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Hyosung Corporation

Hyosung’s Transformation into a Holdco + Four Subsidiaries (Part 3): What's Next?

715 Views13 Jul 2018 00:31
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Douglas Kim
SUMMARY

This note provides an analysis about how the shares of Hyosung Corporation (004800 KS) and its four subsidiaries may trade once they start to trade again on July 13th. Our sum-of-the parts valuation of Hyosung Corp suggests an implied market cap of 6.6 trillion won, which is 39.9% higher than current market cap of 4.7 trillion won. Hyosung Corp shares have been suspended trading from May 29th to July 12th.

The following are the five new entities (including the split ratios) that will be created for Hyosung Group in this reorganization:

  • Hyosung Corp - Holding company (0.3928)
  • Hyosung TNC - Textile & trade (0.1232)
  • Hyosung Heavy Industries - Heavy industries and construction (0.2655)
  • Hyosung Advanced Materials - Materials related (0.1276)
  • Hyosung Chemicals - Chemicals (0.0908)

Most recently, Korea National Pension Service (NPS) increased its stake in Hyosung Corp to 10.63% (as of June 29th, 2018), up from 10.16% (as of March 30th, 2018). As we mentioned in our report, Hyosung's Transformation into a Holdco + Four Subsidiaries (Part 1), the three key positives of this split-off include a transition from a complex to simple structure, potential for higher valuation of its core businesses, and a transition stage from father to son ownership. The negative factors include market cap limits of the split-off subsidiaries and potentially unwise use of treasury shares.

Balance Sheets of Hyosung Corp (Pre & Post Split) and its Four Major Split Off Companies

The table below shows the balance sheets of Hyosung Corp (pre and post company split) as well as its four major affiliates as of July 1st, 2018. Post the company split off, Hyosung Corp (holdco) has the strongest balance sheet as it was in a net cash position as of July 1st, 2018. Among the four major affiliates, Hyosung Chemicals has the weakest balance sheet, with net debt to equity ratio of 301% and total liabilities/equity ratio of 390% as of July 1st, 2018.

Balance Sheets of Hyosung Corp (Pre & Post Split) and its Four Major Split Off Companies
July 1, 2018Prior to Company Split OffPost Company Split OffPost Company Split OffPost Company Split OffPost Company Split OffPost Company Split Off
(Won bn)Hyosung CorpHyosung CorpHyosung TNCHyosung Heavy IndustriesHyosung Advanced MaterialsHyosung Chemicals
Current Assets2,881.2121.4604.51,345.9476.9332.3
Cash & Short Term Inv.734.754.8175.2250.2173.281.2
Accounts Receivables1,151.234.2259.9522.6208.3126.0
Inventory662.015.48146.4300.889.9109.3
Other Current Assets333.316.922.9272.35.515.7
PP&E3,325.1531.6346.4989.2334.11,123.7
Other long term assets3,007.61,217.3538.8821.9563.6229.6
Total Assets9,213.81,870.31,489.73,157.01,374.61,685.6
Current Liabilities4,016.4112.4957.81,788.6443.8716.2
Short term debt & Cut mat of LTD2,675.432.6670.71,136.8328.1508.6
Accounts liabilities1,147.165.1282.0502.896.5201.4
Other Current Liabilities193.914.75.1149.019.26.2
Long term debt1,217.01.124.3132.3451.8606.3
Other Long term Iiabilities464.3207.368.9298.128.219.4
Total Liabilities5,697.7320.81,051.02,219.0923.81,341.9
Total Equity3,516.11,549.5438.7938.0450.8343.7
Current Ratio (%)71.7%108.0%63.1%75.2%107.5%46.4%
Total Liabilities/Equity (%)162.0%20.7%239.6%236.6%204.9%390.4%
Net Debt/Equity (%)89.8%NC118.5%108.6%134.6%300.8%
Source: Company data; NC = net cash

