As the South Korean government pushes Samsung Group to reform its governance structure, global investors are reducing the share of Samsung stocks in their portfolios.
Market watchers say the government’s push for various policies targeting Samsung has raised uncertainties on investment in the stocks of the group’s affiliates.
The government urged Samsung Life Insurance Co. to sell off its stakes in Samsung Electronics Co., forced Samsung SDI Co. to dispose of its stakes in Samsung C&T Corp., and declared prematurely that Samsung BioLogics Co. committed accounting fraud.
Market experts say that there are growing concerns over Samsung as the incumbent government considers it as a main target of chaebol reform. “The government’s pressure on the group makes investors shun its shares.”
S. Korean Gov’t Creates Investment Risks for Samsung
An official from a global asset management firm, who has requested anonymity, said on May 28, “Uncertainty is the biggest risk from the point of view of an investor. The South Korean government’s pressure on Samsung is creating investment risks.” When asked if he would reduce the share of Samsung affiliates in his investment portfolios, he said, “I can’t specifically talk about internal management policy. However, it is true that the government’s policies have increased the risks.”
It is unusual that leading global asset management companies are reluctant to invest in Samsung’s affiliates, including Samsung Electronics which has recently recorded its highest sales figures ever. This is because they are aware of the current situation where almost all government ministries bash Samsung up.
In fact, the incumbent government overturned various decision for Samsung and lowered the corporate investment value after it came to power. Recently, Korea Fair Trade Commission (FTC) chief Kim Sang-jo officially undercut the investment value of Samsung, saying, “Samsung Group's current ownership structure in which Samsung Life Insurance holds a stake in Samsung Electronics is not sustainable. This is the request for Samsung Life Insurance selling off its stakes in Samsung Electronics and it has led to growing uncertainties for Samsung affiliates.
An official from the financial industry said, “Under the current law, there is nothing wrong with Samsung Life Insurance holding a stake in Samsung Electronics. Kim might have said that with the Insurance Business Act to be revised in the future in mind. However, it is nonsense that the head of the FTC has made public statements aiming for a specific firm without legal basis.”
Earlier, the FTC overturned the interpretation of the cross-shareholding cycle between Samsung SDI and Samsung C&T and ordered Samsung SDI to additionally sell its 4.04 million shares of Samsung C&T worth 580 billion won (US$539.53 million). In addition, Samsung is under pressure to resolve its existing cross-shareholding cycles created decades ago. In short, the government asks Samsung to completely eliminate the cross-shareholding structure by selling off the stake in Samsung C&T owned by Samsung Electro-Mechanics Co. and Samsung Fire & Marine Insurance Co. This has a negative effect on stock prices due to the Samsung C&T’s overhang issue.
The controversy over the accounting fraud of Samsung BioLogics also began when the financial authorities reversed its original stance on accounting that was considered proper in 2015. There is a considerable number of cases that the government overturned its decision on Samsung alone such as the change of the appraised value of land of Everland in Yongin owned by Samsung C&T and the opening of Samsung Electronics’ semiconductor plant working condition reports.
Foreign Investors Net Sell 1.9 Trillion Won of Samsung Affiliates Shares in 2018
Foreign investors are actually selling Samsung shares. BlackRock, the world's largest asset management firm, recently sold a 6 percent stake in Samsung Engineering Co. via block deal, though the company is far away from the heart of Samsung’s governance structure. This accounted for nearly half of its total stock holdings and BlackRock recollected about 230 billion won (US$213.95 million) of investments through this.
According to the Korea Exchange (KRX), foreign investors sold a total of 1.92 trillion won (US$1.78 billion) worth of Samsung Group shares from January 1 to until May 24 this year. This included 22 companies listed on the main bourse KOSPI, including preferred stocks, and 1 firm listed on the secondary KOSDAQ market. In particular, foreigners sold shares mainly of Samsung Electronics and Samsung Life Insurance which are the heart of the governance structure. They showed a cumulative net sale of 3.74 trillion won (US$3.47 billion) of Samsung Electronics shares this year as well as 155.4 billion won (US$144.56 million) of Samsung Life Insurance shares.