Overweight (Maintain) Ownership restructuring has been an overriding theme of 2016. We anticipate that large conglomerates, including Samsung, will continue to pursue Industry Report ownership restructuring in 2017 in an effort to secure competitiveness and solidify control over their groups. In this report, we continue examining the November 21, 2016 areas where current standards regarding ownership restructuring―which were once considered adequate―need revision, and forecast changes to come.
Mirae Asset Daewoo Co., Ltd. How will HMG unwind circular shareholdings?
[Holding Companies/IT Services ] Current status (1): Key circular shareholding: Mobis ‰‰‰ HMC ‰‰‰ Kia ‰‰‰ Mobis;
Dae -ro Jeong Selling Kia’s Mobis stake to outsiders not an option; Buying internally also +822 -768 -4160 difficult [email protected] Hyundai Motor Group (HMG) controls Hyundai Motor Company (HMC), Kia Motors (Kia) and other affiliates through Hyundai Mobis, which is at the center Yoon -seok Seo of the group’s ownership structure. Among HMG’s four circular shareholdings, +822 -768 -4127 the key one for maintaining control over the group is bound by Kia’s stake in [email protected] Hyundai Mobis (Mobis ‰ HMC ‰ Kia ‰ Mobis). If the Monopoly Regulation and
Fair Trade Act (MRFTA) is revised to require conglomerates to unwind existing circular shareholdings, Kia’s 16.9% stake in Hyundai Mobis (valued at about W4tr) will present a challenge to HMG; selling the shares to outsiders is not an option, given that they are critically tied to the controlling family’s group ownership, but it would also be difficult for group affiliates or the controlling family to buy the shares directly, given the ban on new circular investments and the sheer cost of the purchase.
Current status (2): Other restructuring considerations: Shareholdings of multiple affiliates and financial affiliates’ stakes 1) Shareholdings of multiple affiliates: The key companies in HMG—Mobis, HMC, and Kia—have stakes in most HMG affiliates. If HMG establishes a holding company, one way for it to meet subsidiary shareholding requirements would be to purchase the three key group members’ stakes in affiliates. However, this would likely impose a huge financial burden on the holding company, and, moreover, the key group members would incur capital gains tax on disposal of the shares.
2) Financial affiliates’ stakes in non-financial HMG affiliates: As there are five financial companies in HMG, including Hyundai Card, HMG has to establish an intermediate financial holding company (now under consideration) in order to maintain its control over financial affiliates after holding company conversion.
Forecast (1): Mobis to switch to holding company; HMC and Kia to split into investment/operating entities; Investment entities to then merge with holding company We believe HMG will opt to transition to a holding company structure to internally absorb its circular shareholdings and thus ensure managerial control and ownership transfer. This will likely be done by having Hyundai Mobis switch to a holding company, after which HMC and Kia will split themselves up into investment and operating entities, with the investment units then merging with Hyundai Mobis’s holding company. In the merger process, the existing circular shareholdings would be absorbed into the group holding company’s treasury shares. This process would allow the group holding company to meet subsidiary stake requir ements (more than 20% for listed companies; 40% for unlisted) without the need to purchase the three key group members’ stakes in affiliates.
Forecast (2): Hyundai Mobis in same situation as SEC; O wnership restructuring likely to boost shareholder value HMG now owns only a 30.2% stake in Hyundai Mobis. A special resolution for spin-off and merger would need to garner a considerable number of outside votes at a special shareholders’ meeting to be approved.
We believe converting SEC to a holding company via a spin-off would be the best way for the group to strengthen its grip on the electronics giant. In our view, SEC’s recent moves to implement a more favorable shareholder return policy can be seen as part of the company’s strategy to bring more outside shareholders on board for a future spin-off. Likewise, we think Hyundai Mobis will also adopt a more aggressive shareholder return policy, including dividend as well as share buyback and retirement, in a bid to gain more support for its ownership restructuring.
