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
for the transfer of managerial control.
Overweight (Maintain)
Industry Report
November 26, 2015
Daewoo Securities Daewoo Securities Daewoo Securities Daewoo Securities CCCCo., Ltd.o., Ltd.o., Ltd.o., Ltd.
[Holding Companies/IT Services]
Dae-ro Jeong
+822-768-4160
Yoon-seok Seo
+822-768-4127
Holding companies
2
November 26, 2015
KDB Daewoo Securities Research
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
RankRankRankRank NameNameNameName HeadHeadHeadHead Circular Circular Circular Circular
shareholdingshareholdingshareholdingshareholding
FinancialFinancialFinancialFinancial
subsidiariessubsidiariessubsidiariessubsidiaries
RankRankRankRank NameNameNameName HeadHeadHeadHead CircularCircularCircularCircular
shareholdingshareholdingshareholdingshareholding
FinancialFinancialFinancialFinancial
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
RankRankRankRank GroupGroupGroupGroup DetailsDetailsDetailsDetails RankRankRankRank GroupGroupGroupGroup DetailsDetailsDetailsDetails
1 Samsung
Samsung C&T and Cheil Industries merge (Sep. 2015)
20 CJ
CJ Systems and CJ Olive Young merge (Dec. 2014)
Samsung group announces disposal of Samsung SDI’s
chemical unit and Samsung Fine Chemicals to Lotte
Group (Oct. 2015)
Announces sale of CJ HelloVision to SK Group (Nov. 2015)
3 Hyundai
Motor
Sells families’ 13.39% controlling stake in Hyundai Glovis
(Feb. 2015) 26 Daelim Daelim Corporation and Daelim I&S merge (Jul. 2015)
Hyundai Steel and Hyundai Hysco merge (Jul. 2015);
INNOCEAN Worldwide IPO (Jul. 2015)
5 SK SK and SK C&C merge (Aug. 2015)
28 Dongbu Announces sale of Dongbu Farm Hannong (Mar. 2015) SK Telecom to acquire CJ HelloVision (Nov. 2015)
6 LG
LG Int’l acquires 51% of Pantos’s outstanding shares
(Jan. 2015) 29 Hyundai Sells stake in Hyundai Logistics (Oct. 2014)
Pantos fully acquires Hi Business Logistics (Oct. 2015)
7 Lotte
Announces IPO of Hotel Lotte (Aug. 2015)
33 Hyosung Galaxia Communications and Infohub merge (Jul. 2015) Unwinds 84% of Lotte Group’s total cross-shareholdings
(Aug.2015)
14 Hanjin
Hanjin KAL Holdings acquires Jungseok Enterprise’s
investment unit (Jun. 2015) 39 Dongkuk
Steel Dongkuk Steel and and Union Steel merge (Jan. 2015)
Hanjin sells entire stake in Korean Air (Jul. 2015)
15 Hanwha
Hanwha Q Cells and Hawha Solar One merge (Feb. 2015)
42 Halla Halla Holdings and Halla Meister merge (Jul. 2015) Acquires Samsung group’s affiliates (Techwin, Thales,
General Chemicals, etc.) (Jun. 2015)
17 Doosan
Oricom fully acquires HAN COMM. (Aug. 2015)
43 Hankook Tire
Hankook Tire acquires 19.5% stake in Halla Visteon Climate
Control (Jun. 2015)
Announces split-off of Doosan Infracore’s machine tool
division and sell partial stake in the division (Oct 2015) Hankook Tire and Hanyang Tire Sales merge (Jul. 2015)
18 Shinsegae Shinsegae Food and Shinsegae SVN merge (Dec. 2014) 61 Hansol
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
company (Dec. 2014)
18 Shinsegae Shinsegae 2,471 Shinsegae spun-off E-mart (May
2011) E-mart 6,049
25 Kumho Asiana Kumho Industrial 555
28 Dongbu Dongbu 92
29 Hyundai Hyundai Elevator 1,468
30 Hyundai Department
Store Hyundai Greenfood 2,467
31 OCI OCI Company 1,801
33 Hyosung Hyosung Corp 4,074
36 Youngpoong Youngpoong Corp 2,037
Notes: Based on Nov, 25th
2015 closing price
Source: KDB Daewoo Securities Research
22 2736
5570
84 92 103 114 117126
34
4
5
9
1213
12
13 1515
0
20
40
60
80
100
120
140
160
05 06 07 08 09 10 11 12 13 14 15F
Financial holding companies
Holding companies
(unit)
GS
SKCJ
LS
Doosan
KolonDaesung
HanjinKAL Halla
Hansol
Nonghyup
Holding companies
6
November 26, 2015
KDB Daewoo Securities Research
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
2015 closing price basis
Source: KDB Daewoo Securities Research
Figure Figure Figure Figure 3333. . . . Holding companiesHolding companiesHolding companiesHolding companies’’’’ market capitalizationmarket capitalizationmarket capitalizationmarket capitalization
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
Park GeunPark GeunPark GeunPark Geun----hyehyehyehye Moon JaeMoon JaeMoon JaeMoon Jae----inininin Ahn CheolAhn CheolAhn CheolAhn Cheol----soosoosoosoo
New circular
shareholdings Ban Ban Ban
Existing circular
shareholdings No new measures
Complete unwinding after
three-year grace period
Voluntary unwinding followed
by possible regulatory
intervention
Other - Violators subject to restrictions
on voting rights and fines
Violators subject to forced
disposal
Source: KDB Daewoo Securities Research
TableTableTableTable 4444. . . . Major groupsMajor groupsMajor groupsMajor groups’’’’ crosscrosscrosscross----shareholdingsshareholdingsshareholdingsshareholdings (units)
GroupGroupGroupGroup 2013201320132013 2014201420142014 2015201520152015
Samsung 30 14 7 Holds financial affiliates
Hyundai Motor 2 5 4 Holds financial affiliates
Lotte 5,851 299 67 Holds financial affiliates
Hyundai Heavy Ind. 1 1 1
Hanjin 2 3 0
Dongbu 5 0 0 Holds financial affiliates
Daelim 1 1 1
Hyundai 4 6 0 Holds financial affiliates
Hyundai
Department Store 3 3 3
Youngpoong 9 6 6
Hyundai
Development 4 4 4 Holds financial affiliates
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
LawLawLawLaw ProvisionsProvisionsProvisionsProvisions TimelineTimelineTimelineTimeline
MRFTA
↓
Providing companies,
benefiting companies,
controlling families
Ban on:
1) Deals with substantially favorable conditions
* Exemption: The price difference with arms’ length transaction is less than 7%, and the
annual transaction amount is less than W5bn (or W20bn for goods/services)
MRFTA revision bill passed by National
Assembly (July 2nd, 2013)
Legislation notice of revision to
Enforcement Decree (Oct. 2nd, 2013)
Revised Enforcement Decree took
effect (Feb. 14th, 2014)
* One-year grace period for ongoing
related party transactions, until Feb.
