-called “one-shot” act), tax benefits would be provided for corporate groups’ restructuring plans and restructuring processes will be simplified, albeit for a limited period (five years). Furthermore, through the tax code revision, the statutory grace period for the deferral of taxation on capital gains from the tender offer would be extended by three years, until end-2018. Historically, corporate governance-related pledges tend to increase during presidential campaigns. Accordingly, the environment for holding company conversions is likely to become increasingly unfavorable heading into the next presidential election in end-2017. Meanwhile, it has taken eight months on average from the announcement of holding structure conversions until the tender offers/rights offerings to meet subsidiary stake requirements. Thus, the two-year period from now should be the opportune time for holding company conversion. 3. Attention to shift to dividend after completion of holding company structure Currently, controlling families are facing increasingly limited opportunities to expand their wealth through related-party transactions due to strengthening regulations. When circular shareholdings were large corporate groups’ prevailing structure, dividends were considered the outflow of groups’ cash holdings. Going forward, however, corporate groups should be encouraged to increase dividends after completing a holding company structure as they need a legitimate way to acquire funds to pay inheritance and gift tax for the transfer of managerial control. Overweight (Maintain) Industry Report November 26, 2015 Daewoo Securities Daewoo Securities Daewoo Securities Daewoo Securities C C Co., Ltd. o., Ltd. o., Ltd. o., Ltd. [Holding Companies/IT Services] Dae-ro Jeong +822-768-4160 [email protected]Yoon-seok Seo +822-768-4127 [email protected]
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Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. he U.S. he U.S. he U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Holding companies Growing motivation for holding company conversion
1. End of circular shareholdings
For Korean conglomerates, circular shareholdings are no longer a feasible option for
maintaining and expanding control over their vast business empires. Under the revision
to the Monopoly Regulation and Fair Trade Act (MRFTA), large corporate groups are
banned from forming new circular shareholdings or strengthening existing ones.
Companies are allowed to keep previously established circular shareholdings, but are
encouraged to gradually and voluntarily untie their existing shareholdings (which are
required to be publicly disclosed). However, we believe there is a possibility that existing
circular shareholdings could also be directly regulated, potentially becoming subject to
mandatory removal within a certain period.
Ultimately, the unwinding of circular shareholdings should serve as a major catalyst to
convert to a holding company. Some of the biggest Korean conglomerates, such as
Samsung, Hyundai Motor Group (HMG), and Lotte, have recently been making great
efforts to unwind their existing circular shareholdings. By doing so, they may be able to
avoid potential policy risks while also making the transition to a holding company
structure easier. In our view, adopting a holding company structure is the best or
second-best option for conglomerates looking to tighten their managerial control and
ensure ownership succession.
2. Opportune time for holding company conversion
The government is introducing various policies to facilitate holding company conversion.
If the intermediate financial holding company bill passes into law, large corporate groups
will be able to convert to holding structures without being forced to dispose of their
stakes in their financial subsidiaries. In addition, under the Special Act for Corporate Vitality
Improvement (the so-called “one-shot” act), tax benefits would be provided for corporate
groups’ restructuring plans and restructuring processes will be simplified, albeit for a
limited period (five years). Furthermore, through the tax code revision, the statutory
grace period for the deferral of taxation on capital gains from the tender offer would be
extended by three years, until end-2018.
Historically, corporate governance-related pledges tend to increase during presidential
campaigns. Accordingly, the environment for holding company conversions is likely to
become increasingly unfavorable heading into the next presidential election in end-2017.
Meanwhile, it has taken eight months on average from the announcement of holding
structure conversions until the tender offers/rights offerings to meet subsidiary stake
requirements. Thus, the two-year period from now should be the opportune time for
holding company conversion.
3. Attention to shift to dividend after completion of holding company structure
Currently, controlling families are facing increasingly limited opportunities to expand
their wealth through related-party transactions due to strengthening regulations. When
circular shareholdings were large corporate groups’ prevailing structure, dividends were
considered the outflow of groups’ cash holdings. Going forward, however, corporate
groups should be encouraged to increase dividends after completing a holding company
structure as they need a legitimate way to acquire funds to pay inheritance and gift tax
Opportune time to convert to holding companyOpportune time to convert to holding companyOpportune time to convert to holding companyOpportune time to convert to holding company
Source: KDB Daewoo Securities Research
Major conglomerates’ circular shareholdings and financial subsidiariesMajor conglomerates’ circular shareholdings and financial subsidiariesMajor conglomerates’ circular shareholdings and financial subsidiariesMajor conglomerates’ circular shareholdings and financial subsidiaries
subsidiariessubsidiariessubsidiariessubsidiaries 1 Samsung Lee Kun-hee ○ ○
21 Hyosung Cho Seok-lae X ○
2 HMG Chung Mong-koo ○ ○
22 Dongkuk Steel Jang Se-joo X X
3 SK Chey Tae-won Converted to holding company
(Jul. 3, 2007)
23 Youngpoong Jang Hyung-jin ○ X
4 LG Koo Bon-moo Converted to holding company
(Apr. 3, 2001)
24 Mirae Asset Park Hyun-joo X ○
5 Lotte Shin Kyuk-ho ○ ○
25 Kolon Lee Woong-yul Converted to holding company
(Jan. 1, 2010) 6 Hyundai Heavy
Industries Chung Mong-joon ○ ○
26 Hanjin Heavy
Industries Cho Nam-ho Converted to holding company
(Aug. 1, 2007) 7 GS Huh Chang-soo Converted to holding company
(Jul. 7, 2004)
27 KCC Jung Mong-jin X X
8 Hanjin Cho Yang-ho In process of converting to holding
company (Aug. 1, 2013)
28 Halla Jung Mong-won In process of converting to holding
company (Sep. 2, 2014) 9 Hanwha Kim Seung-yeon X ○
29 Hankook Tire Cho Yang-lae Converted to holding company (Jul.
6, 2013) 10 Doosan Park Yong-gon Converted to holding company
(Jan. 1, 2009)
30 Taekwang Lee Ho-jin X ○
11 Shinsegae Lee Myung-hee X X
31 Daesung Kim Young-dae Converted to holding company
(Jan. 1, 2011) 12 CJ Lee Jae-hyun Converted to holding company
(Sep. 4, 2007)
32 Hyundai
Development -Jung Mong-kyu ○ ○
13 LS Ku Tae-hoi Converted to holding company (Jul.
2, 2008)
33 Kyobo Life
Insurance Shin Chang-jae X ○
14 Kumho Asiana Park Sam-gu ○ X
34 SeAH Lee Soon-hyung Converted to holding company (Jul.
3, 2001) 15 Dongbu Kim Joon-gi X ○
35 E-Land Park Sung-su X ○
16 Daelim Lee Joon-young ○ X
36 Taeyoung Yoon Sae-young X X
17 Booyoung Lee Joong-geun Converted to holding company
(Dec. 30, 2009)