Hyosung Corp Financials Breakdown by Units

Hyosung Corp Financials Breakdown by Units (2017)　　　　　
(Won bn)TextileIndustrial materialsChemicalHeavy IndustriesConstructionTradeFinancials & OthersConsolidated adjustmentsTotal
Sales2,1372,4101,5012,2491,1522,280816012,546
Operating Profit249.81681316610615.548-14771
Assets2,3313,1471,7622,269534430.96,517-2,45614,535
Liabilities1,0411,1694821,1565755526,285-58810,672
Equity1,2891,9781,2811,113-41-121232-1,8683,863
Operating Margin (%)11.7%7.0%8.7%2.9%9.3%0.7%5.9%--6.1%
Liabilities/Equity (%)80.8%59.1%37.6%103.9%-1409.3%-455.5%2710.9%--276.2%
Source: Company data　　　　　　　　　
Hyosung Corp Financials Breakdown by Units (2016)　　　　　
(Won bn)TextileIndustrial materialsChemicalHeavy IndustriesConstructionTradeFinancials & OthersConsolidated adjustmentsTotal
Sales1,9792,3841,1942,5578922,039883-11,929
Operating Profit31321814818582973-121,016
Assets2,1423,1791,7502,3131,0433905,911-2,60814,121
Liabilities1,0241,1513481,1418053076,185-68210,280
Equity1,1182,0281,4021,17223882-274-1,9263,841
Operating Margin (%)15.8%9.1%12.4%7.2%9.2%0.4%8.3%--8.5%
Liabilities/Equity (%)91.6%56.8%24.8%97.4%338.2%374.4%-2,257.3%--267.6%
Source: Company data　　　　　　　　　
Hyosung Corp Financials Breakdown by Units (2015)　　　　　
(Won bn)TextileIndustrial materialsChemicalHeavy IndustriesConstructionTradeFinancials & OthersConsolidated adjustmentsTotal
Sales2,1052,3751,0682,4938912,875652-12,458
Operating Profit425150101162483056-22950
Assets2,8912,1311,5562,2801,2146335,700-2,39014,013
Liabilities1,6259623221,2247905115,803-69710,541
Equity1,2651,1691,2341,055424121-104-1,6933,472
Operating Margin (%)20.2%6.3%9.5%6.5%5.4%1.0%8.6%--7.6%
Liabilities/Equity (%)128.5%82.3%26.1%116.0%186.3%422.3%-5579.8%--303.6%
Source: Company data　　　　　　　　

Sum-of-the Parts Valuation of Hyosung Corp and Its Affiliates Pre and Post Company Split

Our sum-of-the parts valuation of Hyosung Corp suggests an implied market cap of 6.6 trillion won, which is 39.9% higher than current market cap of 4.7 trillion won. Our valuation methodologies for the break-up value are as follows:

  • Hyosung Heavy Industries - We used Hyundai Heavy Industries, Doosan Heavy Industries, and GS E&C as comps. Taking the book value of Hyosung Heavy Industries as of July 1st and applying the average P/B multiple, we derived an equity value of 568 billion won for Hyosung Heavy Industries.
  • Hyosung Advanced Materials - We used Kolon Industries as the comp. Applying an estimated annual net profit of 134 billion won and applying a P/E of 11.1x (5% premium to Kolon Industries), we derived an equity value of 1,482 billion won for Hyosung Advanced Materials.
  • Hyosung Chemical - We used Lotte Chemical and Kumho Petrochem as comps. We applied a 20% discount to the average P/E multiple of these comps. Applying an estimated net profit of 95 billion won, this suggests an equity value of 414 billion won for Hyosung Chemical.
  • Hyosung TNC - We used Taekwang Industrial and Huvis as comps. We applied a 10% discount to the average P/E multiple of these comps. Applying an estimated net profit of 260 billion won, we derived an equity value of 2,606 billion won for Hyosung TNC.
  • Hyosung Corp (Holdco) - To derive the value of Hyosung Corp, we added all the market caps of the four affiliates and after applying a 30% discount and taking into account its ownership stake of 42.1% (this is ownership by 3 major shareholders + treasury shares; assuming that the Holdco will swap the shares sold by the major owners of the four affiliates) and adjusting for net cash , this resulted in a value of 1,515 billion won.

Hyosung Corporation (004800 KS) shares were trading at P/E of 13.8x (using 2017 earnings) and 10.3x (using 2018 consensus earnings estimates) prior to the company split. Hyosung Corp's current market cap is 4.7 trillion won and the consensus net profit forecast is 459 billion won in 2018.