Under the revision to the MRFTA enacted on July 25, 2014, large corporate groups are banned from forming new circular shareholdings or strengthening existing ones. In addition, a revision to the MRFTA was proposed in September 2016 to require conglomerates to untie existing circular shareholdings within a certain period of time (three years); the revision bill is currently pending in the National Assembly, and we believe there is a chance it will pass ahead of the presidential election in late 2017 if the political parties reach an agreement that existing circular shareholdings should also be directly regulated.
These developments spell the end of circular ownership as a means for large Korean conglomerates to maintain managerial rights and expand control over their groups. Most of them have already begun undertaking serious efforts to unwind their existing circular shareholdings to avoid potential policy risks. Most will continue to unwind existing circular shareholdings, while also improving ownership structure and making the transition to a holding company structure.
▶▶▶ Key circular shareholding is Mobis →→→ HMC →→→Kia →→→ Mobis; Selling Kia’s Mobis stake to outsiders not an option; Buying internally also difficult
HMG has four circular shareholdings, with Hyundai Mobis at the top of the ownership structure controlling HMC, Kia, and other affiliates
. Of the four, the key one for maintaining control over the group is bound by Kia’s stake in Hyundai Mobis (Mobis ‰ HMC ‰ Kia ‰ Mobis). If a pending revision to the MRFTA ends up passing, requiring HMG to unwind its circular shareholdings, the simplest way to do so would seem to be disposing of Hyundai Mobis stakes owned by Kia (16.9%), Hyundai Glovis (0.7%) and Hyundai Steel (5.7%). However, HMG can ill afford to sell Kia’s 16.9% stake in Hyundai Mobis. For one, the stake is key in maintaining control over group affiliates, and so selling it to outsiders is not an option. Secondly, the ban on new circular investments and the sheer size of the stake (valued at about W4tr) mean that buying the shares internally is also unfeasible.
1) Sell-off to third-party buyers not an option: HMG owns 30.2% of Hyundai Mobis shares. With President Chung Mong-koo holding just a 7.0% stake, selling Kia’s 16.9% stake to third- party buyers would lower the group’s stake to 13.3%, causing HMG to lose control of the group.
2) Sell-off to affiliates unlikely: Hyundai Mobis cannot buy back its shares from Kia due to legal restrictions (Article 341 of the Commercial Act). HMC must dispose of Mobis shares it purchases within six months of the acquisition due to the cross investment ban. Financial constraints or regulatory bans also prevent other affiliates from buying Kia’s 16.9% stake. The controlling family cannot afford to buy the stake in its entirety, given the huge financial commitment. A stock swap between the controlling family and Kia shareholders does not seem feasible, either, due to taxation issues involving large shareholders, and potential changes in stake values following the exchange.
Table 1. Current circular shareholdings of HMG (%) Affiliate 1 Affiliate 2 Affiliate 3 Affiliate 4 Affiliate 5 Hyundai Hyundai Hyundai 1 → → Kia Motors → Mobis Motor Mobis 20.80% 33.90% 16.90%
(W6.0tr) (W5.0tr) (W4.0tr) Hyundai Hyundai Hyundai 2 → → Hyundai Glovis → Mobis Motor Mobis 20.80% 4.90% 0.70%
(W6.0tr) (W0.3tr) (W0.2tr) Hyundai Hyundai Hyundai 3 → → Hyundai Steel → Mobis Motor Mobis 20.80% 11.20% 5.70%
(W6.0tr) (W0.7tr) (W1.3tr) Hyundai Hyundai Hyundai Hyundai 4 → → Kia Motors → → Mobis Motor Steel Mobis 20.80% 33.90% 19.60% 5.70%
(W6.0tr) (W5.0tr) (W1.3tr) (W1.3tr) Notes: Numbers in parentheses indicate stake value; Based on Nov. 18 closing prices Source: Fair trade Commission, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 3 November 21, 2016 Holding Companies
Figure 1. Corporate governance of HMG
Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 4 November 21, 2016 Holding Companies
▶ Other restructuring considerations: Shareholdings of multiple affiliates and financial affiliates’ stakes
If HMG conducts governance restructuring to unwind circular shareholding and strengthen its control over the business group, it is likely to consider converting to a holding structure. In this process, the group will likely have to address the following issues.
