Top Picks: :LG Corp and Samsung C&T
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
The Three Laws of Fair Economy have started to come into effect sequentially since end-2020, but given pre-emptive corporate governance restructuring and regulatory exceptions, external changes in governance are to be limited. However, it is expected that holding companies’ role in coordinating business portfolios will be highlighted as CVC possession by them is to become possible through the revised Fair Trade Act.
With the spread of the stewardship code, shareholder engagement activities regarding ESG issues are increasing, and firms are also paying attention to boosting shareholder value. Holding companies have been maintaining high DPRs, and are they expected to continue to strengthen shareholder value by beefing up dividend income and earnings sharing programs in the process of optimizing their business portfolios. And, we point out that ESG ratings of holding companies are higher than both the market average and component affiliates, a factor which should work advantageously towards the spread of responsible investment.
I. Effects of changes in regulatory environment
‘The Three Laws of Fair Economy’ have started to come into effect sequentially since end-2020, but external changes in corporate governance should be limited. As it is to become possible for holding companies to own Corporate Venture Capital (CVC), which was previously impossible due to the principle of separation of financial and industrial capital, the role of holding companies in coordinating business portfolios is to be more highlighted, and valuations for individual holding companies should come to differentiate depending upon their on CVC investment results. And, the implementation of Commercial Act amendments (designed to keep controlling shareholders in check) should spur sector interest in strengthening the value of non-controlling shareholders, and improve corporate governance, by beefing up the expertise and independence of the BOD members.
II. Spread of responsible investment accelerating
Led by the NPS, the spread of responsible investment is accelerating. Currently, 171 institutions have introduced stewardship code, and the number of firms where shareholder proposals are appearing has upped. Also, the main theme of shareholder engagement activities has changed from shareholder return and financial structure improvement to ESG. The size of domestic ESG public equity funds, which had been in a lengthy slump, rose to W200bn~W300bn in 2018 when the NPS introduced the stewardship code, and it has now surged to W2.1tn alongside the NPS’s commitment to boost its ESG-related investment. With Sustainability Reports (E, S) to gradually become mandatory following the mandatory Corporate Governance Report (G), information on ESG, which is the basis for responsible investment, is to become increasingly available.
III. Major governance issues
Overall shareholder value, including dividends, is being strengthened in response to both higher engagement in shareholder engagement activities by institutional investors and a rising need to make shareholder return policies more favorable for non-controlling shareholders. Having maintained lofty DPRs, holding companies will likely continue to boost shareholder value via dividend income and earnings sharing program expansions. And, we point out that ESG ratings of holding companies are higher than both the market average and those for component affiliates, a factor should work advantageously towards the spread of responsible investment.
IV. Top picks
LG boasts both earnings momentum with strengthened fundamentals. Once its separation of affiliates is completed, we expected it to marshal its abundant liquidity to strengthen its new growth portfolio. Overall ESG improvement in LG Group also bodes well. Earnings growth at Samsung C&T is sustaining. Led by strong bio/trading division earnings and normalizing earnings at its fashion/leisure division. And, Samsung C&T is expected to strengthen its bio, eco-friendly, and digital centered business portfolio. Despite the start of inheritance processes, the controlling shareholder’s stake (31.6%) should remain unchanged, and its dividend payouts should rise in order to finance inheritance taxes.