SK Holdings: A Promising Play
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Responsible investment applied assets for the National Pension Service (NPS) amounted to 13.7% of its total assets as of end-2021. The portion of responsible investment in domestic equities already exceeded 50% at end-2020. From 2021, NPS started to apply its responsible investment guidelines to domestic bonds. The size of publicly offered funds focused on ESG stocks has exceeded the W2tn mark since 2021, growing steadily despite bear market conditions. Regulation environment changes, including revisions to the Fair Trade Act and the postponing the expiry of the sunset clause on tax benefits for holding company transition, are not expected to affect significant impact on governance restructuring efforts. As the target of corporate governance report (G) disclosure is expanded to listed companies with a total assets of more than W1tn, both compliance rate increase on newly disclosing companies and strengthened comparative analysis effects with population expansion are anticipated. As a result, investors’ consideration for non-financial information is also looking set to spread.
Holding company valuations has been undervalued for a lengthy time. But, rather than the absolute level of discount to NAV, it is our view that sustainability of shareholder value improvement based upon superior cash flow and capacity in order to beef up business portfolios should be used as the key investment criterion for holding companies. As it is to become possible for holding companies to own Corporate Venture Capital (CVC), the role of holding companies in coordinating business portfolios is to be more highlighted, and valuations for individual firms should come to differentiate depending upon their on CVC investment results. We suggest SK Holdings as a promising play, noting that it has entered a virtuous cycle as an investment holding company, and also noting that it is strengthening its business portfolio (centering upon four major business areas). We also like Samsung C&T on ongoing earnings momentum and accompanying expansion of its investment portfolio.