1) Stakes in affiliates held by Hyundai Mobis, HMC, and Kia: The key companies in HMG—Mobis, HMC, and Kia—have stakes in most HMG affiliates. If HMG were to follow in the footsteps of most Korean holding companies, an HMG affiliate would be split into a holding company and an operating entity, with the former then purchasing the three key group members’ stakes in affiliates to meet subsidiary shareholding requirements. However, this would likely impose a huge financial burden on the holding company, and, moreover, the key group members would incur capital gains tax on disposal of the shares.
2) Financial affiliates’ stakes in non-financial HMG affiliates: HMG currently has five financial affiliates, including Hyundai Card and Hyundai Capital. Under the current law, a non-financial holding company is not allowed to have a financial subsidiary. As such, HMG has to establish an intermediate financial holding company (now under consideration) in order to maintain its control over financial affiliates after holding company conversion.
Table 2. Current shareholders by affiliate Hyundai E&C (shares, %) Hyundai Engineering (shares, %)
Name Relation Number of shares Ownership Name Relation Number of shares Ownership
Hyundai Motor The largest shareholder 23,327,400 20.9 Hyundai E&C The largest shareholder 2,933,000 38.6
Kia Motors Affiliate 5,831,850 5.2 Chung Eui-sun Related party 890,327 11.7
Hyundai Mobis Affiliate 9,719,750 8.7 Hyundai Glovis Affiliate 886,740 11.7
Total 38,879,000 34.9 Kia Motors Affiliate 710,020 9.3
Total number of issued shares 111,355,765 100.0 Hyundai Mobis Affiliate 710,020 9.3
Chung Mong-koo Related party 355,234 4.7
Hyundai Steel (shares, %) Total 6,485,341 85.4
Name Relation Number of shares Ownership Treasury shares 323,715 4.3
Hyundai Motor Affiliate 9,173,595 6.9 Total number of issued shares 7,595,341 100.0
Kia Motors The largest shareholder 23,049,159 17.3
Chung Mong-koo Related party 15,761,674 11.8 Hyundai Autoever (shares, %)
Total 47,984,428 36.0 Name Relation Number of shares Ownership
Total number of issued shares 133,445,785 100.0 HMC Affiliate 598,000 29.0
Kia Affiliate 400,000 19.4
Hyundai Wia (shares, %) Hyundai Mobis Affiliate 400,000 19.4
Name Relation Number of shares Ownership Hyundai E&C Affiliate 45,670 2.2
HMC The largest shareholder 6,893,596 25.3 Hyundai Engineering Affiliate 13,048 0.6
Kia Affiliate 3,654,004 13.4 Hyundai E&S Affiliate 6,524 0.3
Chung Eui-sun Executive 531,095 2.0 Chung Eui-sun Related party 402,000 19.5
Total 11,078,695 40.7 Total 1,865,242 90.3
Treasury shares 633,294 2.3 Total number of issued shares 2,065,242 100.0
Total number of issued shares 27,195,083 100.0
Hyundai PowerTech (shares, %) Hyundai Dymos (shares, %)
Name Relation Number of shares Ownership Name Relation Number of shares Ownership
HMC Affiliate 34,488,000 37.6 HMC Affiliate 14,185,000 47.3
Kia Affiliate 34,488,000 37.6 Kia Affiliate 13,615,000 45.4
Hyundai Mobis Affiliate 22,805,000 24.8 Hyundai Wia Affiliate 1,536,000 5.1
Total 91,781,000 100.0 Total 29,336,000 97.8
Total number of issued shares 91,781,200 100.0 Total number of issued shares 30,008,765 100.0
Name Hyundai Capital Hyundai Card Hyundai Commercial HMC Investment Securities Hyundai Life HMC 56.5 % 37.0% 50.0% 27.5% Kia 11.5% 4.9%
Hyundai Mobis 17.0% 58.9% Total 56.5% 48.5% 50.0% 49.4% 58.9% Source: Dart, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 5 November 21, 2016 Holding Companies
▶ Mobis to switch to holding company; HMC and Kia to split into investment/operating entities; Investment entities to then merge with holding company
We have projected in our previous reports that HMG will switch to a holding structure via the consecutive splits and mergers of Mobis, HMC, and Kia.