37 HiteJinro Park Moon-deok Converted to holding company (Jul.
3, 2008) 18 Hyundai Hyun Jeong-eun ○ ○
38 AmorePacific Seo Kyung-bae Converted to holding company (Jul.
1, 2007) 19 OCI Lee Soo-young X X
39 Samchully Lee Man-deuk X ○
20 Hyundai
Department Jeong Jee-sun ○ X
40 Hansol Lee In-hee In process of converting to holding
company (Jan. 1, 2015) Note: Excludes government-owned companies
Source: FTC, KDB Daewoo Securities Research
Holding companies
3
November 26, 2015
KDB Daewoo Securities Research
C O N T E N T S
I. Corporate governance improved sharply in 2015 4 1. For stronger competitiveness and managerial control 4 2. Holding company conversions to increase 5
II. Changes in corporate governance-related policies 7 1. Restrictions on circular shareholding 8 2. Regulations on related-party transactions 9 3. Introduction of intermediate financial holding companies 11 4. Introduction of“one shot” law 12
III. Holding company conversion A to Z 13 1. Method of transition to a holding company 13 2. Requirements for conversion to holding company 14 3. Tax benefits to boost holding company conversion 15 4. Investment opportunities in holding company conversions 16
IV. Group ownership restructuring scenarios 18 1. Samsung Group 18 2. Hyundai Motor Group (HMG) 22 3. Lotte 24
V. Top Picks 27 SK Holdings (034730 KS) 28 LG (003550 KS) 31
Holding companies
4
November 26, 2015
KDB Daewoo Securities Research
I. Corporate governance improved sharply in 2015
1. For stronger competitiveness and managerial control
Corporate groups’ efforts for improving governance were one of the greatest issues in the Korean
stock market this year. In 2015, major corporate groups have made various efforts to optimize
their business portfolios. Faced with increasing need to concentrate on selected business areas,
corporate groups are seeking to streamline their businesses and improve efficiency of each
business via spin-offs/split-offs and mergers.
Samsung Group and SK Group were the most prominent in this effort. They have optimized their
business portfolios to improve competiveness and strengthen controlling families’ managerial
control. These efforts will likely continue through 2016, with medium-sized corporate groups
following suit.
TableTableTableTable 1111.... Major groupsMajor groupsMajor groupsMajor groups’’’’ restructuring in 2015restructuring in 2015restructuring in 2015restructuring in 2015
Hansol Holdings and Hansol Logistics’s investment unit
merge (Mar. 2015)
Hansol Holdings and Hansol Lighting’s investment unit
merge (Aug. 2015)
Notes: Based on total asset size
Source: Fair trade committee, News, KDB Daewoo Securities Research
Holding companies
5
November 26, 2015
KDB Daewoo Securities Research
2. Holding company conversions to increase
Steady increase in holding company conversions
Currently, a total of 140 holding companies have been established as of October 2015 (+9 in
2011, +10 in 2012, +12 in 2013, +5 in 2014, and +8 in 2015). Since a holding company structure
was allowed under the MRFTA in 1999, the number of holding companies has steadily increased.
Although the number of large corporate groups that have holding companies has steadily risen to
24, there has recently been a slowdown as the MRFTA bans holding companies from having
shares of financial companies, and requires them to eventually unwind circular shareholdings to
become a holding company structure.
Growing demand for holding company conversions
① Government: Request for simpler and more transparent shareholding structure for companies
② Investors: Expectations for growth in EV based on governance improvement and
restructuring via holding company conversion
③ Controlling shareholders: Low stakes � concerns about hostile M&As � defense and transfer
of managerial control
Figure Figure Figure Figure 1111.... Number of holding companiesNumber of holding companiesNumber of holding companiesNumber of holding companies (financial + non(financial + non(financial + non(financial + non----financial)financial)financial)financial)
Source: Fair Trade Commission, KDB Daewoo Securities Research
TableTableTableTable 2222. . . . Current Current Current Current ‘‘‘‘dddde factoe factoe factoe facto’’’’ holding companiesholding companiesholding companiesholding companies (Wbn)
RankRankRankRank GroupGroupGroupGroup De facto holdDe facto holdDe facto holdDe facto holding ing ing ing cocococo Market capMarket capMarket capMarket cap NotesNotesNotesNotes
1 Samsung Samsung C&T 28,928 Samsung C&T and Cheil Industries
merge (Sep. 2015)
3 Hyundai Motor Hyundai Mobis 24,044
7 Lotte Hotel Lotte - Preparing IPO
10 Hyundai Heavy Indust. Hyundai Heavy Industries 6,886
15 Hanwha Hanwha Corp 2,818
17 Doosan Doosan Corp 2,287 Doosan Corp disqualified as holding
Figure Figure Figure Figure 2222. . . . MarketMarketMarketMarket capitalization by sectorcapitalization by sectorcapitalization by sectorcapitalization by sector
Notes: Wise26 classification basis, Hanwha Corp(Chemicals), SK(Software), CJ(Consumer Staples) are labeled as Holding companies, Nov, 25th
Notes: Holding companies whose market cap Is over W60bn, Nov, 25th
2015 closing price basis
Source: KDB Daewoo Securities Research
29
18
13 12 9
7 5
3 2 2 1 1 1
0
5
10
15
20
25
30
35(Wtr)
Over W1tr
986 970 913
805 776 710 691 684 649 610
0
200
400
600
800
1,000
1,200
(Wbn)Over W60bn
0
50
100
150
200
250(Wtr)
Holding companies
7
November 26, 2015
KDB Daewoo Securities Research
II. Changes in corporate governance-related policies
Opportune time for holding company conversion
The government is introducing various policies to facilitate holding company conversion. If the
intermediate financial holding company bill passes into law, large corporate groups will be able to
convert to holding structures without being forced to dispose of their stakes in their financial
subsidiaries. In addition, under the Special Act for Corporate Vitality Improvement (the so-called
“one-shot” act), tax benefits would be provided for corporate groups’ restructuring plans and
restructuring processes will be simplified, albeit for a limited period (five years). Furthermore,
through the tax code revision, the statutory grace period for the deferral of taxation on capital
gains from the tender offer would be extended by three years, until end-2018.
Historically, corporate governance-related pledges tend to increase during presidential
campaigns. Accordingly, the environment for holding company conversions is likely to become
increasingly unfavorable heading into the next presidential election in end-2017. Meanwhile, it
has taken eight months on average from the announcement of holding structure conversions
until the tender offers/rights offerings to meet subsidiary stake requirements. Thus, the two-year
period from now should be the opportune time for holding company conversion.
Figure Figure Figure Figure 4444. . . . Opportune tOpportune tOpportune tOpportune time ime ime ime totototo convert to holding companconvert to holding companconvert to holding companconvert to holding companyyyy
Source: KDB Daewoo Securities Research
Holding companies
8
November 26, 2015
KDB Daewoo Securities Research
1. Restrictions on circular shareholding
For Korean conglomerates, circular shareholdings are no longer a feasible option for maintaining
and expanding control over their vast business empires. Under the revised Monopoly Regulation
and Fair Trade Act (MRFTA), large corporate groups are banned from forming new circular
shareholdings or strengthening existing ones. Companies are allowed to keep previously
established circular shareholdings, but are encouraged to gradually and voluntarily untie their
existing shareholdings (which are required to be publicly disclosed).
Ultimately, the unwinding of circular shareholdings should serve as a major catalyst to convert to
a holding company. Some of the biggest Korean conglomerates, such as Samsung, Hyundai Motor
Group (HMG), and Lotte, have recently been making great efforts to unwind their existing circular
shareholdings. Going forward, we expect conglomerates to continue to unwind their circular
shareholdings to improve their corporate governance and switch to a holding company structure.
