Korea / Special Situations, Clepsydra Capital

Sanghyun Park

I investigate special situations in Korea.

Korea / Special Situations

Emart Crisis: Huge Recap & Industry Consolidation

Recent Data of Coupang, SoBank VF AI Initiative & Emart Crisis

Company Visit: Gwangju Shinsegae(037710.KS)

Emart Raises Stakes in Shinsegae I&C, Shinsegae E&C, and Shinsegae Food

Emart & Shinsegae's Plan to Spin Off And Merge Their Online E-Commerce Businesses

A Visit to Emart's Starfield Goyang MegaMall

Event-Driven

Shinsegae Group restructuring is again drawing a lot of attention from local investors. That is, many local investors now believe that it is finally time for Shinsegae Group to do the long-awaited generational ownership transfer as both <a href="https://www.smartkarma.com/entities/6993" target="_blank" data-smartkarma-citation="entities:6993:1">E Mart Inc (139480 KS)</a> and <a href="https://www.smartkarma.com/entities/20987" target="_blank" data-smartkarma-citation="entities:20987:1">Shinsegae Co Ltd (004170 KS)</a> shares have fallen to an acceptably low level that may allow Shinsegae's two inheritors to afford their respective massive inheritance tax. <div class="content-caption">(E-Mart and Shinsegae 1-yr price chart - source: Google Finance)</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/058/423/original/1.png?1532050535" class="editor-image img-responsive" data-smartkarma-image-id="58423"></figure>As you know, Lee Myung-hee is the youngest sister of Samsung Group Lee Gun-hee. That is, she is Lee Jae-yong's aunt. She has two children, one son and one daughter. His son named Chung Yong-jin is controlling E Mart and those affiliates under E Mart, whereas the daughter named Chung Yoo-kyung is controlling Shinsegae Co., Ltd. (department Store chain) and those affiliated under Shinsegae Co., Ltd.<table class="table table-striped"><tbody>
<tr><td colspan="2" style="width: 771px;">Shinsegae Group governance structure</td></tr>
<tr><td colspan="2" style="text-align: center; width: 771px;">
The Lee family
(Lee Myung-hee and his son Chung Yong-jin and his daughter Chung Yoo-kyung)
* Lee Myung-hee is Samsung Group Lee Gun-hee's youngest sister.
</td></tr>
<tr><td colspan="2" style="text-align: center; width: 771px;">↓</td></tr>
<tr>
<td style="text-align: center; width: 387.25px;">
<a href="https://www.smartkarma.com/entities/6993" target="_blank" data-smartkarma-citation="entities:6993:1">E Mart Inc (139480 KS)</a>
→ Will go to Chung Yong-jin
</td>
<td style="text-align: center; width: 383.75px;">
<a href="https://www.smartkarma.com/entities/20987" target="_blank" data-smartkarma-citation="entities:20987:1">Shinsegae Co Ltd (004170 KS)</a>
→ Will go to Chung Yoo-kyung
</td>
</tr>
<tr>
<td style="text-align: center; width: 387.25px;">↓</td>
<td style="text-align: center; width: 383.75px;">↓</td>
</tr>
<tr>
<td style="text-align: center; width: 387.25px;">
<a href="https://www.smartkarma.com/entities/12661" target="_blank" data-smartkarma-citation="entities:12661:1">Shinsegae I&amp;C (035510 KS)</a> 35.65%
<a href="https://www.smartkarma.com/entities/11972" target="_blank" data-smartkarma-citation="entities:11972:1">Shinsegae Eng. &amp; Construction (034300 KS)</a> 42.7%
<a href="https://www.smartkarma.com/entities/3772" target="_blank" data-smartkarma-citation="entities:3772:1">Shinsegae Food Co Ltd (031440 KS)</a> 46.87%
E Mart Everyday 99.28%
Shinsegae Chosun Hotel 98.78%
Starbucks Korea 50%
Shinsegae Youngrang Resort 100%
Shinsegae L&amp;B 100%
E Mart 24 100%
Shinsegae Payments 50%
Shinsegae Property 100%
Shinsegae TV Shopping 47.83%
Jeju Soju 100%
</td>
<td style="text-align: center; width: 383.75px;">
<a href="https://www.smartkarma.com/entities/4454" target="_blank" data-smartkarma-citation="entities:4454:1">Shinsegae International (031430 KS)</a> 45.8%
<a href="https://www.smartkarma.com/entities/16135" target="_blank" data-smartkarma-citation="entities:16135:1">Gwangju Shinsegae (037710 KS)</a> 10.4% Shinsegae Uijeongbu Station 27.6% Shinsegae Simon 25% Shinsegae Dongdaegu Composite Transit Center 61% Central City 60% Shinsegae Payments 50% Incheon Shinsegae 90% Shinsegae Duty Free 100% Daejeon Shinsegae 100% Casamia 92.4%
</td>
</tr>
<tr><td colspan="2" style="width: 771px;">
Note: Chung Yong-jin personally owns a 52.08% stake in <a href="https://www.smartkarma.com/entities/16135" target="_blank" data-smartkarma-citation="entities:16135:1">Gwangju Shinsegae (037710 KS)</a>.
Source: FnGuide, <a href="https://www.smartkarma.com/profiles/354" target="_blank" data-smartkarma-citation="accounts:354">Sanghyun Park</a>
</td></tr>