14th, 2015
2) Bestowal of business opportunities
* Exemption: Only the related party is capable of performing the business, or the related
party won the contract in a fair manner
3) Transactions of substantial volume without reasonable consideration of outside
options
* Exemption: Annual transaction amount is less than 12% of the transaction party’s
revenue, and less than W20bn; or the transactions are necessary to improve efficiency,
ensure security, and meet urgent needs
Inheritance/gift tax
↓
controlling families
Profits from related-party transactions are deemed taxable gifts given to the controlling
shareholder, etc.
**** Taxable profit = NOPAT Taxable profit = NOPAT Taxable profit = NOPAT Taxable profit = NOPAT ×××× (percentage of related(percentage of related(percentage of related(percentage of related----party transactions party transactions party transactions party transactions ---- 15%) 15%) 15%) 15%) ××××
(ownership stake (ownership stake (ownership stake (ownership stake ---- 3%)3%)3%)3%) ×××× gift tax rategift tax rategift tax rategift tax rate
Revision to inheritance/gift tax (Dec.
31st, 2011)
Revised inheritance/gift tax took
effect as of 2013
Source: KDB Daewoo Securities Research
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
ClassificationClassificationClassificationClassification Corrective Corrective Corrective Corrective actionactionactionaction PenaltiesPenaltiesPenaltiesPenalties Criminal penaltiesCriminal penaltiesCriminal penaltiesCriminal penalties
Providing company
- Discontinuance of provision of unfair
profits to related parties, and
introduction of measures to prevent
recurrence of similar practices
- Deletion of relevant contract terms
- Disclosure of imposition of corrective
orders
- Other necessary measures
(Article 24 of MRFTA)
- In the amount not exceeding 5% of
revenue
- Notice on penalties pronounced on May
30th, 2014
- Up to W2bn, absent revenue (Article 24-
2, Paragraph 2 of MRFTA)
- Imprisonment of up to 3 years, or a fine
of up to W200mn
(Article 66, Paragraph 1 of MRFTA) Controlling families &
related parties
Benefiting company
- Discontinuance of provision of unfair
profits to related parties, and
introduction of measures to prevent
recurrence
- Deletion of relevant contract terms
- Disclosure of imposition of corrective
orders
- Other necessary measures
(Article 24 of MRFTA)
- In the amount not exceeding 5% of
revenue
- Notice on penalties pronounced on May
30th, 2014
- Up to W2bn, absent revenue (Article 24-
2, Paragraph 2 of MRFTA)
Not applicable
Source: KDB Daewoo Securities Research
Holding companies
10
November 26, 2015
KDB Daewoo Securities Research
Figure Figure Figure Figure 5555. . . . DeterminationDeterminationDeterminationDetermination of relatedof relatedof relatedof related----party transactionparty transactionparty transactionparty transaction
Source: KDB Daewoo Securities Research
Figure Figure Figure Figure 6666. . . . DeterminationDeterminationDeterminationDetermination of deemed donationof deemed donationof deemed donationof deemed donation
Source: KDB Daewoo Securities Research
Urgency
No
Efficiency
Yes
Yes
Yes
Yes
No
No
Yes
Yes
Normal related-party
transaction
No
Yes
Yes
No
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
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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
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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
to tender offer/rights offeringto tender offer/rights offeringto tender offer/rights offeringto tender offer/rights offering
Holding companyHolding companyHolding companyHolding company Announcement Announcement Announcement Announcement
datedatedatedate Split dateSplit dateSplit dateSplit date ReReReRe----listing datelisting datelisting datelisting date
Tender offer & Tender offer & Tender offer & Tender offer &
rights offeringrights offeringrights offeringrights offering
Announcement Announcement Announcement Announcement
until tender until tender until tender until tender
offer/rights offer/rights offer/rights offer/rights
offeringofferingofferingoffering
Halla Holdings Apr. 07, 2014 Sep. 01, 2014 Oct. 06, 2014 Nov. 06, 2014 213 days
Hanjin KAL Mar. 22, 2013 Aug. 01, 2013 Sep. 16, 2013 Sep. 23, 2014 550 days
Korea Kolmar
Holdings Jun. 04, 2012 Oct. 01, 2012 Oct. 19, 2012 Dec. 11, 2012 190 days
Hankook Tire
Worldwide Apr. 25, 2012 Sep. 01, 2012 Oct. 04, 2012 May 20, 2013 390 days
AK Holdings Apr. 24, 2012 Sep. 01, 2012 Sep. 17, 2012 Nov. 14, 2012 204 days
Samyang Holdings Aug. 10, 2011 Nov. 01, 2011 Dec. 05, 2011 Jun. 01 , 2012 296 days
Kolon Oct. 15, 2009 Dec. 31, 2009 Feb. 01, 2010 May 24, 2010 221 days
KC Green Holdings Sep. 28, 2009 Jan.01, 2010 Jan. 29, 2010 May 14, 2010 228 days
Youngone Holdings Apr. 14, 2009 Jul. 01, 2009 Jul. 30, 2009 Aug. 31, 2009 139 days
Iljin Holdings Apr. 16, 2008 Jul. 01, 2008 Aug. 01, 2008 Sep. 08, 2008 145 days
Hitejinro Holdings Apr. 16, 2008 Jul. 01, 2008 Jul. 30, 2008 Jul. 22, 2009 462 days
Hanjin Heavy Ind. &
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
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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
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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
Cap. gainsCap. gainsCap. gainsCap. gains raterateraterate
KOSPI & KOSDAQ
listed stocks
Major
shareholders
Small businesses 10% → 20%
Large companies Held over 1yr 20%
Held less than 1yr 30%
Minority shareholders Tax-free
Unlisted stocks
Small businesses 10%
Large companies
Minority shareholders and major shareholders
(held over 1 year) 20%
Major shareholders (held less than 1 year) 30%
Notes: New tax rates take effect April 2016
Source: KDB Daewoo Securities Research
Holding companies
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November 26, 2015
KDB Daewoo Securities Research
4. Investment opportunities in holding company conversions
▶▶▶▶ investors can capitalize on controlling shareholders’ efforts to secure sufficient stakes
during the conversion process
After a corporate group announces its decision to convert to a holding company and
subsequently splits off into a holding company and one or more subsidiaries, we advise investors
to accumulate shares in its subsidiaries during the conversion process until the holding company
acquires subsidiaries’ shares via a tender offer.
Following the tender offer, we recommend investors increase their exposure to the holding
company, as the stock’s perceived undervaluation could trigger a sharp narrowing of its discount
to its net asset value. It goes without saying that our investment strategy is premised on strong
confidence in the operating value of the spun-off subsidiaries.
Controlling shareholders typically make efforts to raise the value of their subsidiary until the
tender offer. The reason behind this is that, as shares of the subsidiary rise, they can secure more
newly issued shares of the holding company in exchange for their stake in the subsidiary. After a
tender offer is announced, the share swap ratio will be determined, positively affecting shares of
the holding company thanks to the lifting of uncertainties over new share issuance.