1) Under the revised MRFTA, large corporate groups are banned from forming new circular
shareholdings or strengthening existing ones.
Following the passage of the revision to the MRFTA in late 2013, the government’s ban on new
cross-shareholdings between affiliates of conglomerates subject to cross-shareholding
restrictions took effect on July 25, 2014. The law bans 1) new circular equity investments and 2)
the acquisition of additional shares to strengthen existing circular ownership structures within a
single corporate group.
Breach of the act could result in: 1) penalties (up to 10% of purchase price), 2) restrictions on the
exercise of voting rights (for every stock used to establish or strengthen circular shareholdings
following the date on which an order of disposal was issued), or 3) criminal prosecution (up to
three years in prison or up to W200mn in fines).
2) Companies are allowed to keep previously established circular shareholdings. However, they
are being encouraged to gradually and voluntarily untie their existing shareholdings.
Indeed, the Fair Trade Commission (FTC) now requires 1) each company under the umbrella of a
large corporate group to disclose its cross-shareholding status, and 2) the representative firm of
each corporate group to disclose the group’s overall cross-shareholding status as of April 1st on
May 31st of each year. And any corporate group that has experienced a change in the cross-
shareholding ties of its affiliates shall disclose such changes at the end of the following quarter
(February 28th, May 31st, August 31st, and November 30th).
3) However, we believe there is a possibility that existing circular shareholdings could also be
directly regulated after the presidential election in late 2017, potentially becoming subject to
mandatory removal within a certain period.
TableTableTableTable 3333. . . . Pledges by 2012 presidential election candidatesPledges by 2012 presidential election candidatesPledges by 2012 presidential election candidatesPledges by 2012 presidential election candidates
Notes: Based on cross-shareholdings which is over 1% stake, Source: KDB Daewoo Securities Research
Holding companies
9
November 26, 2015
KDB Daewoo Securities Research
2. Regulations on related-party transactions
Currently, the government is taking a two-track approach to regulations on related-party transactions by easing its stance on corporations (benefiting companies) on the one hand while tightening restrictions on individuals (controlling families) on the other.
1) Corporate regulations
Restrictions apply to subsidiaries or affiliates in which a specially-related person owns, individually or together with his family members, no less than 30% of issued shares (20% for unlisted subsidiaries or affiliates).
Provision of unfair profits can include: 1) deals with substantially favorable conditions, 2) the bestowal of business opportunities, and 3) transactions of substantial volume without reasonable consideration of external options. However, transactions necessary to improve efficiency, ensure security, and meet urgent needs will be exempt from regulations on related-party transactions.
2) Individual regulations
In the past, economic gains made by managing families from related-party deals were left unregulated. To prevent chaebol families from distributing their wealth to heirs unfettered, the government classified profits from related-party transactions as taxable gifts under the inheritance/gift tax law in 2011 with enforcement beginning in 2013.
The gift tax is calculated based on the NOPAT of any company in which the controlling shareholder and/or an affiliated person has a 3% or higher stake, if the company’s revenue from transactions with group affiliates exceeds 15% of total revenue.
Of note, the gift tax is calculated based on the operating profit generated from transactions between a company (i.e., beneficiary) and an entity affiliated with the controlling shareholder of the company. As the operating profit of a company translates into gains for shareholders (through share price advances), profits from related-party transactions are deemed gifts given to the controlling shareholder, etc.
Table Table Table Table 5555. Regulations on related party transactions. Regulations on related party transactions. Regulations on related party transactions. Regulations on related party transactions
Table Table Table Table 6666. Penalties for breach of related party transaction provision under MRFTA. Penalties for breach of related party transaction provision under MRFTA. Penalties for breach of related party transaction provision under MRFTA. Penalties for breach of related party transaction provision under MRFTA
Related-party transaction is considered to provide unfair
support to related parties
→ Impose legal controls
Security
Does conglomerate in question have over W5tr in total
assets and an ownership structure of a chaebol? Is it
subject to aban on new cross-shareholding?Hyundai Glovis
Does the transaction have
substantially favorable conditions
compared to arm’s length transaction?
Does the transaction bestow business opportunities that could provide substantial profits
without reasonable payment in return?
Is the transaction of substantial
volume and made without reasonable
consideration of external options?
Does the transaction involve an affiliate in which an
individual or inclusive of family members hold more than
30% of issued shares (20% for an unlisted affiliate)?
Holding companies
11
November 26, 2015
KDB Daewoo Securities Research
3. Introduction of intermediate financial holding companies
▶▶▶▶ Government is moving to allow non-financial holding companies to own financial
subsidiaries
▶▶▶▶ Government has recently demonstrated its firm commitment to the introduction of
intermediate financial holding companies
The bill allowing non-financial holding companies to own financial subsidiaries and requiring
conglomerates to establish intermediate financial holding companies under certain circumstances
is still pending at the National Assembly. However, the government has recently demonstrated its
firm commitment to the introduction of intermediate financial holding companies.
Many large conglomerates already own a number of financial and insurance companies. Under
current law, they are prohibited from converting to a holding company unless they sell their
financial subsidiaries. Thus, once non-financial holding companies are allowed to own financial
subsidiaries via intermediate financial holding companies, large conglomerates will be able to
convert to holding structures without being forced to dispose of their stakes in their financial
subsidiaries. In other words, the introduction of intermediate financial holding companies would
ultimately encourage large conglomerates to adopt holding structures.
Currently, out of the 62 conglomerates subject to cross-shareholding restrictions (as designated
by the FTC), 29 are based in manufacturing yet have financial companies as subsidiaries. Among
them, Samsung, HMG, Lotte, Hanwha, and Dongbu would need to introduce intermediate
financial holding companies if they were to choose to adopt holding structures. Once non-
financial holding companies are allowed to own financial subsidiaries, these conglomerates may
switch to holding structures to solidify or transfer ownership while keeping their stakes in
financial subsidiaries intact.
