Hyosung's Transformation into Holdco + Four Subsidiaries (Part 2): A Lot of Controversy

It has been reported in recent days that the Hyosung Group has received an approval of its plans for the split-off of Hyosung Corporation (004800 KS) by the Korea Exchange. This spin-off involves splitting Hyosung Corp into holdco (Hyosung Corp) and four other operating companies including Hyosung T&C (textile and trading), Hyosung Heavy Industries (shipbuilding and construction), Hyosung Advanced Materials (industrial materials) and Hyosung Chemical.

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)

For further details on this split-off, see our report, Hyosung's Transformation into a Holdco + Four Subsidiaries (Part 1). This method is dividing up the company is reminiscent of similar split-up of other major chaebols in 2017 including the Hyundai Heavy Industries Group and the Lotte Group. (See our report, Its All About Hyundai Robotics).

The split-off of Hyosung Corporation is expected to be completed by June 1st and the shareholders' meeting to vote on this matter will be held on April 27th. The newly formed companies will start trading on July 13th.

A Lot of Controversy on This Stock

On the bright side, the Chairman Cho Hyun-Joon has been buying a lot ofHyosung Corporation (004800 KS) shares. On March 13th, it was reported that Chairman Cho increased his stake in the company from to 14.52%, up from 14.27% at end of September 2017. His average purchase price for the shares he purchased this year is estimated to be about 136,510 won, which is higher than the current price of 127,000 won. The purchase amount is estimated to be about 12 billion won (US$11.2 million).

On the negative side, in January 2018, Hyosung's Chairman Cho Hyun-Joon was indicted on charges of embezzlement and breach of trust. In the past five years, Chairman Cho Hyun-Joon has been on a brutal fight between his younger brother Cho Hyun-Moon who has accused his older brother of numerous improper business dealings. The following is a summary of this fight between the Hyosung Group's Chairman Cho Hyun-Moon and his brother Cho Hyun-Moon:

• In February 2013, Cho Hyun-Moon who was a Vice President of Hyosung Heavy Industries at that time resigned from the company. It was later found that Cho Hyun-Moon was very dissatisfied with the way his brother was operating Hyosung Corp. and this disagreement with his brother was a key reason for him leaving the company.
• In January 2016, Cho Seok-Rae (the founder of the Hyosung Group; 83 years old now) was sentenced to a three-year imprisonment on charges of tax evasion and accounting fraud. He was fined US$110 million.
• In December 2016, Cho Seok-Rae stepped down as the Chairman of the Hyosung Group, replaced by his first son Cho Hyun-Joon.
• In January 2018, Cho Hyun-Joon, the Chairman of the Hyosung Group, was indicted by the Korean government (Seoul Central District) prosecutors on charges of embezzlement and breach of trust. In the past several years, Cho Hyun-Joon tried to help the local prosecutors by tryng to get some dirt on his older brother.

In addition, a well known civic organization called Solidarity of Economic Reform (SER) (http://www.ser.or.kr/main.html), which specializes in trying to protect the minority shareholder rights in Korea, has pointed out that despite Hyosung's efforts to split off the company, it still has concerns regarding its corporate governance. SER's major concerns about Hyosung's corporate governance policies include a) the recent indictment of Hyosung's Chairman Cho Hyun-Joon for embezzlement worth nearly 20 billion won and breach of trust and b) Hyosung's reappointment of Choi Joong-Kyung, who is the Chairman of the KICPA (Korea Institute of Certified Public Accountants) as a member of its Board of Directors. This involves a conflict of interests, especially because there are some concerns about the potential accounting irregularities of Hyosung's financials.

Overall, Hyosung Corporation (004800 KS) is an interesting stock with an opportunity to realize higher value through the split-off process. However, the company is facing some serious concerns regarding its corporate governance and potential accounting irregularities, which have helped to push down the share price.