Figure Figure Figure Figure 9999. . . . ConverConverConverConversionsionsionsion process: Equity spinprocess: Equity spinprocess: Equity spinprocess: Equity spin----offoffoffoff����Tender offerTender offerTender offerTender offer����Equity swapEquity swapEquity swapEquity swap
Source: KDB Daewoo Securities Research
Figure Figure Figure Figure 10101010. . . . Historical sHistorical sHistorical sHistorical sharehareharehare performance performance performance performance during conversionduring conversionduring conversionduring conversion to holding companyto holding companyto holding companyto holding company
Source: KDB Daewoo Securities Research
Holding ASubsidiary A Subsidiary B
① Equity spin-off
Subsidiary B
Operating co. A
Holding A
Subsidiary BOperating co.
A
② Tender offer&
Equity swap
20% 40%
15% of treasury shares
20%
20%
15%
40%
20%+α
35% 40%
Controllingshareholders
Controllingshareholders
Controllingshareholders
0
50
100
150
200
07.9 07.12 08.3 08.6 08.9
(Stock price)
Announce transitionto holding company
Equity spin-offTender offerEquity swap
Holding
company
Subsidiary
(Time)
Holding companies
17
November 26, 2015
KDB Daewoo Securities Research
▶▶▶▶ Changes in market caps after conversion: Pre-conversion market cap < post-conversion
market cap
Comparing pre- and post–conversion market caps also supports our investment case. Although
uncertainties arise during the trading suspension period, we note that the combined market cap
of a holding company and its subsidiary is larger than the pre-conversion market cap of the
subsidiary.
Theoretically speaking, corporate value should not change after conversion, as a subsidiary just
splits into a holding company and a new subsidiary. However, this is not the case, as we have
outlined above. As such, expectations that conversion to a holding structure will ensure higher
independence and specialized management appear to be reflected in corporate value. Therefore,
the announcement of a firm’s conversion into a holding company will likely be well received in the
stock market, as the change should not just improve corporate governance but also clarify each
subsidiaries’ business focus.
Figure Figure Figure Figure 11111111. . . . NongsimNongsimNongsimNongsim’’’’ssss equity spinequity spinequity spinequity spin----offoffoffoff Figure Figure Figure Figure 12121212. . . . SKSKSKSK’’’’s equity spins equity spins equity spins equity spin----offoffoffoff Figure Figure Figure Figure 13131313. . . . Hankook TireHankook TireHankook TireHankook Tire’’’’s equity spins equity spins equity spins equity spin----offoffoffoff
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure Figure Figure Figure 14141414. . . . Aekyung PetrochemAekyung PetrochemAekyung PetrochemAekyung Petrochem’’’’s equity s equity s equity s equity
spinspinspinspin----offoffoffoff
Figure Figure Figure Figure 15151515. . . . Korea KolmarKorea KolmarKorea KolmarKorea Kolmar’’’’s equity spins equity spins equity spins equity spin----
offoffoffoff Figure Figure Figure Figure 16161616. . . . DongDongDongDong----A STA STA STA ST’’’’s equity spins equity spins equity spins equity spin----offoffoffoff
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Holding companies
18
November 26, 2015
KDB Daewoo Securities Research
IV. Group ownership restructuring scenarios
1. Samsung Group
(1) Issues
▶▶▶▶ Expanding control over SEC: SEC’s split, followed by merger of SEC’s investment holding
unit and Samsung SDS
▶▶▶▶ Unwinding circular shareholdings: Once the group secures complete control over SEC
through Samsung C&T, remaining circular shareholdings to be untied
TableTableTableTable 13131313. . . . Controlling familiesControlling familiesControlling familiesControlling families’’’’ stakesstakesstakesstakes (%, Wbn)
NameNameNameName RelationRelationRelationRelation CompanyCompanyCompanyCompany StakeStakeStakeStake ValueValueValueValue
Lee Kun-hee
(1942) -
SEC 3.38 6,476
Samsung Life 20.76 4,484
Samsung C&T 2.86 827
Samsung SDS 0.01 3
Total 11,790
Lee Jay-yong
(1968) Eldest son
Samsung C&T 16.54 4,784
SEC 0.57 1,092
Samsung SDS 11.25 2,263
Total 8,139
Lee Boo-jin
(1970) Eldest daughter
Samsung C&T 5.51 1,595
Samsung SDS 3.90 785
Total 2,380
Lee Seo-hyun
(1973) Second daughter
Samsung C&T 5.51 1,595
Samsung SDS 3.90 785
Total 2,380
Notes: Based on Nov, 25th
2015 closing price, Source: Dart, KDB Daewoo Securities Research
Figure Figure Figure Figure 17171717. . . . Samsung Samsung Samsung Samsung GGGGrouprouprouproup’’’’s corporate governances corporate governances corporate governances corporate governance (current)(current)(current)(current)
Source: KDB Daewoo Securities Research
7.2%
1.3%
5.1%
15.0%
11.1%
4.1%
19.6%
23.7%
4.8%
37.5% 34.4%
(Treasury shares12.2%)
7.3%
17.6%
(Treasuryshares12.7%)
Lee Jae-yong and related parties
Cheil Industries[028260]
Samsung C&T[000830]
SEC[005930]
Samsung SDS[018260]
Samsung SNS
Samsung Fine Chemicals[004000]
S1[012750]
Samsung Card[029780]
Samsung Securities[016360]
Samsung Life[000810]
Samsung SDI[006400]
Formerly CheilIndustries[001300]
Samsung Engineering[028050]
SHI[010140]
SEMCO[009150]
Samsung Welstory
Hotel Shilla[008770]
100%
19.3%
Cheil Worldwide[030000]
12.6%
12.6%
22.6%
13.1%
11.0%
14.7%
7.8%
30.8%
2.6%
(Treasury shares0.05%)
8.0%
20.8%
1.4%
8.4%
19.1%
(Sep. 23, 2013)Cheil Industries’ fashionbusinesstransferredto Everland
①
(Sep. 27, 2013) Samsung SDS and Samsung SNS merge②
(Nov. 4, 2013 ) Everlanddecides to split offSamsung Welstory(wholly-owned subsidiary)③
(Dec. 12, 2013)Lifepurchasesstake inCard(6.38%)④
(Mar.31, 2014)SDI mergedwith Cheil Industries
⑤
(Sep. 1, 2014)AnnouncesmergerbetweenSHI andEngineering,(Nov. 19, 2014)Merger fails⑥
(Nov. 26, 2014)HanwhaGroupacquiresSamsungTechwin,SamsungTotal, SamsungGeneral Chemicals,SamsungThales
⑦
(Nov.26,2014)CheilWorldwidesoldtreasurystock(10%toSEC)SECtobuybackshares(1.12%)
⑧
(May26, 2015)Announcedmerger betweenCheil IndustriesandSamsungC&T
⑨
⑩ (Jul 14, 2015)Modulebusinesstransfer
17.1%
Samsung Life[032830]
Holding companies
19
November 26, 2015
KDB Daewoo Securities Research
(2) Expanding control over SEC
▶ Acquisition of additional stakes unlikely
1) Currently, Samsung Group owns a 17.31% stake in SEC via affiliates and the controlling Lee
family (excluding 12.21% in treasury shares). The group needs to increase its stake in order to
ensure firm control over the electronics giant. However, buying additional shares in the company
could be challenging given the group’s budget constraints. Given SEC’s current market cap of
W190tr, it would cost around W1.9tr for just an additional 1% stake.
