EUR 439.30 For Business Accounts Only

South Korean 5-Way Split is a Step in the Right Direction

On July 13, 2018, Hyosung Corp. completed the 5-way Spinoff of its 6 divisions into 4 new operating entities. We believe the current break-up is a first step in the right direction taken by the management to improve its corporate governance and operational transparency, which has been burdened with undue owner family influence and accounting fraud allegations.

What's Interesting? The Edge View...
Following the separation, each Spinoff will be governed by an independent board and executives unrelated to the owner family. This will free each board from undue owner family influence and boost investor confidence. Along with the Spinoffs, the shareholding structure of the owner family will also be streamlined by swapping their stake in operating subsidiaries with the holding company’s shares by the end of 2018. It is worth noting that the consolidated financial statement of each Spinoff has not been available to date. However, from our analysis, Hyosung TNC Ltd. (Spinoff) provides an upside potential of +24.6% with a target price of KRW 252,904 from the current share price of KRW 203,000. We believe this as a classic case of mispricing and recommend investors to leverage on this opportunity. After the separation, Hyosung Corp. (ex-Spin), will establish itself as a holding company. Each of the Spinoffs will operate as distinct businesses with independent boards and managements.

In the last decade, Hyosung TNC has maintained a market share of over 10% in the Spandex segment with an industry leading EBITDA margin profile of 17.0%, compared to the average industry margins of ~15.8%. Although Chinese companies have been expanding their presence in this sector, we believe that the competition will have little impact on Hyosung TNC going forward. The industry-wide downturn in power & industrial operations has taken a toll on the overall top-line performance of Hyosung Heavy Industries, which reduced by 1.4% in FY17 despite a 29.0% growth registered by the construction segment. We believe that the near-term pressure will remain in the power and industrial segment and effectively offset growth in the construction business. Over the last couple of years, Advanced Materials has seen a muted top-line growth, having grown by a mere 1.1% in FY17 compared to the average peer’s growth of 4.4% in the same period. We believe profitability may improve in the coming quarters in the event of improved demand for Airbags and Seatbelts from automakers. Hyosung Chemical registered a revenue growth of 25.8% in FY17 on the back of additional PP-3 volume. However, the top-line performance fails to lift the company’s EBITDA margin, which has reduced to 17.1% in FY17 from 22.2% in FY16. We believe the segment’s margin profile will stabilize in the mid- to long-term.