2020 Outlook Conglomerates Winds of change Dae-ro Jeong +822-3774-1634 [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Contents I. 2019 review 3 II. 2020 outlook 5 III. Major shareholders and inheritance taxes 10 IV. Key issues by group 27 V. Top picks 50 I. 2019 review Undiscovered, undervalued, and rebounding Holding companies > KOSPI Holding companies < KOSPI (Jul. 2010-Apr. 2011) The values of holding companies’ unlisted subsidiaries (May 2011-May 2012) Corporate governance regulations were introduced increased. (restrictions on related-party transactions, etc.). (Jun. 2012-Aug. 2015) Major conglomerates overhauled their corporate (Sep. 2015-Feb. 2017) Regulators sought stronger restrictions on holding structures/governance, and holding companies received valuation premiums. companies via the Monopoly Regulation and Fair Trade Act (MRFTA), etc. (Mar. 2017-Feb. 2018) Minority shareholder rights strengthened, and (Mar. 2018-Aug. 2019) External uncertainties increased; holding companies stewardship code expectations increased. received steeper valuation discounts. Holding companies vs. the KOSPI (1/1/10=100) 200 Holding companies KOSPI 180 160 140 120 100 80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Notes: Combined market cap of top five holding companies (LG Corp., SK Holdings, Doosan Corp., Hanwha Corp., and CJ Corp.); based on Nov. 15, 2019 closing prices Source: WISEfn, Mirae Asset Daewoo Research 3| 2020 Outlook [Conglomerates] Mirae Asset Daewoo Research I. 2019 review Discount to net asset value (NAV): Valuations at historical lows LG Corp. (003550 KS) SK Holdings (034730 KS) Hanwha Corp. (000880 KS) (%) (%) (%) 70 60 70 60 50 60 50 50 40 40 40 30 30 30 20 20 20 10 10 10 0 0 0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 8/15 2/16 8/16 2/17 8/17 2/18 8/18 2/19 8/19 10 11 12 13 14 15 16 17 18 19 Source: WiSEfn, Mirae Asset Daewoo Research Source: WiSEfn, Mirae Asset Daewoo Research Source: WiSEfn, Mirae Asset Daewoo Research CJ Corp. (001040 KS) Doosan Corp. (000150 KS) Lotte Corp. (004990 KS) (%) (%) (%) 70 80 60 70 50 50 60 40 30 50 40 30 10 30 20 20 -10 10 10 -30 0 0 09 10 11 12 13 14 15 16 17 18 19 09 10 11 12 13 14 15 16 17 18 19 1/18 3/18 5/18 7/18 9/18 11/18 1/19 3/19 5/19 7/19 9/19 11/19 Source: WiSEfn, Mirae Asset Daewoo Research Source: WiSEfn, Mirae Asset Daewoo Research Source: WiSEfn, Mirae Asset Daewoo Research 4| 2020 Outlook [Conglomerates] Mirae Asset Daewoo Research II. 2020 outlook Pending bills to be scrapped in 2020 • Pending bills will be automatically scrapped when the term of the 20th National Assembly draws to a close next year (general elections scheduled for April 2020). • It is uncertain whether corporate governance-related bills will be signed into law. Legislative process No. of bills introduced/passed by National Assembly Motion Classification Term/election date Proposal (by assembly th (by gov’t) 20 May 30, 2016-May 29, 2020 member) 21st General election: April 15, 2020 (Wed.) (No.) (%) National Assembly 25,000 Introduced (L) 100 Speaker Passed (L) Passage rate (R) Submission 20,000 80 Standing 73.0 Committee Tabling Submission 63.0 Veto Legislation and 15,000 60 Judiciary 50.3 Committee 44.4 Tabling 10,000 41.7 40 Plenary session 28.3 Transfer 5,000 20 President Within 15 days Proclamation/ 0 0 enforcement 15th 16th 17th 18th 19th 20th Source: National Assembly, Mirae Asset Daewoo Research Note: Bill Information, Source: Mirae Asset Daewoo Research 5| 2020 Outlook [Conglomerates] Mirae Asset Daewoo Research II. 2020 outlook Regulatory uncertainty • President Moon Jae-in’s five-year plan indicated that his administration would pursue greater to dissipate for now economic democratization. • The major goals of the administration’s policies are to strengthen the rights of minority shareholders, secure board of director independence, and prevent controlling families from abusing their power. • Numerous corporate governance bills were proposed, but many are still pending. • It is doubtful whether these bills will pass ahead of the 2020 general elections; related regulatory uncertainty should lift for now. Moon administration’s economic democratization policies (five-year plan) No. Goal Details Progress Passage into law Preventing Motion to revise the Commercial Act Introduction of multiple derivative suits and electronic voting; adoption of either a 1 controlling families (Kim Jong-in, Chae Yi-bae, X cumulative voting system or separate election of audit committee members (-2018) from abusing power Lee Jong-geol, et al.) Motion to revise the MRFTA Stronger legal requirements for holding companies (2017-18) (Park Chan-dae, Chae Yi-bae, Park X Preventing