Figure Figure Figure Figure 7777. . . . Introduction of intermediate financial holding companIntroduction of intermediate financial holding companIntroduction of intermediate financial holding companIntroduction of intermediate financial holding companyyyy
Source: KDB Daewoo Securities Research
TableTableTableTable 7777. . . . GovGovGovGovernmenternmenternmenternment to allow nonto allow nonto allow nonto allow non----financial holding companies to own financial subsidiariesfinancial holding companies to own financial subsidiariesfinancial holding companies to own financial subsidiariesfinancial holding companies to own financial subsidiaries
NotesNotesNotesNotes
Proposal to revise the Fair
Trade Act (9/26/12)
Permission for holding companies to own financial subsidiaries; introduction of
intermediate financial holding companies to prevent movement of capital between
financial and non-financial companies
Presidential transition
committee’s national agenda
(3/21/13) Permission for holding companies to own financial subsidiaries; obligation to establish
intermediate financial holding company if certain criteria are met—e.g. companies that
own three or more financial subsidiaries (including insurers), or whose financial
subsidiaries (including insurers) hold total assets of at least W20tr
FTC policy briefing (4/24/13)
Plan to promote M&As
(3/6/14)
FTC reports to National
Policy Committee
(7/2/14)
Prioritize the establishment of intermediate financial holding companies in order to
encourage large conglomerates to improve their corporate governance and separate
financial and non-financial capital
New economic team’s policy
direction (7/30/14)
Passage of economic democratization agenda items (including requirements to establish
intermediate financial holding companies) by year-end
Current ~ The government and ruling parties are trying to introduce intermediate financial
holding company in the end of 2015
Source: KDB Daewoo Securities Research
Holding companies
12
November 26, 2015
KDB Daewoo Securities Research
4. Introduction of““““one shot” law
▶▶▶▶ The bill to pass the National Assembly by end-2015; Provides a support package for
companies undergoing restructuring for five years
▶▶▶▶ ““““One shot” law to facilitate business restructuring full swing via M&As
- Timeline
The government sought to introduce the so-called “one shot” law, or a special law to boost
corporate vitality, which was outlined in the Ministry of Strategy and Finance’s (MOSF) “2015
Economic Policy Directions” report (December 22nd, 2014); The government announced the
results of research into the “one shot” law (May 27th, 2015); Lawmaker Lee Hyun-jae led the way
in proposing a bill to introduce the “one shot” law (July 9th, 2015); The bill is expected to pass the
National Assembly by end-2015, and the “one shot” law will likely be implemented in 2016.
- Purpose
Designed to demand that companies take preemptive reorganizing efforts � Provides a support
package for companies undergoing restructuring to advance into new business areas (Case of
Japan: Enacted a special law to boost industry vitality in 1999, contributing to raising corporate
profitably and economic growth; The average ROA of 103 companies subject to the law climbed
from 2.9% in 2003 to 3.9% in 2007, while payrolls increased by 49,000)
- Key highlights
The law is designed to make it easier for companies to restructure their businesses by allowing
them to circumvent certain regulatory restrictions if their restructuring plans are approved by a
private-public committee and the related ministry.
(Submission of restructuring plan � approval by a private-public committee and the related
ministry � application of the “one shot” law reduces business restructuring expenses, including
M&A costs, and regulatory restrictions
Table Table Table Table 8888. Special law to boost corporate vitality. Special law to boost corporate vitality. Special law to boost corporate vitality. Special law to boost corporate vitality
DetailsDetailsDetailsDetails
Target
Companies undergoing restructuring in sectors in oversupply (Example: shipbuilding, steel, display, auto, etc.)
**** Sectors in oversupplySectors in oversupplySectors in oversupplySectors in oversupply
: Sectors that have many non-viable firms due to intense competition, or those that have seen competitiveness deteriorate due to
the emergence of replacement industries
1) Sector revenue and operating profit fell sharply for the past three years, compared to their 10-year averages; The recent three-
year price hike is lower than the increase in raw material costs
2) Oversupply is unlikely to ease for the time being due to the difficulty of cost reduction
Support period Support companies undergoing restructuring for five years
Source: KDB Daewoo Securities Research
Table Table Table Table 9999. Details of “one shot” law . Details of “one shot” law . Details of “one shot” law . Details of “one shot” law
Regulatory itemsRegulatory itemsRegulatory itemsRegulatory items Measures under Measures under Measures under Measures under considerationconsiderationconsiderationconsideration
Reduce cost burden Appraisal rights
In M&As, extend share repurchase period for dissenting shareholders (from one to three months for listed
firms and from two to six months for non-listed firms)
Period of exercising appraisal rights: From less than 20 days after a shareholders’ meeting to less than 10
days
Corporate registration tax 50% cut in corporate registration tax
Relax holding
company regulations
Holding third-tier
subsidiaries
Allow ownership of third-tier subsidiary if holding company owns a 20% or higher stake (Currently,
holding companies must own 100% of third-tier subsidiaries)
Extend deadline for holding company conversion to (Currently two years, but can be extended by two
years )
Debt guarantee
Cross/circular shareholding
Joint shareholding
Allow debt guarantee during holding company conversion
Extend grace period to unwind cross/circular shareholdings from six months to one year
Allow subsidiaries to jointly invest in a second-tier subsidiary during holding company conversion
Simplify procedure
Small-scale merger Exempt shareholder resolution when newly issued shares for merger account for less than 20% of
outstanding shares (currently less than 10%)
Shareholders’ meeting
Abort a small-scale merger in the event that 20% or more of the surviving company’s shareholders
oppose the merger (currently 10% or more)
Shorten the period of shareholder notice and financial disclosure from two weeks to one week
Exempt shareholder resolution when acquiring company buys more than 2/3 of acquired company’s
outstanding shares (currently more than 90%)
Source: KDB Daewoo Securities Research
Holding companies
13
November 26, 2015
KDB Daewoo Securities Research
III. Holding company conversion A to Z
1. Method of transition to a holding company
▶▶▶▶ Holding company conversion: 1) Spin-off, 2) tender offer, 3) rights offering
▶▶▶▶ It took an average of eight months from announcement to rights offering
Several companies that underwent transitions into holding companies opted for tender offers
after spinning off their subsidiaries. In other words, once a company is separated into a holding
company and a subsidiary, the holding company could acquire a stake in the subsidiary via a
tender offer to meet regulatory qualifications (20% stake in listed subsidiaries and 40% stake in
unlisted subsidiaries). Then, shareholders would receive new shares of the holding company via a
rights offering in return for their shares in the subsidiary.
This method of transition is the most popular among companies switching to a holding company
structure, as it allows the controlling shareholder to increase their stakes in the holding company
and allows holding companies to raise its stakes in subsidiaries. Acquiring a stake in an affiliate in
the open market would require a substantial amount of funds, whereas a tender offer followed by
a rights offering would enable a holding company to easily gain stakes in its subsidiaries without
having to invest sizable funds. Simply put, controlling shareholders can assert their ownership in
holding companies at minimal costs, and holding companies can meet their regulatory
requirements for ownership in subsidiaries.
It took an average of eight months from the announcement of a holding company conversion to
rights offering (four months for a BOD meeting, a shareholders’ meeting, and re-listing, and
another four months for a rights offering, share exchange, and listing of new shares. In the event
that subsidiary earnings were weak, it took more than 12 months to ensure more favorable share
exchange ratios for controlling shareholders.
TableTableTableTable 10101010. . . . Average of eight months (247 days) from announcement of holding company conversion Average of eight months (247 days) from announcement of holding company conversion Average of eight months (247 days) from announcement of holding company conversion Average of eight months (247 days) from announcement of holding company conversion
Const. Holdings May 15, 2007 Aug. 01, 2007 Aug. 31, 2007 Oct. 08, 2007 146 days
SK Apr. 11, 2007 Jul. 01, 2007 Jul. 25, 2007 Aug. 29, 2007 140 days
Woongjin Feb. 15, 2007 May 01, 2007 May 31, 2007 Aug. 02, 2007 168 days
CJ Jun. 12, 2007 Sep. 01, 2007 Oct. 04, 2007 Nov. 08, 2007 149 days
Amorepacific
Group Mar. 15, 2006 Jun. 01, 2006 Jun. 29, 2006 Oct. 09, 2006 208 days
LG Nov. 15, 2000 Apr. 01, 2001 May 02, 2001 Nov. 08, 2001 358 days
Average time until tender offerAverage time until tender offerAverage time until tender offerAverage time until tender offer/rights offering/rights offering/rights offering/rights offering 247 days247 days247 days247 days
Notes: Tender offer/rights offering date is based on date of public announcement
Source: KDB Daewoo Securities Research
Holding companies
14
November 26, 2015
KDB Daewoo Securities Research
2. Requirements for conversion to holding company
▶▶▶▶ Four conditions for establishing a holding company
In order to establish or convert to holding company, the company must meet all of the following
four requirements:
First, a domestic holding company must possess assets worth more than W100bn. The asset
threshold has been raised from initial W10bn, to W30bn in 2001, and to W100bn in 2002.
