Holding Companies’ Dividend Revenue Expected to Increase
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
A third generation of leaders is at the forefront of management at LG Group, HMG, and Samsung Group. While three fair economy bills are likely to be passed at the 21st session of the National Assembly, and the Special Tax Treatment Control Act is set to expire at end-2021, these developments are to bring about qualitative changes to the governance structure of business groups (including stronger rights for minority shareholders and enhancement of value for non-controlling shareholders) rather than fundamental changes to governance structures themselves. Once CVC ownership, which is currently not permitted under the industrial/financial capital separation rules, is allowed, the role of holding companies as business control towers should strengthen.
SRI is going mainstream, in line with higher interest in corporate sustainability and environmentally-responsible industry, amid penetration of the stewardship code, mandatory disclosure of corporate governance reports, and the Covid-19 pandemic. The NPS’s SRI roadmap is to both directly and indirectly affect ESG integration of non-financial information by listed firms and market participants. With shareholder engagement strengthening, companies are expected to set up more aggressive shareholder return policies going forward.
I. Regulatory environment changes expected in 2021
The three so-called fair economy bills (Proposal for General Revision of Monopoly Regulation and Fair Trade Act, amendment to the Commercial Act, and a new bill for financial group supervision) are likely to pass the National Assembly at the 21st session, and the sunset period for tax deferral benefits for holding companies is likely to end in 2021. But, we do not expect major changes in corporate governance structure to occur, given that business groups that have not adopted a holding company structure yet are likely to stick to their current form, owing to difficulties complying with holding company restrictions.
That said, the introduction of the amendment to the Commercial Act to bolster minority shareholders’ rights will likely encourage companies to pay greater attention to improving minority shareholder value. Meanwhile, CVC ownership has been impossible thus far due to the principle of segregation of financial/industrial capital. But, once the new CVC rule is passed, CVC establishment by holding companies is expected to increase and the role of holding companies as control towers for their business portfolios should strengthen, in turn drawing in greater investor attention moving ahead.
II. SRI and corporate value enhancement
Following the NPS’s lead, a total 132 institutions have introduced a stewardship code so far, and at 2019 shareholders’ meetings, institutional investors’ dissent level differed to some extent versus that seen in the past. Meanwhile, the mandatory reporting of corporate governance is to become applicable to all listed companies by 2026. With the number of companies subject to related regulations on the rise and time series analysis becoming possible, we expect governance reports to serve as objective evaluation indicators for corporate governance moving ahead. In addition, the NPS’s responsible investment roadmap should have direct/indirect impacts on other institutions and market participants’ ESG consideration. With shareholder activism becoming more common, firms are expected to improve their shareholder-friendly policies in the days to come.
III. Key governance issues
In response to institutional investors’ growing dividend expansion demand, and also being aware of the importance of strong shareholder-return policies, more and more companies are introducing interim dividends and unveiling long-term payout ratio targets. Having maintained high payout ratios, holding companies’ dividend revenue is expected to increase further in line with greater dividends from subsidiaries. We predict that holding companies will continue to strengthen shareholders’ value moving ahead in the process of business portfolio optimization. That said, firms with no plans for asset securitization could experience cash flow deterioration in 2021 due to Covid-19.
IV. Top picks
Even amid Covid-19, Samsung C&T’s OP growth should remain almost flat y-y (-0.4% y-y). In 2021, the company is to enjoy strong earnings momentum on higher plant utilization rates at the bio arm. With Samsung C&T located at the top of the Samsung Group’s governance structure, despite the initiation of an inheritance process, we believe that the Samsung Group founding family members’ stake in the firm (31.6%) will remain unaltered. Rather, we expect inheritance tax burden to be met via stronger dividend policy. In addition, we point out that the main cause of Samsung C&T’s current undervaluation (shares trading at a discount to NAV of 59.9% and 2021F P/E of 16.8x), namely uncertainties related to the trial of founding family member Jae-yong Lee, is expected to dissipate amid both favorable public sentiment following the death of GH Lee and the largest inheritance tax payment in Korea’s history.