2) Even if the group secures enough funds to acquire additional shares, it would be practically
impossible for affiliates to raise their stakes without violating the government’s ban on new cross-
shareholdings (Under the revised MRFTA enacted in July 2014, large corporate groups are banned
from forming new circular shareholdings or strengthening existing ones).
Hence, the only way for the group to raise its SEC stake would be for SEC to increase its treasury
shares, which do not have voting rights. That said, SEC is already implementing a large repurchase
and cancellation program. We thus believe the group will not seek to increase its control over SEC
by raising its stake in the company.
TableTableTableTable 14141414. . . . SECSECSECSEC’’’’s s s s majormajormajormajor shareholdersshareholdersshareholdersshareholders (%,Wbn)
NameNameNameName SharesSharesSharesShares StakeStakeStakeStake ValueValueValueValue
Controlling family Controlling family Controlling family Controlling family
(1)(1)(1)(1)
Lee Kun-hee 4,985,464 3.38 6,476
Hong Ra-hee 1,083,072 0.74 1,407
Lee Jae-yong 840,403 0.57 1,092
Total 6,908,939 4.69 8,975
Affiliates (2)Affiliates (2)Affiliates (2)Affiliates (2)
Samsung Life 10,622,814 7.21 13,799
Samsung C&T 5,976,362 4.06 7,763
Samsung F&M 1,856,370 1.26 2,411
Samsung
Welfare
Foundation
89,683 0.06 116
Samsung
Foundation of
Culture
37,615 0.03 49
Total 18,582,844 12.62 24,138
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
Treasury stock 17,986,686 12.21 23,365
GroupGroupGroupGroup’’’’s ownerships ownerships ownerships ownership 43,478,46943,478,46943,478,46943,478,469 29.52 29.52 29.52 29.52 56,47956,47956,47956,479
TotalTotalTotalTotal 147,299,337147,299,337147,299,337147,299,337 100.00 100.00 100.00 100.00 191,342191,342191,342191,342
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
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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
SharesSharesSharesShares OwnershipOwnershipOwnershipOwnership SharesSharesSharesShares OwnershipOwnershipOwnershipOwnership SharesSharesSharesShares OwnershipOwnershipOwnershipOwnership
Lee JaeLee JaeLee JaeLee Jae----yongyongyongyong 220,635220,635220,635220,635 0.58%0.58%0.58%0.58% 8,704,3128,704,3128,704,3128,704,312 11.25%11.25%11.25%11.25% 2,338,5752,338,5752,338,5752,338,575 4.11%4.11%4.11%4.11%
Controlling Controlling Controlling Controlling
familyfamilyfamilyfamily
9.499.499.499.49%%%%
Lee BooLee BooLee BooLee Boo----jinjinjinjin 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%
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%
Lee GunLee GunLee GunLee Gun----heeheeheehee 1,308,8561,308,8561,308,8561,308,856 3.44%3.44%3.44%3.44% 9,7019,7019,7019,701 0.01%0.01%0.01%0.01% 1,311,2171,311,2171,311,2171,311,217 2.30%2.30%2.30%2.30%
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%
Samsung F&M 487,361 1.28% 0 0.00% 487,361 0.86%
Samsung C&TSamsung C&TSamsung C&TSamsung C&T 1,569,0011,569,0011,569,0011,569,001 4.12%4.12%4.12%4.12% 13,215,82213,215,82213,215,82213,215,822 17.08%17.08%17.08%17.08% 4,784,6854,784,6854,784,6854,784,685 8.41%8.41%8.41%8.41%
SEC 4,722,125 12.40% 17,472,110 22.58% 8,973,452 15.77% Treasury sharesTreasury sharesTreasury sharesTreasury shares
15.15.15.15.78787878%%%% Samsung SDS 0 0.00% 27,614 0.04% 6,719 0.01%
Total number of issued Total number of issued Total number of issued Total number of issued
sharessharessharesshares 38,085,70338,085,70338,085,70338,085,703 100.00%100.00%100.00%100.00% 77,377,80077,377,80077,377,80077,377,800 100.00%100.00%100.00%100.00% 56,913,32856,913,32856,913,32856,913,328 100.00%100.00%100.00%100.00%
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
unwindingunwindingunwindingunwinding 1 Samsung C&T → SEC → SEMCO → Samsung C&T
SEMCO
→Samsung C&T
4.1% 23.7% 2.6%
2 Samsung C&T → Samsung Life → SEC → SEMCO → Samsung C&T
19.3% 7.2% 23.7% 2.6%
3 Samsung C&T → Samsung Life → Samsung F&M → SEC → SEMCO → Samsung C&T
19.3% 14.9% 1.3% 23.7% 2.6%
4 Samsung C&T → SEC → Samsung SDI → Samsung C&T
Samsung SDI
→Samsung C&T
4.1% 19.6% 4.8%
5 Samsung C&T → Samsung Life → SEC → Samsung SDI → Samsung C&T
19.3% 7.2% 19.6% 4.8%
6 Samsung C&T → Samsung Life → Samsung F&M → SEC → Samsung SDI → Samsung C&T
19.3% 14.9% 1.3% 19.6% 4.8%
7 Samsung C&T → Samsung Life → Samsung F&M → Samsung C&T Samsung F&M
→Samsung C&T 19.3% 14.9% 1.4%
Source: KDB Daewoo Securities Research
Figure Figure Figure Figure 20202020. . . . Projection of Projection of Projection of Projection of Samsung Samsung Samsung Samsung GGGGrouprouprouproup’’’’s future corporates future corporates future corporates future corporate governancegovernancegovernancegovernance
Source: KDB Daewoo Securities Research
Samsung C&T[028260]
Samsung Life[032830]
Samsung F&M[000810]
SEMCO[009150]
SEC[005930]
Samsung SDI[006400]
14.98%
19.34%
1.38%1.26%
7.21%
4.77%
19.58%23.69%
2.64%
4.06%
Holding companies
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November 26, 2015
KDB Daewoo Securities Research
2. Hyundai Motor Group (HMG)
(1) Cross shareholding structure
HMG controls Hyundai Motor Company (HMC), Kia Motors and other affiliates through Hyundai
Mobis. HMG has four cross-shareholdings, two of which are bound by Hyundai Steel’s 5.7% stake
in Hyundai Mobis, one by Hyundai Glovis’s 0.7% stake in Hyundai Mobis, and the other by Kia
Figure Figure Figure Figure 21212121. . . . Hyundai Motor GroupHyundai Motor GroupHyundai Motor GroupHyundai Motor Group’’’’s corporate governances corporate governances corporate governances corporate governance
Source: KDB Daewoo Securities Research
TableTableTableTable 17171717.... Controlling familiesControlling familiesControlling familiesControlling families’’’’ stakesstakesstakesstakes (%, Wbn)
NameNameNameName RelationRelationRelationRelation TitleTitleTitleTitle CompanyCompanyCompanyCompany StakeStakeStakeStake ValueValueValueValue
Chung Mong-koo
(1938) - President of HMG
Hyundai Motor 5.17 1,726
Hyundai Mobis 6.96 1,674
Hyundai Glovis 6.71 500
Hyundai Steel 11.81 790
Hyundai Engineering 4.68 294
Hyundai Autoever 9.68 11
Haevichi Hotels & Resorts 4.65 12
Total 5,007
Chung Eui-son
(1970) Eldest son
VP of Hyundai
Motor
Hyundai Glovis 23.29 1,733
Hyundai Engineering 11.72 736
Kia Motors 1.74 378
Innocean 2.00 28
Hyundai Wia 1.95 66
Hyundai Autoever 19.47 22
Seolim Development 100 13
Hyundai Motor 2.28 1,040
Total 4,015
Notes: Based on Nov. 25th
, 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