Second, the sum of stakes in subsidiaries owned by a holding company must exceed 50% of the
holding company’s asset value. Under the enforcement decree to MRFTA, a holding company is
designed to control operations of domestic subsidiaries. It should be noted that even if the sum
of shares in affiliates (not subsidiaries) exceeds 50% of asset value, the holding company does not
meet this qualification.
Third, a holding company must directly possess shares in companies that it controls, rather than
taking executive posts at the companies or having a de facto influence.
Fourth, a holding company is designed to control only domestic companies; overseas affiliates are
not considered subsidiaries. However, if a holding company establishes firms in Korea in
partnership with foreign investors, these foreign-invested firms could be regarded as subsidiaries.
In the meantime, under the MRFTA, companies that meet all of the aforementioned four
requirements will be automatically considered holding companies and will be subject to relevant
regulations.
TableTableTableTable 11111111.... RequirementRequirementRequirementRequirement totototo convert to holding companconvert to holding companconvert to holding companconvert to holding companyyyy
DetailsDetailsDetailsDetails
Requirement to
convert
Total assets Total assets > W100bn
Share ratio Value of stakes in subsidiaries is over 50% of parent basis total assets
Restrictions
Debt ratio Less than 200%
Separation of
industrial and
financial capital
Barred from holding stakes in financial subsidiaries (second and third-tier)
Share ratio Stakes in listed subsidiaries (second-tier subsidiaries): over 20%
Stakes in un listed subsidiaries (second-tier subsidiaries): over 40%
Holding third-tier
subsidiaries
Permitted only if second-tier subsidiaries owns 100% stakes in third-tier
subsidiaries
Stakes in non-
affiliates Holding companies can hold under 5% stake in non-affiliates
Prohibited from
joint investment Holding companies can invest only in affiliates
Source: Fair trade committee, News, KDB Daewoo Securities Research
Figure Figure Figure Figure 8888. . . . Requirement for holding company structureRequirement for holding company structureRequirement for holding company structureRequirement for holding company structure
Source: KDB Daewoo Securities Research
Holding companies
15
November 26, 2015
KDB Daewoo Securities Research
3. Tax benefits to boost holding company conversion
▶▶▶▶ Deferral of capital gains tax arising from the conversion process
Conversion to a holding company inevitably entails share transfer and a resulting tax burden. The
biggest tax burden is capital gains tax (or corporate tax). In most of cases, capital gains on the
sale of listed shares are not subject to tax. However, major shareholders are subject to a capital
gains tax.
Under the current tax law, major shareholders are those that meet either share ratio or stake
value <Table 12>. This is determined by taking into account all shares owned by not just the
person, but also by relatives (stipulated by the law) and related parties. Thus, controlling family
members of a listed firm are rarely free from capital gains tax when they do equity transactions.
In order to facilitate conversion to a holding company, the Korean government provides holding
companies with a statutory grace period for the deferral of taxation on capital gains from the
tender offer until the disposal of holding companies’ shares. Specifically, under the Special Tax
Treatment Control Act (Article 38-2), shareholders that receive shares in the holding company in
return for their shares in the subsidiary are not subject to capital gains/income taxes until they
dispose of the holding company shares. Given that such disposal rarely occurs (because stake is
directly related with management control), taxation burden should largely dissipate.
These tax benefits will be effective only until December 31st, 2018. We see these benefits are
meant to encourage holding company conversion by relieving funding burden of major
shareholders.
TableTableTableTable 12121212. . . . Qualification Qualification Qualification Qualification of major shareholder and of major shareholder and of major shareholder and of major shareholder and capitalcapitalcapitalcapital gains gains gains gains tax ratetax ratetax ratetax ratessss
KOSPIKOSPIKOSPIKOSPI KOSDAQKOSDAQKOSDAQKOSDAQ
Share ratio 2% → 1% 4% → 2%
Stake value Over W5bn → Over W2.5bn Over W4bn → Over W2bn
Holdings in the group (1) + (2)Holdings in the group (1) + (2)Holdings in the group (1) + (2)Holdings in the group (1) + (2) 25,491,78325,491,78325,491,78325,491,783 17.31 17.31 17.31 17.31 33,11433,11433,11433,114
Notes: Reflected current ongoing buy-back shares; Based on Nov. 25th
, 2015 closing price
Source: Dart, KDB Daewoo Securities Research
▶▶▶▶ SEC’s split, followed by merger between SEC’s investment holding unit and Samsung SDS
If SEC splits into an investment holding company and an electronics operating subsidiary,
Samsung C&T and the controlling Lee family will need to secure sufficient ownership in the
holding unit. This can be achieved by merging the holding company with Samsung SDS, in which
the group holds a considerable stake (total of 58.7%, including 22.6% by SEC, 19.1% by the Lee
family, and 17.1% by Samsung C&T). When the SEC holding company offers its shares to increase
its stake in its operating subsidiary, the Lee family and Samsung C&T could acquire additional
shares in the holding company (SEC investment holding and Samsung SDS), thereby obtaining
control over the SEC operating company and other electronics affiliates.
Such an approach would alleviate worries that a direct merger between SEC and Samsung SDS
would dilute SEC’s operating value, reducing the potential backlash from SEC shareholders. For
shareholders of SEC’s investment holding company, this could rather be viewed as a positive
event that 1) leads to a net increase in the combined market cap of SEC’s investment holding
company and operating subsidiary, and 2) turns SEC holdings into an operating holding company
through the integration of Samsung SDS’s business.