</tbody></table>Samsung family has beeb known for their openness to female family members' management involvement. Samsung founder Lee Byung-chul passed down retail business to his youngest daughter. Lee Byung-chl's oldest daughter inherited Samsung's paper making business which is now known as Hansol Group. So, as part of this family tradition, Lee Myung-hee has also passed down her Shinsegae Group equally to his two children. Discount store chain (E Mart) and shopping mall business (Starfield) and those affiliates under E Mart were given to her son Chung Yong-jin. Department store chain (Shinsegae Department Store) and duty free business and those affiliates under Shinsegae Co., Ltd. were given to her daughter Chung Yoo-kyung.<table class="table table-striped"><tbody>
<tr><td colspan="2" style="width: 771px;">Shinsegae Group governance structure</td></tr>
<tr>
<td style="text-align: center; width: 387.25px;">Chung Yong-jin</td>
<td style="text-align: center; width: 383.75px;">Chung Yoo-kyung</td>
</tr>
<tr>
<td style="text-align: center; width: 387.25px;">↓</td>
<td style="text-align: center; width: 383.75px;">↓</td>
</tr>
<tr>
<td style="text-align: center; width: 387.25px;">
Discount store chain
Shopping mall
</td>
<td style="text-align: center; width: 383.75px;">
Department store chain
Duty free
</td>
</tr>
<tr><td colspan="2" style="width: 771px;">Source: <a href="https://www.smartkarma.com/profiles/354" target="_blank" data-smartkarma-citation="accounts:354">Sanghyun Park</a></td></tr>
</tbody></table>But due to various reasons including massive inheritance taxes (50% if inheritance amount exceeds ₩5bil), Lee Myung-hee still owns a 18.22% stake in both E Mart and Shinsegae and remains as the largest shareholder. Chung Yong-jin owns a 9.83% stake in E Mart and Chung Yoo-kyung own a 9.83% stake in Shinsegae. So, they need to get their mother's 18.22% stake.<table class="table table-striped"><tbody>
<tr>
<td style="width: 327px;">Shinsegae Group shareholding structure</td>
<td style="text-align: right; width: 219.3375244140625px;"><a href="https://www.smartkarma.com/entities/6993" target="_blank" data-smartkarma-citation="entities:6993:1">E Mart Inc (139480 KS)</a></td>
<td style="text-align: right; width: 226.6624755859375px;"><a href="https://www.smartkarma.com/entities/20987" target="_blank" data-smartkarma-citation="entities:20987:1">Shinsegae Co Ltd (004170 KS)</a></td>
</tr>
<tr>
<td style="width: 327px;">Lee Myung-hee</td>
<td style="text-align: right; width: 219.3375244140625px;">18.22%</td>
<td style="text-align: right; width: 226.6624755859375px;">18.22%</td>
</tr>
<tr>
<td style="width: 327px;">Chung Yong-jin</td>
<td style="text-align: right; width: 219.3375244140625px;">9.83%</td>
<td style="text-align: right; width: 226.6624755859375px;">-</td>
</tr>
<tr>
<td style="width: 327px;">Chung Yoo-kyung</td>
<td style="text-align: right; width: 219.3375244140625px;">-</td>
<td style="text-align: right; width: 226.6624755859375px;">9.83%</td>
</tr>
<tr>
<td style="width: 327px;">Treasury shares</td>
<td style="text-align: right; width: 219.3375244140625px;">0.04%</td>
<td style="text-align: right; width: 226.6624755859375px;">0.09%</td>
</tr>
<tr><td colspan="3" style="width: 327px;"><hr></td></tr>
<tr>
<td style="width: 327px;">Korea NPS</td>
<td style="text-align: right; width: 219.3375244140625px;">10.00%</td>
<td style="text-align: right; width: 226.6624755859375px;">12.60%</td>
</tr>
<tr><td colspan="3" style="width: 773px;">Source: FnGuide, KRX</td></tr>
</tbody></table>Shinsegae Group restructuring is relatively very straightforward. There is no need to do a holdco conversion. The governance structure has already been set up to operate as a holding company structure. Of course, there are some benefits by going for an official holdco structure. But unlike other peer conglomerates, they don't have a lot of treasury shares to potentially capitalize on. This means they will have to spend a lot more money to meet the 20%/40% subsidiary stake requirement. Moreover, as far as the Korea FTC is concerned, Shinsegae Group is relatively free of any intra-group deals controversy. Even to make sure that they are really clean, they recently moved the remaining portion of the owner family's personal stake in the group's three key affiliates to E Mart (July 10 this year). This means they really don't need to change their group governance structure. In other words, there is no need to go for a holding company structure.<div class="content-caption">(<a href="http://kind.krx.co.kr/common/disclsviewer.do?method=search&amp;acptno=20180710000595&amp;docno=&amp;viewerhost=&amp;viewerport=" target="_blank">E Mart regulatory filing on July 10 about acquiring stakes in Shinsegae I&amp;C, Shinsegae Construction and Shinsegae Food from the owner family</a> - source: KIND)</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/058/424/original/2.png?1532050559" class="editor-image img-responsive" data-smartkarma-image-id="58424"></figure><table class="table table-striped"><tbody>