AffiliateAffiliateAffiliateAffiliate 1111
Affiliate 2Affiliate 2Affiliate 2Affiliate 2
Affiliate 3Affiliate 3Affiliate 3Affiliate 3
Affiliate 4Affiliate 4Affiliate 4Affiliate 4 Affiliate Affiliate Affiliate Affiliate 5555
1 Hyundai Mobis → Hyundai Motor → Kia Motors → Hyundai Mobis
20.8%
33.9% 16.9%
2 Hyundai Mobis → Hyundai Motor → Hyundai Glovis → Hyundai Mobis
20.8% 4.9% 0.7%
3 Hyundai Mobis → Hyundai Motor → Hyundai Steel → Hyundai Mobis
20.8% 11.2% 5.7%
4 Hyundai Mobis → Hyundai Motor → Kia Motors → Hyundai Steel → Hyundai Mobis
20.8% 33.9% 19.6% 5.7%
Source: Dart, KDB Daewoo Securities Research
(2) Unwinding of cross shareholdings
Kia’s shares of Hyundai Mobis (valued at roughly W3.8tr) are critically tied to the controlling
family’s group ownership, meaning selling them to outsiders is not an option. But it would also be
difficult for group affiliates or the controlling family to directly buy the shares, given the ban on
new circular investments and the sheer cost of purchase. We believe HMG will opt to transition to
a holding company structure, through which it can internally absorb its cross-shareholdings and
thus ensure managerial control and ownership transfer.
This will likely be done by Hyundai Mobis switching to a holding company, after which HMC and
Kia will follow suit, splitting themselves up into investment units and operating companies. The
investment units of HMC and Kia should then merge with Hyundai Mobis’s holding company. In
the merger process, the existing cross-shareholdings should be absorbed into the group holding
company’s treasury shares. This would also allow the group holding company to meet subsidiary
stake requirements.
Figure Figure Figure Figure 23232323. . . . ProjectedProjectedProjectedProjected converconverconverconversionsionsionsion totototo holding companyholding companyholding companyholding company
Source: KDB Daewoo Securities Research
X
X: Expected to unwind
XHyundai Mobis
[028260]
Hyundai Motor[032830]
Kia Motors[032830]
Hyundai Glovis[028260]
Hyundai Steel[032830]
Hyundai MobisInvestment unit
Hyundai MobisInvestment unit
Hyundai Motor Kia Motors
Hyundai Mobisoperating co.
Hyundai Mobisinvestment unit
Hyundai Motorinvestment unit
Kia Motors
Hyundai Motoroperating co.
Hyundai Motoroperating co.
Hyundai Mobisinvestment unit
Hyundai Motorinvestment unit
Kia Motorsoperating co.
Hyundai Mobisoperating co.
Kia Motorsinvestment unit
20.8%
Step 1. Hyundai Mobis’sequity spin-off
� Change Hyundai Mobis’s investment unit
into Hyundai Motor holding company
Step 2. Hyundai Motor spin-off
� Merge Hyundai Motor investment unit with
Hyundai Motor holding company
Step 3. Kia Motors’ spin-off
� Merge Kia Motors’ investment unit with
Hyundai Motor holding company
33.9%
16.9%16.9%
20.8%
33.9%
16.9% 16.9%
20.8% 33.9% 16.9%
20.8%
33.9%
Hyundai Motor holding companyMerge
Merge
16.9%
Holding companies
24
November 26, 2015
KDB Daewoo Securities Research
3. Lotte
(1) Cross shareholding structure
Lotte Group now has 67 (down from 416 in 2Q15), following chairman Shin Dong-bin’s purchase
of Lotte E&C’s 1.34% stake (W35.8bn) in Lotte Confectionery in August, and Lotte Hotel’s
purchase of shares in affiliated companies in October (Lotte Shopping’s 12.0% stake in Lotte
Aluminum, Fujifilm Korea’s 3.5% stake in Daehong Communications (W13bn)., and Lotte
Confectionary’s 0.9% stake in Fujifilm Korea).
Among the group’s cross-shareholdings, 1) three are bound by Lotte Confectionery’s stake in
Lotte Shopping; 2) three by Lotte Chilsung’s stake in Lotte Shopping; 3) 26 by Fujifilm Korea’s
stake in Lotte Shopping; 4) 14 by Lotte Data Communication’s stake in Lotte Shopping; 5) 14 by
Lotte Data Communication’s stake in Lotte Shopping; 6) 17 by Lotte E&C’s stake in Lotte
Shopping; and 7) four by Daehong Communications’ stake in Lotte Confectionery.
TableTableTableTable 19191919. . . . Timeline of key eventsTimeline of key eventsTimeline of key eventsTimeline of key events
DateDateDateDate DetailsDetailsDetailsDetails
End-2Q15 Lotte Group: 416 circular shareholdings
Aug. 11, 2015 Shin Dong-bin releases public apology; announces group’s transition to a holding company
structure
Aug. 26, 2015 Launches task force to improve Lotte Group’s corporate governance; announces disposal of 80%
of circular shareholdings by end-Nov. 2015 via open-market and off-board deals
Aug. 28 , 2015 Shin Dong-bin buys 1.3% stake in Lotte Confectionery (19,000 shares; W35.8bn) from Lotte E&C
� unwound 140 circular shareholdings (33.7%)
Sep. 17, 2015 Shin Dong-bin announced the group’s plans to dispose of 80% of circular shareholdings by end-
Oct. 2015
Oct. 27. 2015
Hotel Lotte acquired affiliates’s stakes in other affiliates (W101bn) → Unwound 209 circular
shareholdings
① Lotte Shopping’s stake in Lotte Aluminum 12.0% (W84bn)
② Fujifilm Korea’s stake in Daehong Communications 3.5% (W13bn)
③ Lotte Confectionary’s stake in Fujifilm Korea 0.9% (W3.8bn)
Compared to end-June, 83.9% of circular shareholdings were unwound
Source: KDB Daewoo Securities Research
TableTableTableTable 20202020. . . . Controlling familiesControlling familiesControlling familiesControlling families’’’’ stakesstakesstakesstakes (Wbn)
Major shareholdersMajor shareholdersMajor shareholdersMajor shareholders RelationRelationRelationRelation CompanyCompanyCompanyCompany StakeStakeStakeStake ValueValueValueValue
Shin Kyuk-ho
(1922) -
Lotte Confectionary 6.83 192
Lotte Chilsung 1.30 37
Lotte Shopping 0.93 67
Total 296
Shin Dong-ju
(1954)
Eldest
son
Lotte Confectionary 3.95 111
Lotte Chilsung 2.83 80
Lotte Shopping 13.45 964
Lotte Food 1.96 23
Lotte Card 0.17 2
Lotte Capital 0.53 2
Lotte Data Communication 3.99 26
Lotte E&C 0.37 6
Lotte Corp. 8.03 36
Total 1,250
Shin Dong-bin
(1955) Second son
Lotte Confectionary 8.78 247
Lotte Chilsung 5.71 161
Lotte Shopping 13.46 964
Lotte Food 1.96 23
Lotte Card 0.27 3
Lotte Capital 0.86 3
Lotte Non-life 1.35 5
Lotte Data Communication 7.50 48
Lotte E&C 0.59 10
Lotte Corp. 8.40 38
Total 1,502
Notes: Based on Nov. 25th
, 2015 closing price
Source: Dart, KDB Daewoo Securities Research
Holding companies
25
November 26, 2015
KDB Daewoo Securities Research
Figure Figure Figure Figure 24242424. . . . Lotte GroupLotte GroupLotte GroupLotte Group’’’’s corporate governance (current)s corporate governance (current)s corporate governance (current)s corporate governance (current)
Source: KDB Daewoo Securities Research
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.