Holding companies
20
November 26, 2015
KDB Daewoo Securities Research
TableTableTableTable 15151515. . . . Expected major shareholders after merger between SECExpected major shareholders after merger between SECExpected major shareholders after merger between SECExpected major shareholders after merger between SEC’’’’s investment unit and Samsung SDSs investment unit and Samsung SDSs investment unit and Samsung SDSs investment unit and Samsung SDS (shares)
Before mergerBefore mergerBefore mergerBefore merger After mergerAfter mergerAfter mergerAfter merger
NotesNotesNotesNotes SECSECSECSEC’’’’s investment unit s investment unit s investment unit s investment unit (surviving)(surviving)(surviving)(surviving) Samsung Samsung Samsung Samsung SDSSDSSDSSDS ((((dissolveddissolveddissolveddissolved)))) SEC holding companySEC holding companySEC holding companySEC holding company
Lee Lee Lee Lee SeoSeoSeoSeo----hyunhyunhyunhyun 0000 0.00%0.00%0.00%0.00% 3,018,8593,018,8593,018,8593,018,859 3.90%3.90%3.90%3.90% 734,551734,551734,551734,551 1.29%1.29%1.29%1.29%
Hong Hong Hong Hong RRRRaaaa----heeheeheehee 284,344284,344284,344284,344 0.75%0.75%0.75%0.75% 0000 0.00%0.00%0.00%0.00% 284,344284,344284,344284,344 0.50%0.50%0.50%0.50%
Samsung Welfare
Foundation 23,545 0.06% 0 0.00% 23,545 0.04%
Samsung Foundation of
Culture 9,875 0.03% 0 0.00% 9,875 0.02%
Samsung Life 2,788,855 7.32% 0 0.00% 2,788,855 4.90%
Note 1: Assumed split ratio between SEC’s investment unit and operating company at 0.3:0.7 and merger ratio between SEC’s investment unit and Samsung SDS at
1.0 : 0.26 (based on Nov. 25th
, 2015 closing price),
Note 2: If tender offer and share transfer are processed after merger, Samsung Group’s stake in SEC holding company will increase
Source: KDB Daewoo Securities Research estimates
Figure Figure Figure Figure 18181818. . . . MMMMerger between SEC’s investment unit and Samsung SDSerger between SEC’s investment unit and Samsung SDSerger between SEC’s investment unit and Samsung SDSerger between SEC’s investment unit and Samsung SDS����SEC holding companySEC holding companySEC holding companySEC holding company
Source: Dart, KDB Daewoo Securities Research
SEMCO[009150]
30.8%
4.1%
23.7%
22.58%
SECoperating company
12.2%+x(Additionalshare buyback)
Samsung SDS[018260]
SECInvestment unit
4.8%
4.8%
19.1%17.1%
Related parties
SEMCO[009150]
30.8%
23.7%
SECoperating company
12.2%+γ(Acquire over 20% after equity swap)
Related parties
SEC holding co(SEC inv unit+Samsung SDS)
8.6%+β (After equity swap)
9.7%+α(After
equity swap)
4.1%
Samsung C&T
(Cheil Industries+SamsungC&T)
Samsung C&T
(Cheil Industries+SamsungC&T)
Holding companies
21
November 26, 2015
KDB Daewoo Securities Research
(3) Unwinding of cross shareholdings
Currently, there are seven cross-shareholdings across Samsung Group, three of which are bound
by Samsung SDI’s 4.8% stake in Samsung C&T, three by Samsung Electro-Mechanics’ (SEMCO)
2.6% stake in Samsung C&T, and the remaining one by Samsung F&M’s 1.4% stake. We believe
Samsung Group will first take steps to secure complete control over Samsung Electronics (SEC)
through Samsung C&T before unwinding its remaining circular shareholdings.
Figure Figure Figure Figure 19191919. . . . Samsung Samsung Samsung Samsung GGGGrouprouprouproup’’’’s s s s crosscrosscrosscross----shareholdishareholdishareholdishareholdingsngsngsngs
Notes: Red ‘O’ indicates last step of each cross-shareholding
Source: KDB Daewoo Securities Research
TableTableTableTable 16161616. . . . Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of SamsungSamsungSamsungSamsung GroupGroupGroupGroup
AffiliateAffiliateAffiliateAffiliate 1111
Affiliate 2Affiliate 2Affiliate 2Affiliate 2
Affiliate 3Affiliate 3Affiliate 3Affiliate 3
Affiliate 4Affiliate 4Affiliate 4Affiliate 4
Affiliate 5Affiliate 5Affiliate 5Affiliate 5
Affiliate 6Affiliate 6Affiliate 6Affiliate 6 Subject to Subject to Subject to Subject to
, 2015 closing price, Source: Dart, KDB Daewoo Securities Research
Holding companies
23
November 26, 2015
KDB Daewoo Securities Research
Figure Figure Figure Figure 22222222. . . . Hyundai Motor Hyundai Motor Hyundai Motor Hyundai Motor GGGGrouprouprouproup’’’’s crosss crosss crosss cross----shareholdingsshareholdingsshareholdingsshareholdings
Source: KDB Daewoo Securities Research
TableTableTableTable 18181818. . . . Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of Hyundai MotorHyundai MotorHyundai MotorHyundai Motor GroupGroupGroupGroup
Figure Figure Figure Figure 25252525. . . . Lotte Lotte Lotte Lotte GGGGrouprouprouproup’’’’s s s s circular circular circular circular shareholdingsshareholdingsshareholdingsshareholdings
Source: KDB Daewoo Securities Research
LotteCorp. LotteE&C
LotteNon-Life Insurance(000400)
LotteAluminum
LotteriaDaehong
CommunicationsLotte.com
LotteShopping(023530)
LotteHimart(071840)
Korea SevenWoori
Home Shopping
LotteTrading
Korea Fujifilm
Hotel Lotte
LotteCapital LotteCard
43.1%
LotteFood(002270)
LotteDataCommunication
31.1% 25.0%
13.2%35.2% 3.2%
LotteChilsung(005300)
LotteConfectionery
(004990)
9.3%
9.3%
25.0% 26.6% 22.4% 93.8%
31.3%
12.7%
8.9% 3.5% 34.6% 27.7% 38.7%18.8%
34.5%
60.3% 51.1% 53.0%
34.0%16.3% 50.0%13.1%
56.8%
Hyundai Information
Tech (026180)
52.3%
JapanLotteHoldings
Kwangyoon-sa
19.1%
L 4th Investment company. 15.6%, L 9th Investment company10.4%L 7th Investment company9.4%, L 1st Investment company8.6%L 8th Investment company5.8%, L 10th Investment company4.4%L 12th Investment company4.2%, L 6th Investment company4.0%L 5th Investment company3.6%, L 11th Investment company3.3%L 2nd Investment company3.3%, Japan family 2.1% Hotel Lotte Pusan0.6%
28.1%
5.5%
75.5%
Korea Fujifilm7.86%LotteConfectionery7.86%LotteData Communication4.81%LotteChilsung3.93%LotteE&C0.95%Hotel LottePusan0.78%
64.0%
LotteRental20.8%
19.3%
8.8%
LotteChem(011170)
15.3%
8.9%
Holding companies
26
November 26, 2015
KDB Daewoo Securities Research
2) Expected corporate governance
▶▶▶▶ Currently moving to meet shareholding requirements for subsidiaries and second-tier
subsidiaries
The Lotte Group is currently pursuing the IPO of Hotel Lotte which controls most Lotte Group
affiliates along with Lotte Shopping. In the process of holding company conversion, shareholding
requirements for subsidiaries and second-tier subsidiaries should be met (at least a 20% stake in
listed firms and 40% in non-listed firms)
▶▶▶▶ Passage of the intermediate financial holding company bill to make it easier to convert to a
holding structure
The Lotte Group currently has financial subsidiaries. If the intermediate financial holding company
bill pending in the National Assembly is passed, it will be easier to convert to a holding structure
as the group would not have to sell its stakes in financial subsidiaries. Of note, the group needs to
change its third-tier subsidiary shareholding structure, given that a holding company is currently
required to have a 100% ownership of a third-tier subsidiary.