We believe HMG can untie the current circular shareholdings of Mobis, HMC, and Kia by opting to transition to a holding company. This will likely be done by having Hyundai Mobis switch to a holding company, after which HMC and Kia will split themselves up into investment and operating entities, with the investment units then merging with Hyundai Mobis’s holding company. This merger process would allow the group holding company to meet subsidiary stake requirements (more than 20% for listed companies; 40% for unlisted) without the need to purchase the three key group members’ stakes in affiliates. In addition, the process would make it easier to establish an intermediate financial holding company.
Figure 2. Projected conversion to holding company
Step 1. Hyundai Mobis’s equity spin-off Step 2. Hyundai Motor spin-off Step 3. Kia Motors’ spin-off ‰ Change Hyundai Mobis’s investment unit ‰ Merge Hyundai Motor investment unit with ‰ Merge Kia Motors’ investment unit with into Hyundai Motor holding company Hyundai Motor holding company Hyundai Motor holding company
Merge Merge Hyundai Motor holding company Hyundai Mobis Hyundai Mobis Hyundai Mobis Hyundai Mobis Investment unit Investment unit investment unit operating co. Hyundai Mobis 16.9% investment unit Kia Motors Hyundai Motor 33.9% investment unit investment unit 16.9% 20.8% 16.9% 20.8% 16.9% 16.9%
33.9% Hyundai Motor 33.9% 20.8% 33.9% 16.9% Hyundai Motor Kia Motors Kia Motors investment unit
20.8% Hyundai Motor Hyundai Motor Kia Motors Hyundai Mobis operating co. operating co. operating co. operating co.
Source: Mirae Asset Daewoo Research
Figure 3. Expected corporate governance of HMG
Controlling shareholders
Hyundai Motor holding company 1) Hyundai Motor investment unit Hyundai Mobis investment unit + Kia Motors 2) investment unit
Intermediate Hyundai Mobis Hyundai Motor Kia Motors Hyundai Wia Hyundai Steel Hyundai Glovis financial company [012330 KS] [005380 KS] [000270 KS] [011210 KS] [004020 KS] [086280 KS]
Hyundai E&C Hyundai Rotem [004020 KS] [064350 KS]
HMC Investment Hyundai Hyundai Hyundai Hyundai Hyundai BNG Steel Hyundai Securities Commercial Capital Card Life [004560 KS] Engineering [001500 KS]
Source: Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 6 November 21, 2016 Holding Companies
▶ Hyundai Mobis in same situation as SEC; Ownership restructuring likely to boost shareholder value
Chairman Chung Mong-koo controls HMG through his direct holdings in Hyundai Mobis (7.0% stake), which is at the center of the group’s circular shareholding structure. From an ownership perspective, Hyundai Mobis serves as the group’s de facto holding company. Given that HMG owns only a 30.2% stake (excluding 2.8% in treasury shares) in Hyundai Mobis, the group would need to gain consent from outside shareholders, especially foreign shareholders (47.8% stake), in order to pass any spin-off or merger for its group restructuring. A spin-off or merger is a matter decided by a special resolution, which requires approval from at least two-thirds of the voting rights of the shareholders present and at least one-third of the total shares outstanding. Generally, high-profile mergers have an attendance rate of 70-80%, in which case 46.7-53.3% of voting shares would be needed for a special resolution to be passed (see our November 18 th report “Right now, wrong then: (2) Shareholders’ approval”).
In the case of Samsung Group, which holds only an 18.1% stake in SEC (excluding 12.8% in treasury shares), converting the electronics giant to a holding company via a spin-off would require approval from a significant number of its outside shareholders, especially its foreign shareholders (50.6% stake). In October 2015, SEC announced that it will return 30-50% of its annual free cash flow in the form of dividends and buybacks for the next three years. In line with this plan, the company has so far repurchased and canceled around W11.3tr worth of shares in four separate rounds through September. Such changes in SEC’s shareholder return policy can be seen as part of the company’s move to bring more outside shareholders on board in a potential spin-off. Likewise, we think Hyundai Mobis will also adopt a more aggressive shareholder return policy in a bid to gain more support for its ownership restructuring.