SK Holdings (034730 KS)
Five growth strategies to drive up NAV
FY (12) 12/11 12/12 12/13 12/14 12/15F 12/16F
Revenue (Wbn) 1,702 2,242 2,302 2,426 41,476 99,362
OP (Wbn) 176 201 225 272 1,827 5,842
OP Margin (%) 10.3 9.0 9.8 11.2 4.4 5.9
NP (Wbn) 438 356 189 127 5,427 1,513
EPS (W) 8,765 7,122 3,777 2,546 77,130 21,498
ROE (%) 25.3 15.8 8.4 5.5 41.2 9.3
P/E (x) 13.3 14.5 35.7 83.9 3.4 12.2
P/B (x) 2.4 1.9 2.4 3.6 1.3 1.3
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) 330,000
Share Price (11/25/15, W) 261,500
Expected Return 26%
OP (15F, Wbn) 1,827
Consensus OP (15F, Wbn) 2,937
EPS Growth (15F, %) 2,929
Market EPS Growth (15F, %) 22.4
P/E (15F, x) 3.4
Market P/E (15F, x) 11.6
KOSPI 2,009.42
Market Cap (Wbn) 18,399
Shares Outstanding (mn) 71
Free Float (%) 48.4
Foreign Ownership (%) 24.1
Beta (12M) 0.87
52-Week Low 196,500
52-Week High 320,500
(%)(%)(%)(%) 1M1M1M1M 6M6M6M6M 12M12M12M12M
Absolute -2.8 6.5 20.2
Relative -1.3 13.8 18.5
80
100
120
140
160
11.14 3.15 7.15 11.15
SK Holdings KOSPI
Holding companies
29
November 26, 2015
KDB Daewoo Securities Research
TableTableTableTable 21212121. . . . SK GroupSK GroupSK GroupSK Group’’’’ssss growth frameworkgrowth frameworkgrowth frameworkgrowth framework
Growth areasGrowth areasGrowth areasGrowth areas Related companiesRelated companiesRelated companiesRelated companies DetailsDetailsDetailsDetails
ICT
(1) IT services SK C&C, etc. - Extend the coverage of IT services, establish overseas footholds through business
partnerships, and broaden cloud-based offerings
(2) ICT
convergence
SK C&C, Infosec,
NSOK, etc.
- Security convergence platform (information security and physical security)
- Expand into security devices (sensors, etc.) as well as biometrics- and video surveillance
- related software
New
growth
portfolio
(3) Bio/
pharmaceuticals SK Biopharmaceuticals
- Integrate the pharmaceuticals value chain, including R&D, manufacturing, and
marketing by 2018
- Take SK Biopharmaceuticals public in 2018 and acquire drug developers with strong
potential
(4) LNG SK E&S
- Integrate and expand LNG value chain in the group; expand capacity of LNG business
to 5mn tonnes by 2020
- Benefits from cost advantages (due to direct access to cheap gas in the US and
Australia) and captive demand
- Expected to partner with a Chinese firm in the near future to secure new business
Opportunities
(5) Semiconductor
modules/materials
SK C&C, Essencore, SK Hynix,
etc.
- Semiconductor module business (Essencore) aims to achieve W1.5tr in revenue by
2019
- Plans to acquire a firm with world class technology to secure stable footing in the
market
Source: Company data, KDB Daewoo Securities Research
TableTableTableTable 22222222. . . . SKSKSKSK’’’’s major shareholderss major shareholderss major shareholderss major shareholders (Wbn)
NameNameNameName Number of sharesNumber of sharesNumber of sharesNumber of shares StakeStakeStakeStake ValueValueValueValue NotesNotesNotesNotes
NameNameNameName 16,465,472 23.4 4,001
Chey Tae-won 8,616 0.0 2
Noh So-young 5,250,000 7.5 1,276
Chey Gi-won 5,736 0.0 1
Chey Shin-won 21,729,824 30.9 5,280
Total of related parties 2,450,000 3.5 595 100% subsidiary of Foxconn Holdings
Best Leap Enterprises 31,644,533 45.0 7,690
Other 14,535,940 20.7 3,532
Total treasury shares 11,021,664 15.7 2,678 SK Holdings’ stake in SK C&C (31.8%) became treasury shares after
merger Original 3,514,276 5.0 854 Share buyback completed (9/11/2015 – 11/11/2015)
Newly acquired 70,360,297 70,360,297 70,360,297 70,360,297 100.0 100.0 100.0 100.0 17,098 17,098 17,098 17,098
Total number of Total number of Total number of Total number of issued sharesissued sharesissued sharesissued shares
Notes: Based on Nov. 25th
, 2015 closing price, Source: Dart, KDB Daewoo Securities Research
Figure Figure Figure Figure 27272727. . . . SK GroupSK GroupSK GroupSK Group’’’’ssss corporate governancecorporate governancecorporate governancecorporate governance (current)(current)(current)(current)
Source: KDB Daewoo Securities Research
25.2%
SK ShippingSKC
[011790 KS]SK E&S
Chey Tae-won and related
parties
SK C&C+SK[034730 KS]
SK Innovation[096770 KS]
SK E&CSK Telecom[017670 KS]
SK Gas[018670 KS]
SK BiophramSKNetworks[001740 KS]
SK Chemicals[006120 KS]
33.4% 39.1% 100% 83.1% 100% 100% 44.5%
28.2%
17.3%
Infosec
Encarsales.com
10.0%
99.4%
Initz
100%
30.9%
SKForest
41.8%
50.0%
▶ SK’s major shareholders
Chey Tae-won 23.4%Chey Gi-won 7.5%Treasury shares 15.7%
SKHynix[000660 KS]
SK Broadband SK Telink SKPlanetiRiver
[060570 KQ]
SKCommunications
[066270 KQ]
100% 20.1% 48.9% 83.5% 100%64.5%
SKD&D[210980 KS]
32.8%
▶ SKChem’s major shareholders
Chey Chang-won 14.7%Chey Shin-won 0.1%Treasury shares 15.5%
EntisUBcare
[032620 KQ]
44.0%
SK Syntec
66.0% 45.6%50.0%
SKSecurities[001510 KS]
25.4%
Chey Chang-won and related parties
Holding companies
30
November 26, 2015
KDB Daewoo Securities Research
TableTableTableTable 23232323. . . . SKSKSKSK Biopharmaceuticals’ Biopharmaceuticals’ Biopharmaceuticals’ Biopharmaceuticals’ major pipelinesmajor pipelinesmajor pipelinesmajor pipelines
Current stageCurrent stageCurrent stageCurrent stage DetailsDetailsDetailsDetails
Sleep-wake disorders
(SKL-N05) Phase 3b clinical trial underway
Signed out-licensing deal with Jazz Pharmaceuticals (US); Plan to go on sale in 2018
Will receive engineering fees during clinical trials (under technology export deal with
Jazz) and royalties once drug goes on sale
Secured copyright in 12 Asian countries; Plans to engage in direct marketing