Figure Figure Figure Figure 26262626. . . . Projection ofProjection ofProjection ofProjection of Lotte Lotte Lotte Lotte GGGGrouprouprouproup’’’’s s s s future future future future corporate governancecorporate governancecorporate governancecorporate governance
Source: KDB Daewoo Securities Research
Holding companies
27
November 26, 2015
KDB Daewoo Securities Research
V. Top Picks
SK Holdings (034730/Buy) Five growth strategies to drive up NAV
� 1) IT services (in-house): To raise its IT services profile to global standards via partnership
� 2) ICT security convergence and smart logistics (in-house): To expand new businesses
� 3) Bio/pharmaceuticals (SK Biopharmaceuticals and SK Biotek): To generate value from the pharmaceutical businesses
� 4) LNG (SK E&S): To integrate its LNG value chain; To secure new business opportunities in China
� 5) Semiconductor module (Essencore) and materials (M&A, JV, etc.): To establish high-growth, high-margin business models
� Maintain Buy and TP of W330,000
LG (003550/Buy) Rebound to start
� LG Group is revamping business portfolio: To achieve vertical integration of the automotive electronics businesses and
complete the value chain of the energy solution businesses
� Valuation to recover if electronics business recovers
� Maintain Buy and TP of W90,000
Holding companies
28
November 26, 2015
KDB Daewoo Securities Research
Five growth strategies to drive up NAV
1) IT services (in-house): The company is seeking to raise its IT services profile to global standards, using cloud, big data, and IoT technologies. As part of such efforts, the company established FSK Holdings, a joint venture with Taiwan’s Foxconn (Hon Hai Precision Industry). Through the joint venture (70% owned by Foxconn and 30% by SK Holdings), the company plans to acquire Daiwa Associate Holdings, a Hong Kong-based manufacturer of smart sensors and parts for the Internet of Things (IoT). Looking forward, we expect the company to gain various opportunities related to smart factory projects for Foxconn’s Chongqing plant.
2) ICT security convergence and smart logistics (in-house): The company is aiming to establish a security convergence platform (information security and physical security) and expand into security devices (sensors, etc.), as well as biometrics- and video surveillance-related software. The company is also looking to enter the business of smart logistics using big data and IoT. The company will initially focus on bolstering its capabilities on the back of captive (affiliate) demand until 2016 and then work on broadening its global presence, especially in China through its partnership with Hon Hai, from 2017.
3) Bio/pharmaceuticals (SK Biopharmaceuticals and SK Biotek): SK Group plans to fully integrate its value chain (R&D, manufacturing, and marketing) by 2018. After this, SK Biopharmaceuticals will consider going public and acquire developers with strong potential. Currently, SK Biopharmaceuticals is focusing its resources on developing central nervous system agents and seeking out-licensing deals with global companies. In particular, the drug company has successfully completed Phase 2b clinical trial for its lead epilepsy treatment (YKP3089) and is expected to move onto Phase 3 trial. Assuming manufacturing and sales begin in 2018, we estimate annual revenue to reach W1tr. SK Biotek, which was spun off from SK Biopharmaceuticals in April, manufactures and sells active pharmaceutical ingredients (API) and intermediates to multinational drug companies. The company plans to invest W70.1bn to expand its API capacity by 2019 with the aim of increasing its annual revenue to W100bn by 2020.
4) LNG (SK E&S): SK E&S is aiming to integrate its LNG value chain and expand its LNG capacity to 5mn tonnes by 2020. The LNG business enjoys cost advantages due to direct access to cheap gas in the US and Australia. SK E&S is also expected to secure new business opportunities in China through partnerships with local companies like Huadian Group and China Gas Holdings.
5) Semiconductor module (Essencore) and materials (M&A, JV, etc.): The semiconductor module business (Essencore) aims to achieve W1.5tr in revenue by 2019. The semiconductor materials business is looking to acquire or form a joint venture with a company that holds world class technology to tap into the fast-growing materials market.
Maintain Buy and TP of W330,000
As an operating holding company, SK Holdings is focusing on five key areas it believes are essential to ensuring sustainable growth. We believe the company is well positioned to implement its vision given its ample cash flow and ICT capabilities. As the company executes its growth strategies, we expect the value of the operating business and subsidiary stakes to increase, supporting a potential upward revision in our target price. We maintain our Buy call on SK Holdings with a target price of W330,000.
TableTableTableTable 24242424. . . . SK BiopharmaceuticalsSK BiopharmaceuticalsSK BiopharmaceuticalsSK Biopharmaceuticals’’’’ consolidated income statementconsolidated income statementconsolidated income statementconsolidated income statement ((((WbnWbnWbnWbn))))
Figure Figure Figure Figure 28282828. . . . SK GroupSK GroupSK GroupSK Group’’’’s bio s bio s bio s bio business value chainbusiness value chainbusiness value chainbusiness value chain Figure Figure Figure Figure 29292929. . . . SK BiopharmaceuticalSK BiopharmaceuticalSK BiopharmaceuticalSK Biopharmaceutical’’’’s global peer UCB (UCB BB s global peer UCB (UCB BB s global peer UCB (UCB BB s global peer UCB (UCB BB
Equity)Equity)Equity)Equity)
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Tae-won Chey and related persons
SK C&C+SK Holdings(034730 KS)
30.9%
SK Biopharm(New drug
development)
SK Biotech(Supplies pharmaceutical
ingredients)
SKLife Science (US)
100% 100%
100%
UCB's financial data (US$mn)
2011 2012 2013 2014
Revenue 4,519.8 4,451.7 4,161.6 4,442.5
Cost of sales 1,410.5 1,393.9 1,281.8 1,398.9
Gross profit 3,109.3 3,057.8 2,879.8 3,043.6
Operating profit 484.6 537.5 349.3 362.7
OP margin 10.7% 12.1% 8.4% 8.2%
Pretax profit 324.4 338.2 160.7 147.5
Net profit 331.4 320.2 212.5 277.7
($mn,x)
Market cap P/E P/BEV/EBITD
A2015F 16,752 39.5 2.9 22.4
Holding companies
31
November 26, 2015
KDB Daewoo Securities Research
LG Group revamping business portfolio
Vertical integration of auto electronics systems: LG Electronics (LGE; infotainment,
motors) � LG Chem (batteries) � LG Innotek (sensors, LED) � LG Display (auto display),
etc.
Completion of energy solution value chain: LGE (solar modules, ESS) � LG Chem
(batteries) � LG CNS (smart microgrids), etc.; 2017 revenue target is upper-W4tr levels.
Valuation to recover if electronics business recovers
General investment points for holding companies are: 1) upside from rising value of
stakes in listed subsidiaries, 2) exposure to non-listed subsidiaries, and 3) positive
attributes of holding company shares (e.g., brand royalty income, dividends, and
transparent governance).
Among these three, we believe LG Corp. meets the first point. LG Group’s business
portfolio includes electronics, chemicals, telecom and other services, with electronics
(mainly LGE) responsible for 50% of revenue and operating profit. As such, LG Corp.’s
shares have been inextricably tied to the performance of the electronics business, even
in recent months despite a fall in the share of electronics in the company’s NAV. Thus, a
recovery in automotive electronic equipment and parts should help drive LG Corp.’s
stock. In the past, valuation discount eased, when the share of LGE stake in NAV
increased.