<tr>
<td style="width: 338px;">E Mart's affiliate company stake acquisition from the owner family</td>
<td style="text-align: right; width: 163px;">Shinsegae Construction</td>
<td style="text-align: right; width: 139.51251220703125px;">Shinsegae Food</td>
<td style="text-align: right; width: 130.48748779296875px;">Shinsegae I&amp;C</td>
</tr>
<tr>
<td style="width: 338px;">Acquisition shares</td>
<td style="text-align: right; width: 163px;">411,374</td>
<td style="text-align: right; width: 139.51251220703125px;">29,938</td>
<td style="text-align: right; width: 130.48748779296875px;">114,170</td>
</tr>
<tr>
<td style="width: 338px;">Acquisition value (₩ mil)</td>
<td style="text-align: right; width: 163px;">14,357</td>
<td style="text-align: right; width: 139.51251220703125px;">4,566</td>
<td style="text-align: right; width: 130.48748779296875px;">15,413</td>
</tr>
<tr>
<td style="width: 338px;">Acquisition price per share (₩)</td>
<td style="text-align: right; width: 163px;">34,900</td>
<td style="text-align: right; width: 139.51251220703125px;">152,500</td>
<td style="text-align: right; width: 130.48748779296875px;">135,000</td>
</tr>
<tr>
<td style="width: 338px;">Shareholding after acquisition</td>
<td style="text-align: right; width: 163px;">1,707,907</td>
<td style="text-align: right; width: 139.51251220703125px;">1,815,223</td>
<td style="text-align: right; width: 130.48748779296875px;">613,170</td>
</tr>
<tr>
<td style="width: 338px;">Shareholding % after acquisition</td>
<td style="text-align: right; width: 163px;">42.70%</td>
<td style="text-align: right; width: 139.51251220703125px;">46.87%</td>
<td style="text-align: right; width: 130.48748779296875px;">35.65%</td>
</tr>
<tr><td colspan="4" style="width: 771px;">Source: KIND</td></tr>
</tbody></table>So, only thing that will have to be done is to move Lee Myung-hee's 18.22% stake in both E Mart and Shinsegae Co., Ltd. to her two children. Any weird expedient would be employed? Well, Korea's local market doesn't think so for this case. Believe or not, unlike their cousin Lee Jae-yong, the Shinsegae family's two children have been very honorable when it comes to their tax duty in the past. Moreover, given the current political moon under the Moon administration, it'd be foolish to do something too imaginative. So, I guess it's pretty much 100% sure that Lee Myung-hee's two children will choose the only legitimate way: inherit directly from their mother and pay a full 50% inheritance tax. Then how much would they have to pay for inheritance tax? The amount of inheritance tax is to be calculated based on a 60-day average stock price from the inheritance date. So, if they inherited yesterday (July 19), they would have to pay ₩623.4bil for Chung Yong-jin and ₩353.5bil for Chung Yoo-kyung. Obviously, this is a lot even for these chaebols, but substantially lower than even several months ago when Chung Yong-jin would have to pay nearly ₩800bil.<table class="table table-striped"><tbody>
<tr>
<td style="width: 414.26251220703125px;">Inheritance tax calculations</td>
<td style="text-align: right; width: 176.73748779296875px;">
<a href="https://www.smartkarma.com/entities/6993" target="_blank" data-smartkarma-citation="entities:6993:1">E Mart Inc (139480 KS)</a> for Chung Yong-jin</td>
<td style="text-align: right; width: 179px;">
<a href="https://www.smartkarma.com/entities/20987" target="_blank" data-smartkarma-citation="entities:20987:1">Shinsegae Co Ltd (004170 KS)</a> for Chung Yoo-kyung</td>
</tr>
<tr>
<td style="width: 414.26251220703125px;">Market cap as of July 19 (₩ bil)</td>
<td style="text-align: right; width: 176.73748779296875px;">6,132.7</td>
<td style="text-align: right; width: 179px;">3,032.3</td>
</tr>
<tr>
<td style="width: 414.26251220703125px;">Value of a 18.22% stake based on July 19 market cap (₩ bil)</td>
<td style="text-align: right; width: 176.73748779296875px;">1,117.4 </td>
<td style="text-align: right; width: 179px;">552.5</td>
</tr>
<tr>
<td style="width: 414.26251220703125px;">60-day average stock price from July 19 (₩)</td>
<td style="text-align: right; width: 176.73748779296875px;">245,476</td>
<td style="text-align: right; width: 179px;">394,098</td>
</tr>
<tr>
<td style="width: 414.26251220703125px;">Shares outstanding</td>
<td style="text-align: right; width: 176.73748779296875px;">27,875,819</td>
<td style="text-align: right; width: 179px;">9,845,181</td>
</tr>
<tr>
<td style="width: 414.26251220703125px;">Total estimated value of inheritance tax at 50% tax rate (₩ bil)</td>
<td style="text-align: right; width: 176.73748779296875px;">623.4</td>
<td style="text-align: right; width: 179px;">353.5</td>
</tr>
<tr><td colspan="3" style="width: 770px;">Source: FnGuide, KRX</td></tr>
</tbody></table>