Epilepsy
(YKP3089)
Phase 2b clinical trial underway
Results expected to come out in July
Phase 3b clinical trial expected to begin in 4Q15
Global release planned for 2018; Direct revenue (approximately W1tr annually)
expected
Chronic constipation/
Irritable bowel syndrome
(YKP10811)
Phase 2b clinical trial underway Plans to sign out-licensing deals with global drug companies in 1Q16
Acute seizures
(PLUMIAZ) Submitted NDA
Signed out-licensing in 2010 with Acorda Therapeutics (US supplier of drugs for
central nervous system disorders)
Dementia/ cognitive
impairment
(SKL 15508)
Phase 2a clinical trial underway Conducting phase 2a clinical trial independently
Source: KDB Daewoo Securities Research
TableTableTableTable 24242424. . . . SK BiopharmaceuticalsSK BiopharmaceuticalsSK BiopharmaceuticalsSK Biopharmaceuticals’’’’ consolidated income statementconsolidated income statementconsolidated income statementconsolidated income statement ((((WbnWbnWbnWbn))))
2011201120112011 2012201220122012 2013201320132013 2014201420142014
RevenueRevenueRevenueRevenue 37.6 37.6 37.6 37.6 51.8 51.8 51.8 51.8 60.5 60.5 60.5 60.5 72.4 72.4 72.4 72.4
CMS 108.1 113.0
Development of new drugs 10.1 16.1
(adjustment) -57.8 -56.7
Cost of sales 27.4 37.7 44.4 46.6
Gross profit 10.2 14.1 16.1 25.9
SG&A 32.6 50.1 60.2 65.1
Operating profitOperating profitOperating profitOperating profit ----22.3 22.3 22.3 22.3 ----36.0 36.0 36.0 36.0 ----44.2 44.2 44.2 44.2 ----39.2 39.2 39.2 39.2
OP margin -59.4% -69.5% -73.0% -54.2%
CMS 4.7 7.8
OP margin 4.4% 6.9%
Development of new drugs -48.9 -46.7
OP margin -484.9% -289.6%
(adjustment) 0.1 -0.3
Financial income 4.9 9.2 6.4 6.2
Financial expenses 1.3 1.4 1.9 2.5
Non-operating income 2.6 1.2 0.3 0.6
Non-operating expenses 4.6 3.0 3.2 1.2
Pretax income -20.7 -30.0 -42.6 -36.2
Corporate tax -1.2 0.4 -1.6 0.8
Net profitNet profitNet profitNet profit ----19.5 19.5 19.5 19.5 ----30.3 30.3 30.3 30.3 ----41.0 41.0 41.0 41.0 ----37.0 37.0 37.0 37.0
Source: Dart, KDB Daewoo Securities Research
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.
LG (003550 KS)
Rebound to start
FY (12) 12/11 12/12 12/13 12/14 12/15F 12/16F
Revenue (Wbn) 10,059 9,695 9,799 9,865 10,210 10,440
OP (Wbn) 1,351 1,232 1,154 1,044 1,311 1,420
OP Margin (%) 13.4 12.7 11.8 10.6 12.8 13.6
NP (Wbn) 978 938 896 845 1,059 1,114
EPS (W) 5,563 5,334 5,095 4,802 6,019 6,334
ROE (%) 9.6 8.7 7.8 7.0 8.3 8.2
P/E (x) 11.0 12.2 12.6 12.7 12.3 11.7
P/B (x) 1.0 1.0 1.0 0.9 1.0 0.9
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
Figure Figure Figure Figure 32323232. . . . NAVNAVNAVNAV breakdownbreakdownbreakdownbreakdown Figure Figure Figure Figure 33333333. . . . LGLGLGLG’’’’s cashflows cashflows cashflows cashflow
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
Ordinary Cash inflow(1) 589.5 616.6 568 575.7 585.8
Dividends 260.9 252.6 200.3 209.4 214.4
Brand Royalties 264.9 271.1 269.1 264.9 267.6
Lease income 63.7 92.9 98.7 101.5 103.7
Ordinary Cash outflow(2) 434.1 376.1 399.1 376.3 387.7
Admin cost(exclude
depreciation cost)107.5 131.3 141.3 141.5 141.4
Corporate tax 64.2 68.8 67.7 60.6 64.2
Dividend payout 175.9 175.9 175.9 175.9 175.9
Investment on tangible and
intangible asset88 3.1 20.6 5.5 13
Net financial expense -1.5 -3.1 -6.5 -7.2 -6.9
0
10
20
30
40
50
60
70
06 07 08 09 10 11 12 13 14 15
(%)
0
5
10
15
20
25
03 04 05 06 07 08 09 10 11 12 13 14 15
6.0x
8.0x
10.0x
12.0x
14.0x
(Wtr)
15F
30.1%
LG
(003550 KS)
LG CNSLG Chemical
[051910]
LGElectronics
[066570]
LG Housys
[108670]
LG Display
[034220]
LGInnotek
[011070]
33.7% 30.1%
37.9% 40.8%
85.0%
Holding companies
33
November 26, 2015
KDB Daewoo Securities Research
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
RevenueRevenueRevenueRevenue 9,7999,7999,7999,799 9,8659,8659,8659,865 10,21010,21010,21010,210 10,44010,44010,44010,440 Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 3,7103,7103,7103,710 3,8513,8513,8513,851 4,3864,3864,3864,386 4,0354,0354,0354,035
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
SG&A ExpensesSG&A ExpensesSG&A ExpensesSG&A Expenses 461461461461 459459459459 470470470470 454454454454 Inventories 330 308 316 330
Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj) 1,1541,1541,1541,154 1,0441,0441,0441,044 1,3111,3111,3111,311 1,4201,4201,4201,420 Other Current Assets 694 783 736 361
Operating ProfitOperating ProfitOperating ProfitOperating Profit 1,1541,1541,1541,154 1,0441,0441,0441,044 1,3111,3111,3111,311 1,4201,4201,4201,420 NonNonNonNon----Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 12,84112,84112,84112,841 13,48213,48213,48213,482 13,74613,74613,74613,746 13,90613,90613,90613,906
NonNonNonNon----Operating ProfitOperating ProfitOperating ProfitOperating Profit ----75757575 ----88888888 ----73737373 ----79797979 Investments in Associates 9,434 9,815 10,094 10,524
Net Financial Income -55 -60 -65 -25 Property, Plant and Equipment 2,362 2,478 2,464 2,212
Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 156 134 123 99
Pretax Profit 1,079 956 1,238 1,341 Total AssetsTotal AssetsTotal AssetsTotal Assets 16,55016,55016,55016,550 17,33317,33317,33317,333 18,13218,13218,13218,132 17,94117,94117,94117,941
Income Tax 123 127 167 184 Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 2,6602,6602,6602,660 2,8972,8972,8972,897 2,5482,5482,5482,548 2,2322,2322,2322,232
Profit from Continuing Operations 956 829 1,071 1,157 AP & Other Payables 1,254 1,372 960 1,001