Implied values of Hyosung Corp (Holdco)(Won bn)
Hyosung Heavy industries568
Hyosung Advanced Materials1,482
Hyosung Chemical414
Hyosung TNC2,606
Total5,069
Implied value (post 30% discount)3,548
Net cash 21
Hyosung Corp NAV (Holding Co's stake): 42.1% + Net cash1,515
Source: Companies data, WiseFN, Our Estimates
Implied values of Hyosung Corp + Its 4 Major Affiliates(Won bn)
Hyosung Heavy industries568
Hyosung Advanced Materials1,482
Hyosung Chemical414
Hyosung TNC2,606
Hyosung Corp (Holdco)1,515
Total mkt cap6,584
Current mkt cap4,706
Expected upside (%)39.9%
Source: Companies data, WiseFN, Our Estimates
Comparable Companies Analysis of Hyosung Heavy Industries (Heavy Industries & Construction Business Units)
Hyundai Heavy IndustriesDoosan Heavy IndustriesGS E&CAverage
P/E (x); 2018ENM4.96.25.5
P/B (x); 20170.50.31.00.6
OP Margin (%); 2018E-0.2%7.3%7.8%5.0%
ROE (%); 2018E-1.7%3.4%15.7%5.8%
Sales (Won bn); 2018E131,17515,47812,31352,989
Net profit (Won bn); 2018E-199341539227
Operating profit (Won bn); 2018E-2321,133961621
Mkt cap (Won bn)6,6401,6643,3273,877
Equity (Won bn); 201712,3726,5663,2407,393
Book value of Hyosung Heavy Industries (Won bn)938
P/B (x) 0.6
Implied value (mkt cap) of Hyosung Heavy Ind. (Won bn)568
Source: Companies data, WiseFN, Our Estimates
Comparable Companies Analysis of Hyosung Advanced Materials
Kolon Industries
P/E (x); 2018E10.5
P/B (x); 20170.7
OP Margin (%); 2018E4.3%
ROE (%); 2018E6.9%
Sales (Won bn); 2018E4,964
Net profit (Won bn); 2018E144
Operating profit (Won bn); 2018E212
Mkt cap (Won bn)1,518
Equity (Won bn); 20172,322
Avg. OP (Won bn) of Hyosung Advanced Materials ('15-'17)179
Avg. OP Margin of Hyosung Advanced Materials ('15-'17)7.5%
Est. NP (Won bn) of Hyosung Advanced Materials134
P/E (x)11.1
Implied value (mkt cap) of Hyosung Advanced Materials (Won bn)1,482
Source: Companies data, WiseFN, Our Estimates
Comparable Companies Analysis of Hyosung Chemical
Lotte ChemicalKumho PetrochemAverage
P/E (x); 2018E5.45.55.4
P/B (x); 20171.01.81.4
OP Margin (%); 2018E16.0%10.2%13.1%
ROE (%); 2018E17.5%21.7%19.6%
Sales (Won bn); 2018E17,0975,54011,319
Net profit (Won bn); 2018E22156251420
Operating profit (Won bn); 2018E27375671652
Mkt cap (Won bn)11,8763,4587,667
Equity (Won bn); 201712,2551,9577,106
Avg. OP (Won bn) of Hyosung Chemical ('15-'17)127
Avg. OP Margin of Hyosung Chemical ('15-'17)10.2%
Est. NP (Won bn) of Hyosung Chemical95
P/E (x)4.4
Implied value (mkt cap) of Hyosung Chemical (Won bn)414
Source: Companies data, WiseFN, Our Estimates
Comparable Companies Analysis of Hyosung TNC
Taekwang IndustrialHuvisAverage
P/E (x); 20179.013.311.1
P/B (x); 20170.50.70.6
OP Margin (%); 20178.3%2.3%5.3%
ROE (%); 20175.3%5.6%5.5%
Sales (Won bn); 20172,9161,2812,099
Net profit (Won bn); 201717923101
Operating profit (Won bn); 201724130135.5
Mkt cap (Won bn)1,609305957
Equity (Won bn); 20173,1744071,791
Avg. OP (Won bn) of Hyosung TNC ('15-'17)347
Avg. OP Margin of TNC ('15-'17)7.8%
Est. NP (Won bn) of Hyosung TNC260
P/E (x)10.0
Implied value (mkt cap) of Hyosung Chemical (Won bn)2,606
Source: Companies data, WiseFN, Our Estimates

Major Events from May 29th to July 12th (Start of tariff war between US and China)

Although we have a positive view of the Hyosung Corp split off, one of the major recent concerns is the start of the tariff war between the US and China. For now, it remains to be seen whether the two nations will manage to control this tariff war to minimize the damage or whether it will spiral out of control.

Since end of May, many industrial related stocks in Korea that are sensitive to the growth of the Chinese economy have taken a beating. For example, since May 29th, Hyundai Heavy Industries and Doosan Heavy Industries' share prices are down 17% and 24%, respectively. These two companies are comps to Hyosung Heavy Industries. Likewise, Hyosung Corp (holding company) will likely be compared to other holding companies with major industrial related affiliates including Hyundai Heavy Industries Holdings (267250 KS) and Doosan Corp (000150 KS). Since May 29th, Hyundai Heavy Industries Holdings and Doosan Corp's share prices are down 11.8% and 6.9%, respectively. These holding companies have also been negatively impacted by the weaker share prices of their industrial sector related affiliates and continued concerns about the US and China tariff war.

In the near term, this tariff war between China and US is perhaps the most important factor that could put a cap of the share prices of the Hyosung Corp and its four major affiliates once they start trading again on July 13th.

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