Table 3. Hyundai Mobis’s and SEC’s major shareholders (shares, %, Wbn) Number of Number of Hyundai Mobis Ownership Value SEC Ownership Value shares shares Controlling family (1) Chung Mong-koo 6,778,966 7.0 1,624 Controlling Lee Kun-hee 4,985,464 3.5 7,907 family (1) Total 6,778,966 7.0 1,624 Hong Ra-hee 1,083,072 0.8 1,718
Affiliates (2) Kia 16,427,074 16.9 3,934 Lee Jae-yong 840,403 0.6 1,333
Hyundai Steel 5,504,846 5.7 1,318 Total 6,908,939 4.9 10,958
Hyundai Glovis 656,293 0.7 157 Affiliates (2) Samsung Life 10,622,814 7.6 16,848
Total 22,588,213 23.2 5,410 Samsung C&T 5,976,362 4.2 9,479
Controlling family + affiliates (1)+(2) 29,367,179 30.2 7,033 Samsung F&M 1,856,370 1.3 2,944
Treasury shares 2,678,295 2.8 641 Samsung Welfare Foundation 89,683 0.1 142
Holdings in the group 32,045,474 32.9 7,675 Samsung Foundation of Culture 37,615 0.0 60
Group's ownership 46,540,101 47.8 11,146 Total 18,582,844 13.2 29,472
Total 97,343,863 100.0 23,314 Controlling family + affiliates (1)+(2) 25,491,783 18.1 40,430
Treasury shares 17,981,686 12.8 28,519 Notes: Based on Nov. 18 closing prices Source: Mirae Asset Daewoo Research Holdings in the group 43,473,469 30.9 68,949
Group's ownership 71,211,880 50.6 112,987
Total 140,679,337 100.0 223,117
Mirae Asset Daewoo Research 7 November 21, 2016 Holding Companies
Figure 4. SEC ’s favorable shareholder return policy Figure 5. Minimum shares with voting rights required to
(repurchase & cancellation of treasury stock ) and share price approve special resolution (varies by attendance rate)
(W) (%) (7/28/16) 100 1,800,000 SEC's share price 4th treasury stock 100 Minimum shares required for buybackand 90 approval of special resolution cancellation Attendance rate of meeting (10/29/15) 33.3 80 1st treasury stock (4/28/16) 80 1,600,000 buybackand 3rd treasury stock 30.0 70 cancellation buybackand 26.7 cancellation 60 (1/28/16) 60 23.3 50 2nd treasury stock 1,400,000 buybackand 20.0 cancellation 40 16.7 66.7 60.0 53.3 1,200,000 46.7 20 40.0 33.3
1,000,000 0 9/15 11/15 1/16 3/16 5/16 7/16 9/16 11/16 1 2 3 4 5 6
Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
The end of circular ownership
▶ Bill to mandate the unwinding of existing circular shareholdings proposed
Under the revision to the MRFTA enacted on July 25, 2014, large corporate groups are banned from forming new circular shareholdings or strengthening existing ones. A violation of the rule could result in: 1) penalties (up to 10% of the share purchase price), 2) restrictions on the exercise of voting rights (for every stock used to establish or strengthen circular ownership 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).
In addition, a revision to the MRFTA was proposed in September 2016 to require conglomerates to untie existing circular shareholdings within a certain period of time (three years); the revision bill is now pending in the National Assembly. The lawmakers who proposed the revision argue that banning the formation of new circular shareholders while allowing existing loops is unfair, and see the revision as a way to further improve the transparency of corporate governance and ease the concentration of economic privilege.