Yong-jin, et al.) controlling families 2 from amassing Motion to revise the Commercial Act control via illegal Ban on the allotment of new subsidiary shares (post-spin-off) based on treasury stock (Park Yong-jin, Park Yeong-seon, Je X means Yun-gyeong, et al.) Motion to revise the MRFTA Introduction of measures to gradually unwind existing circular shareholdings X (Choi Un-yeol, et al.) Rooting out controlling families’ Motion to revise the MRFTA Expansion of the scope of regulations on controlling families’ pursuit of private interests 3 pursuit of private (Kim Dong-cheol, Je Yun-gyeong, Chae X via illegal means (-2018) interests via illegal Yi-bae, et al.) means Stricter separation of Motion to revise the Insurance Act 4 financial and non- Tighter regulations on voting rights of financial/insurance affiliates (-2018) X (Lee Jong-geol, Park Yong-jin, et al.) financial capital Source: Mirae Asset Daewoo Research 6| 2020 Outlook [Conglomerates] Mirae Asset Daewoo Research II. 2020 outlook MRFTA revision bills pending at National Assembly Goal Current Special committee recommendations Proposal by the FTC Revisions to the Asset criterion for groups subject to cross-shareholding 1 designation of Total asset value of W10tr+ restrictions revised to 0.5% of GDP (effective the year after 0.5% Recommendation accepted conglomerates of GDP reaches W10tr). Conglomerates obligated to disclose overseas affiliates’ stakes Recommendation accepted Disclosure in domestic affiliates and circular shareholdings regarding 2 None overseas Conglomerates obligated to disclose information about Recommendation accepted after revisions; applied only to affiliates overseas affiliates (and subsidiaries) in which the controlling overseas affiliates in which the controlling family holds a family holds a 20% stake 20%+ stake (subsidiaries excluded) Broadening of Controlling families’ Controlling families’ ownership threshold unified to 20% for related-party ownership thresholds: 30% 3 both listed and unlisted affiliates; regulations to be applied to Recommendation accepted transaction for listed and 20% unlisted their subsidiaries (over 50% stake) regulations subsidiaries Revisions to circular Voting rights restricted for companies with circular Recommendation accepted after revisions; applied only to 4 None shareholding shareholdings groups newly subject to mutual investment limits regulations 15% limit on the combined Regulations on voting rights of Recommendation accepted after revisions; mergers 5 financial/ Voting interests of financial/insurance firms limited to 5% financial/insurance firms between affiliates excluded from list of exceptions insurance firms and affiliates Regulations on conglomerate- Voting right restrictions applied to foundations tied to Recommendation accepted after revisions; to be phased in 6 None controlled conglomerates (same as limit for financial/insurance firms) (by 5% annually for three years) after grace period foundations 1) Upward revisions to minimum ownership of first- and second-tier subsidiaries (listed 30%, unlisted 50%); new rules Minimum ownership of Recommendations accepted; higher minimum ownership Revisions to to first be applied to newly-established holding companies; first/second-tier to be applied only to newly established or converted holding new rules to apply to all holding companies with a grace 7 subsidiaries: 20% for listed, holding companies; efforts to incentivize holding company period 40% for unlisted companies to voluntarily maintain high stakes by revising regulations 2) Required debt ratio threshold to either be tightened to 100% tax rules; current debt ratio regulations to be maintained; (from 200%) or remain flat stronger rules on disclosure of related-party transactions 3) Stricter rules on disclosure of related-party transactions Source: Mirae Asset Daewoo Research 7| 2020 Outlook [Conglomerates] Mirae Asset Daewoo Research II. 2020 outlook Tax benefits for holding company conversion/establishment to disappear • Under the Special Tax Treatment Control Act, corporate income/capital gains taxes on share acquisitions (through rights offerings) for holding company establishment/conversion are deferred until disposal of the shares. • Following the 2019 tax law revision, the deferred taxes shall be paid in three yearly installments after a four-year deferral period, starting in 2022; this means that tax deferrals still apply to shares acquired (for holding company establishment/conversion) until December 31, 2021. • Thus, the revised law may hasten holding company establishment/conversion to some extent. 2019 tax law revision (tax benefits related to holding company Tax benefits for holding