To Accelerate Growth of New Businesses
The author is an analyst of KB Securities. She can be reached at hyejung.jung@kbfg.com. -- Ed
POSCO announces decision to adopt holding company structure
— On Dec 10, 2021, POSCO’s board of directors approved a plan for governance structure reform, including its conversion to a holding company structure. The change will take place via a split-off of the steel business into a new, unlisted entity (POSCO)—100% of which will be owned by the surviving entity (POSCO Holdings). Any other entities subsequently established for new business ventures (e.g., lithium, nickel, hydrogen) will remain as unlisted subsidiaries of POSCO Holdings. Shares in POSCO ended 4.58% lower than the previous close following the announcement.
— The plan still needs final approval at the upcoming shareholders’ meeting scheduled for Jan 28, 2022. Final approval of such a plan would require consent of at least a third of all shareholders and two thirds of shareholders present. If approved, the split-off would take place on Mar 1, 2022.
Change intended to accelerate growth of new businesses and allow for re-rating
— POSCO stated that the purpose of the change is to: (1) develop and nurture non-steel businesses in order to accelerate growth for POSCO Group overall; and (2) allow for re-rating by changing the Group’s image as a steel-centric conglomerate. The holding company will focus on establishing future business portfolios and facilitating in-group synergy. Future growth businesses include secondary battery materials, lithium/nickel, hydrogen, energy, construction/infrastructure, and agricultural biotech—with battery anode/cathode materials, lithium/nickel, and hydrogen expected to be the key drivers of new-business growth.
— POSCO hopes accelerated growth of its new-growth and eco-friendly businesses would more than triple its enterprise value by 2030 (from KRW43tn as of 2021). Advances in such areas should reduce the revenue/OP proportion of its steel business from 50%/70-80% in 2021 to 40%/50% by 2030.
— The company plans to increase its output capacity for anode/cathode materials from 110k tonnes in 2021 to 680k tonnes by 2030 (+22.4% CAGR), lithium from 0 tonnes to 220k tonnes, and hydrogen from 100 tonnes to 500k tonnes. POSCO will also increase its output capacity for crude steel from 46mn tonnes to 68mn tonnes (+4.4% CAGR) during the same period.
Conversion to holding company structure to have limited impact in short/medium term
— The short/medium-term implications of this change on POSCO’s enterprise value should be neutral, in our view. The conversion to holding company structure via split-off tends to hurt share price because of concerns over dilution upon the listing of the split-off entity. POSCO, however, has no plans to list its subsidiaries (the split-off steel business entity or any other entities to be established under the holding company in the future), and has stated that the articles of association for the split-off steel business entity will not include any clauses needed for going public (e.g., third-party allocation, public offering).
— We find it positive that POSCO has expressed its commitment to new-business growth and that it may engage in reorganization when necessary. However, we believe it will take some time for the value of new businesses to be reflected in share price given that the ventures are small in size and lack earnings visibility, and the company has yet to disclose plans for funding such ventures.