Table 4. Proposed revision to MRFTA to require conglomerates to untie existing circular shareholdings Present (July 2014 until now) Proposed revision
▶ Article 9 -2-2 ▶ Creation of Article 9 -3-1 No company belonging to an enterprise group subject to A company belonging to an enterprise group subject to limitations on mutual investment shall make an affiliated limitations on mutual investment shall unwind the circular investment that 1) forms circular equity investment or 2) shareholdings formed before July 24, 2014 within three years. strengthens existing circular shareholdings. ▶ Creation of Article 9-3-2 Monopoly A violation of the rule could result in: A company belonging to an enterprise group that became subject Regulation and 1) penalties (within 10/100 of the share purchase price), to limitations on mutual investment after July 24, 2014 shall Fair Trade Act 2) restrictions on the exercise of voting rights (for every stock used unwind the circular shareholdings within three years. to establish or strengthen circular ownership following the date on which an order of disposal was issued), or ▶ Based on Article 9-2-2 and 9-2-3 3) crimina l prosecution (up to three years in prison or up to A company that fails to untie existing circular shareholdings within W200mn in fines). three years shall be s ubject to the same regulations as the ones applied for the violation of a ban on the formation of new circular shareholdings. Source: Bill Information System, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 8 November 21, 2016 Holding Companies
Table 5. Major conglomerates’ circular shareholdings and financial subsidiaries Circular Financial Circular Financial Rank Name Head Rank Name Head shareholding subsidiaries shareholding subsidiaries 1 Samsung Lee Kun-hee ○ ○ 21 Hyosung Cho Seok-lae X ○ 2 HMG Chung Mong-koo ○ ○ 22 Dongkuk Steel Jang Se-joo X X Converted to holding company 3 SK Chey Tae-won 23 Youngpoong Jang Hyung-jin ○ X (Jul. 3, 2007) Converted to holding company 4 LG Koo Bon-moo 24 Mirae Asset Park Hyeon-joo X ○ (Apr. 3, 2001) Converted to holding company 5 Lotte Shin Kyuk-ho ○ ○ 25 Kolon Lee Woong-yul (Jan. 1, 2010) Hyundai Heavy Hanjin Heavy Converted to holding company 6 Chung Mong-joon ○ ○ 26 Cho Nam-ho Industries Industries (Aug. 1, 2007) Converted to holding company 7 GS Huh Chang-soo 27 KCC Jung Mong-jin X ○ (Jul. 7, 2004) Converted to holding company Converted to holding company 8 Hanjin Cho Yang-ho 28 Halla Jung Mong-won (Aug. 1, 2013) (Sep. 2, 2014) Converted to holding company 9 Hanwha Kim Seung-yeon X ○ 29 Hankook Tire Cho Yang-lae (Jul. 6, 2013) 10 Doosan Park Yong-gon X ○ 30 Taekwang Lee Ho-jin X ○ Converted to holding company 11 Shinsegae Lee Myung-hee X X 31 Daesung Kim Young-dae (Jan. 1, 2011) Hyundai Converted to holding company 12 CJ Lee Jae-hyun 32 Development - Jung Mong-kyu ○ ○ (Sep. 4, 2007) E&C Converted to holding company Kyobo Life 13 LS Ku Tae-hoi 33 Shin Chang-jae X ○ (Jul. 2, 2008) Insurance Converted to holding company 14 Kumho Asiana Park Sam-gu ○ X 34 SeAH Lee Soon-hyung (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 Converted to holding company Converted to holding company 17 Booyoung Lee Joong-geun 37 HiteJinro Park Moon-deok (Dec. 30, 2009) (Jul. 3, 2008) Converted to holding company 18 Hyundai Hyun Jeong-eun X ○ 38 AmorePacific Seo Kyung-bae (Jul. 1, 2007) 19 OCI Lee Soo-young X X 39 Samchully Lee Man-deuk X ○ Hyundai Converted to holding company 20 Department Jeong Jee-sun ○ X 40 Hansol Lee In-hee (Jan. 1, 2015) Store Note: Excludes government-owned companies Source: FTC, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 9 November 21, 2016 Holding Companies
▶ (Outlook) Conglomerates can no longer rely on circular shareholdings to maintain and strengthen managerial control
We see a chance of the aforementioned revision being passed ahead of the presidential election in late 2017, if the political parties reach an agreement that existing circular shareholdings should also be directly regulated.