Maintain Buy with TP of W90,000
We maintain Buy with a target price of W90,000. The company’s valuation discount is
decreasing (from roughly 50% early this year) due to LGE’s turnaround. This positive
trend should continue throughout next year, as LGE’s earnings are projected to expand
further.
LG Corp. is the only holding company with a net-cash position in the KDB Daewoo
universe. The company typically generates annual free cash flow of around W250bn
from dividend income, trademark royalties, rental income, etc. Notably, if the trademark
royalty rate—which is revised annually and currently stands at 20bp of revenue—is
raised, the company will be able to secure additional cash flow of W110bn per 10bp.
Given that LG Corp. is a pure holding company that does not incur capex, expectations
of shareholder return policies, including higher dividend payouts, are likely to increase
steadily.
The company’s stable holding structure and corporate governance, combined with
positive outcomes from new growth drivers including auto parts, energy, eco-friendly
household products, and healthcare, should further brighten its business prospects.
Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates
Holding companies
(Maintain) Buy
Target Price (12M, W) 90,000
Share Price (11/25/15, W) 74,100
Expected Return 21%
OP (15F, Wbn) 1,311
Consensus OP (15F, Wbn) 1,270
EPS Growth (15F, %) 25.3
Market EPS Growth (15F, %) 20.9
P/E (15F, x) 12.3
Market P/E (15F, x) 11.5
KOSPI 2,009.42
Market Cap (Wbn) 12,786
Shares Outstanding (mn) 176
Free Float (%) 51.4
Foreign Ownership (%) 27.1
Beta (12M) 0.75
52-Week Low 53,100
52-Week High 74,400
(%)(%)(%)(%) 1M1M1M1M 6M6M6M6M 12M12M12M12M
Absolute 7.9 13.3 9.5
Relative 9.5 21.0 7.9
70
80
90
100
110
120
11.14 3.15 7.15 11.15
LG Corp. KOSPI
Holding companies
32
November 26, 2015
KDB Daewoo Securities Research
Figure Figure Figure Figure 30303030. . . . Discount to NAVDiscount to NAVDiscount to NAVDiscount to NAV Figure Figure Figure Figure 31313131. . . . P/E bandP/E bandP/E bandP/E band
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Source: KDB Daewoo Securities Research Source: Dart, KDB Daewoo Securities Research
Figure Figure Figure Figure 34343434. . . . LG LG LG LG GGGGrouprouprouproup’’’’s electric car business value chains electric car business value chains electric car business value chains electric car business value chain Figure Figure Figure Figure 35353535. . . . LG LG LG LG GGGGrouprouprouproup’’’’s electric car business ecosystems electric car business ecosystems electric car business ecosystems electric car business ecosystem
Source: Dart, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
(Wbn)2011 2012 2013 2014 2015F
Ordinary net cash inflow(1)-(2) 155.4 240.5 169 199.4 198.1
Figure Figure Figure Figure 36363636. . . . LG LG LG LG GGGGrouprouprouproup’’’’s corporate goves corporate goves corporate goves corporate governancernancernancernance
Source: KDB Daewoo Securities Research
LGMMA
30.1% 34.0%30.4%
48.6%
33.7%
27.6%
Ku Bon-mu and
related parties
LG[003550]
LG Uplus[032640]
36.1% 35.0%30.1%
LG Housys[108670]
GⅡR[035000]
Silicon Works[108320]
28.2%
LGInternationalCorp [001120]
Pantos Logistics51.0%
LG Chemical[051910]
LG Innotek[011070]
LG Display[034220]
LG CNS
LG H&H[051900]
LG Life Sciences[068870]
LGSiltron
ServeOne
LG Electronics[066570]
37.9%
40.8%
LG Sports
LG N Sys
85.0%
100%
51.0%
100%
50.0%
LG-ToyoEngineering
100%
100%
HS Ad
100%
TheFaceShop
Haitai Beverage
Coca-ColaBeverage
100%
100%
90.0%
CNP Cosmetics
86.0%
Medialog
98.4%
WithU
100%
Hi BusinessLogistics
LG-HitachiWater Solutions
100%
51.0%
Holding companies
34
November 26, 2015
KDB Daewoo Securities Research
LG (003550 KS/Buy/TP: W90,000)
Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14 12/15F 12/16F (Wbn) 12/13 12/14 12/15F 12/16F
Cost of SalesCost of SalesCost of SalesCost of Sales 8,1858,1858,1858,185 8,3628,3628,3628,362 8,4298,4298,4298,429 8,5668,5668,5668,566 Cash and Cash Equivalents 682 497 799 701
Gross ProfitGross ProfitGross ProfitGross Profit 1,6141,6141,6141,614 1,5031,5031,5031,503 1,7811,7811,7811,781 1,8741,8741,8741,874 AR & Other Receivables 2,004 2,263 2,535 2,643
Source: Company data, KDB Daewoo Securities Research estimates
Holding companies
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KDB Daewoo Securities Research
APPENDIX 1
Important Disclosures & Disclaimers
2222----Year Rating and Target Price HistoryYear Rating and Target Price HistoryYear Rating and Target Price HistoryYear Rating and Target Price History
Company Company Company Company ((((Code)Code)Code)Code) DateDateDateDate RatingRatingRatingRating Target PriceTarget PriceTarget PriceTarget Price Company Company Company Company ((((Code)Code)Code)Code) DateDateDateDate RatingRatingRatingRating Target PriceTarget PriceTarget PriceTarget Price
SK Holdings(034730) 08/30/2015 Buy 330,000 02/06/2014 Buy 150,000
04/27/2015 Buy 290,000 11/01/2013 Buy 140,000
03/08/2015 Buy 270,000 LG Corp.(003550) 12/02/2013 Buy 90,000
03/07/2014 Buy 170,000
Equity Ratings DistributionEquity Ratings DistributionEquity Ratings DistributionEquity Ratings Distribution
* Based on recommendations in the last 12-months (as of September 30, 2015)
DisclosuresDisclosuresDisclosuresDisclosures
As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or
The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean
securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions
expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this
report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s
area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified
herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been
promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific
recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by
overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and
private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of
the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.
DisclaimersDisclaimersDisclaimersDisclaimers
This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.
Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been
independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or
correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English
translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this
report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This
report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any
securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of
the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any
laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof.
Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or
form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,
Stock RatingsStock RatingsStock RatingsStock Ratings Industry RatingsIndustry RatingsIndustry RatingsIndustry Ratings
Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving
Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes
Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening
Sell : Relative performance of -10%
Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material
development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of
future earnings.
* The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic
conditions.
0
20,000
40,000
60,000
80,000
100,000
Nov 13 Nov 14 Nov 15
(W) LG Corp.
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Nov 13 Nov 14 Nov 15
(W)SK Holdings
Holding companies
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KDB Daewoo Securities Research
employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a
purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or
agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment
banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to
in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to
future performance. Future returns are not guaranteed, and a loss of original capital may occur.
DistributionDistributionDistributionDistribution
United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other
persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant
Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its
contents.
United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional
investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance
thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that
they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed
herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The
securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or
sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements.
Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong
Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for
distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws
of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person.
All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or
its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its
affiliates to any registration or licensing requirement within such jurisdiction.
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