Profit from Discontinued Operations -125 6 0 0 Short-Term Financial Liabilities 605 686 578 178
Net ProfitNet ProfitNet ProfitNet Profit 831831831831 834834834834 1,0711,0711,0711,071 1,1571,1571,1571,157 Other Current Liabilities 801 839 1,010 1,053
Controlling Interests 896 845 1,059 1,114 NonNonNonNon----Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 1,7851,7851,7851,785 1,8501,8501,8501,850 2,1022,1022,1022,102 1,2461,2461,2461,246
Non-Controlling Interests -65 -10 12 43 Long-Term Financial Liabilities 1,149 1,196 1,431 831
Total Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive Profit 741741741741 659659659659 1,0741,0741,0741,074 1,1571,1571,1571,157 Other Non-Current Liabilities 636 654 671 415
Controlling Interests 804 674 1,090 1,162 Total LiabilitiesTotal LiabilitiesTotal LiabilitiesTotal Liabilities 4,4454,4454,4454,445 4,7474,7474,7474,747 4,6504,6504,6504,650 3,4793,4793,4793,479
Non-Controlling Interests -63 -15 -16 -5 Controlling InterestsControlling InterestsControlling InterestsControlling Interests 11,75611,75611,75611,756 12,25212,25212,25212,252 13,13713,13713,13713,137 14,07514,07514,07514,075
EBITDA 1,478 1,347 1,619 1,695 Capital Stock 879 879 879 879
FCF (Free Cash Flow) 405 239 417 1,527 Capital Surplus 2,365 2,363 2,362 2,362
EBITDA Margin (%) 15.1 13.7 15.9 16.2 Retained Earnings 8,575 9,153 10,025 10,963
Operating Profit Margin (%) 11.8 10.6 12.8 13.6 NonNonNonNon----Controlling InterestsControlling InterestsControlling InterestsControlling Interests 349349349349 334334334334 345345345345 388388388388
Net Profit Margin (%) 9.1 8.6 10.4 10.7 Stockholders' EquityStockholders' EquityStockholders' EquityStockholders' Equity 12,10512,10512,10512,105 12,58612,58612,58612,586 13,48213,48213,48213,482 14,46314,46314,46314,463
Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized) Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized) (Wbn)(Wbn)(Wbn)(Wbn) 12/1312/1312/1312/13 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/1312/1312/1312/13 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F
Cash Flows from Op Activities 736 600 701 1,527 P/E (x) 12.6 12.7 12.3 11.7
Net Profit 831 834 1,071 1,157 P/CF (x) 12.8 13.0 10.6 7.9
Non-Cash Income and Expense 45 -7 163 484 P/B (x) 1.0 0.9 1.0 0.9
Depreciation 300 274 281 252 EV/EBITDA (x) 8.3 9.0 8.7 7.8
Amortization 24 29 27 23 EPS (W) 5,095 4,802 6,019 6,334
Others -279 -310 -145 209 CFPS (W) 4,982 4,701 7,016 9,330
Chg in Working Capital -89 -223 -463 95 BPS (W) 66,860 69,678 74,710 80,043
Chg in AR & Other Receivables -107 -252 -257 -108 DPS (W) 1,000 1,000 1,000 1,000
Chg in Inventories 79 30 -4 -13 Payout ratio (%) 20.8 20.7 16.1 14.9
Chg in AP & Other Payables 11 108 -415 41 Dividend Yield (%) 1.6 1.6 1.3 1.3
Income Tax PaidIncome Tax PaidIncome Tax PaidIncome Tax Paid ----126126126126 ----128128128128 ----197197197197 ----184184184184 Revenue Growth (%) 1.1 0.7 3.5 2.3
Cash Flows from Inv Activities -543 -721 -304 -19 EBITDA Growth (%) -6.3 -8.9 20.2 4.7
Chg in PP&E -323 -356 -253 0 Operating Profit Growth (%) -6.3 -9.5 25.6 8.3
Chg in Intangible Assets -46 -27 -16 0 EPS Growth (%) -4.5 -5.8 25.3 5.2
Chg in Financial Assets -149 -21 -13 -19 Accounts Receivable Turnover (x) 4.9 4.6 4.3 4.0
OthersOthersOthersOthers ----25252525 ----317317317317 ----22222222 0000 Inventory Turnover (x) 25.5 30.9 32.7 32.3
Cash Flows from Fin Activities -18 -60 -55 -1,176 Accounts Payable Turnover (x) 6.5 6.4 7.2 8.7
Chg in Financial Liabilities 158 129 126 -1,000 ROA (%) 5.1 4.9 6.0 6.4
Chg in Equity -1 -3 -1 0 ROE (%) 7.8 7.0 8.3 8.2
Dividends Paid -182 -179 -179 -176 ROIC (%) 30.4 26.2 30.0 33.3
OthersOthersOthersOthers 7777 ----7777 ----1111 0000 Liability to Equity Ratio (%) 36.7 37.7 34.5 24.1
Increase (Decrease) in Cash 174 -185 302 -99 Current Ratio (%) 139.5 132.9 172.1 180.8
Beginning Balance 508 682 498 799 Net Debt to Equity Ratio (%) 6.3 8.3 6.4 -0.4
Ending BalanceEnding BalanceEnding BalanceEnding Balance 682682682682 498498498498 799799799799 701701701701 Interest Coverage Ratio (x) 14.7 12.2 15.9 30.0
Source: Company data, KDB Daewoo Securities Research estimates
Holding companies
35
November 26, 2015
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
BuyBuyBuyBuy Trading BuyTrading BuyTrading BuyTrading Buy HoldHoldHoldHold SellSellSellSell
72.77% 13.86% 13.37% 0.00%
* 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
more of the subject company's shares outstanding.
Analyst CertificationAnalyst CertificationAnalyst CertificationAnalyst Certification
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
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correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English
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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
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(W) LG Corp.
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(W)SK Holdings
Holding companies
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November 26, 2015
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.
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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
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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
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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
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