Holding Company in Control of Group's Cash Cow
Lotte Corp., the holding company of Lotte Group, is benefiting from the inclusion of Lotte Chemical Corp. as a subsidiary.
Investment banking (IB) industry sources estimated on Jan. 9 the consolidated operating profit of Lotte Corp. at the fourth quarter last year at 109 billion won (US$97 million), up 80 percent from a year ago.
Lotte Corp. owes its earnings improvement to Lotte Chemial, the group’s cash cow which was put under the control of the holding company. Lotte Corp. acquired a 23.2 percent stake in Lotte Chemical from Lotte International Co. and Hotel Lotte Co. for 2.23 trillion won (US$1.99 billion) in October last year.
Under the equity method of accounting, Lotte Chemical’s net operating profit is reflected into Lotte Corp.’s income in proportion to the latter’s stake in the former. Accordingly, Lotte Corp.’s annual operating profit this year is expected to grow to 802 billion won (US$715 million) from 288 billion won (US$257 million) a year earlier.
Lotte Corp.’s dividend income is also expected to soar this year. Lotte Chemical paid out a cash dividend of 10,500 won (US$9) per common share in 2017. The total amount of cash dividends came to 359.90 billion won (US$320.85 million) and the payout ratio stood at 16.04 percent. When Lotte Chemical maintains a similar level of payout ratio, Lotte Corp.’s dividend income this year is forecast to total 178 billion won (US$159 million), up 87 percent from 95 billion won (US$85 million) in 2018.
Daishin Governance Research Institute said that Lotte Chemical had the highest profitability among Lotte Group’s listed subsidiaries with 21.1 percent of return on equity (ROE) as of 2017.
Meanwhile, Lotte Group, which introduced the holding company system in October 2017, is expected to carry out an additional governance reform plan this year. Lotte Group is expected to sell its financial affiliates by October this year, list non-listed affiliates, and list Hotel Lotte and merge it with Lotte Corp. These measures are needed to help Lotte Corp. meet the requirements of a holding company.