Such a proposal was floated during the 2012 presidential election period, which would have prohibited affiliates of large conglomerates from forming new circular shareholdings, while also requiring them to unwind existing circular shareholdings within three years and prohibiting voting rights of related shares. The restrictions that ended up passing two years later only applied to new circular shareholdings and efforts to strengthen existing ones.
Amid uncertainties over circular shareholding restrictions, most large conglomerates have already taken steps to eliminate existing circular shareholdings since July 2014. As of April 1st , 2016, only eight large conglomerates (Samsung, HMG, Lotte, Daelim, Hyundai Department Store, Youngpoong, Hyundai, and Hyundai Development Company) maintain a circular shareholding structure, with a total of 94 circular relations.
In a nutshell, the government’s restrictions spell the end of circular ownership as a means for large Korean conglomerates to maintain managerial rights and expand control over their groups. Most will continue to unwind existing circular shareholdings, while also improving governance and making the transition to a holding company structure.
Table 6. Pledges by 2012 presidential election candidates Park Geun-hye Moon Jae-in Ahn Cheol-soo
New circular Ban Ban Ban shareholdings Voluntary unwinding followed Existing circular Complete unwinding after three - No new measures by possible regulatory shareholdings year grace period intervention Violators subject to restrictions Violators subject to forced Other - on voting rights and fines disposal Source: Mirae Asset Daewoo Research
Table 7. Parties’ positions on existing circular shareholding ban and our forecast Mirae Asset Saenuri Party Minjoo Party People’s Party Justice Party Daewoo
projection Position - In favor Opposed In favor No need to No law necessary Law necessary to Financial deterioration, introduce law; because groups are narrow ownership- malfeasance, and Measures to induce currently canceling Introduction likely Reasons control gap and ease management issues voluntary their cross- concentration of could lead to a chain of cancellation would shareholdings economic power bankruptcies be sufficient voluntarily Source: The Citizens ´ Coalition for Economic Justice, Mirae Asset Daewoo Research
Table 8. Number of circular shareholdings of major groups (no.) Group 2013 2014 2015 2016
Samsung 30 14 10 7 Holds financial affiliates Hyundai Motor 2 5 5 3 Holds financial affiliates Lotte 5,851 299 299 50 Holds financial affiliates Hyundai Heavy Industries 1 1 1 1
Hanjin 2 3 0 0
Dongbu 5 0 0 0 Holds financial affiliates Daelim 1 1 1 1
Hyundai 4 6 0 0 Holds financial affiliates Hyundai Department Store 3 3 3 3
Youngpoong 10 6 6 6
Hyundai Development 4 4 4 4 Holds financial affiliates Notes: Based on circular shareholdings in which the stake exceeds 1% Source: Fair Trade Commission, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 10 November 21, 2016 Holding Companies
APPENDIX 1
Important Disclosures & Disclaimers
Analyst 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. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) 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 Mirae Asset Daewoo, 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 Mirae Asset Daewoo except as otherwise stated herein.
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Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
Mirae Asset Daewoo Research 11 November 21, 2016 Holding Companies
Mirae Asset Daewoo International Network
Mirae Asset Daewoo Co., Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 810 Seventh Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 37th Floor
Seoul 150-716 8 Finance Street, Central New York, NY 10019 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000
Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte., Ltd. PT. Daewoo Securities Indonesia 41st Floor, Tower 42 Six Battery Road #11-01 Equity Tower Building Lt.50 25 Old Broad St. Singapore, 049909 Sudirman Central Business District Jl. London EC2N 1HQ Jendral Sudirman Kav. 52 -53, Jakarta Selatan United Kingdom Indonesia 12190 Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 62-21-515-1140
Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,
Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China Vietnam Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District
Chaoyang District, Beijing 100022 Ulaanbaatar 14240 China Mongolia Tel: 86-10-6567-9699 Tel: 976-7011-0807
Mirae Asset Daewoo Research 12