Shinsegae Group restructuring is again drawing a lot of attention from local investors. That is, many local investors now believe that it is finally time for Shinsegae Group to do the long-awaited generational ownership transfer as both E Mart Inc (139480 KS) and Shinsegae Co Ltd (004170 KS) shares have fallen to an acceptably low level that may allow Shinsegae's two inheritors to afford their respective massive inheritance tax. (E-Mart and Shinsegae 1-yr price chart - source: Google Finance)As you know, Lee Myung-hee is the youngest sister of Samsung Group Lee Gun-hee. That is, she is Lee Jae-yong's aunt. She has two children, one son and one daughter. His son named Chung Yong-jin is controlling E Mart and those affiliates under E Mart, whereas the daughter named Chung Yoo-kyung is controlling Shinsegae Co., Ltd. (department Store chain) and those affiliated under Shinsegae Co., Ltd.
Shinsegae Group governance structure

The Lee family
(Lee Myung-hee and his son Chung Yong-jin and his daughter Chung Yoo-kyung)
* Lee Myung-hee is Samsung Group Lee Gun-hee's youngest sister.

↓


E Mart Inc (139480 KS)
→ Will go to Chung Yong-jin


Shinsegae Co Ltd (004170 KS)
→ Will go to Chung Yoo-kyung



↓
↓



Shinsegae I&amp;C (035510 KS) 35.65%
Shinsegae Eng. &amp; Construction (034300 KS) 42.7%
Shinsegae Food Co Ltd (031440 KS) 46.87%
E Mart Everyday 99.28%
Shinsegae Chosun Hotel 98.78%
Starbucks Korea 50%
Shinsegae Youngrang Resort 100%
Shinsegae L&amp;B 100%
E Mart 24 100%
Shinsegae Payments 50%
Shinsegae Property 100%
Shinsegae TV Shopping 47.83%
Jeju Soju 100%


Shinsegae International (031430 KS) 45.8%
Gwangju Shinsegae (037710 KS) 10.4% Shinsegae Uijeongbu Station 27.6% Shinsegae Simon 25% Shinsegae Dongdaegu Composite Transit Center 61% Central City 60% Shinsegae Payments 50% Incheon Shinsegae 90% Shinsegae Duty Free 100% Daejeon Shinsegae 100% Casamia 92.4%



Note: Chung Yong-jin personally owns a 52.08% stake in Gwangju Shinsegae (037710 KS).
Source: FnGuide, Sanghyun Park

Samsung family has beeb known for their openness to female family members' management involvement. Samsung founder Lee Byung-chul passed down retail business to his youngest daughter. Lee Byung-chl's oldest daughter inherited Samsung's paper making business which is now known as Hansol Group. So, as part of this family tradition, Lee Myung-hee has also passed down her Shinsegae Group equally to his two children. Discount store chain (E Mart) and shopping mall business (Starfield) and those affiliates under E Mart were given to her son Chung Yong-jin. Department store chain (Shinsegae Department Store) and duty free business and those affiliates under Shinsegae Co., Ltd. were given to her daughter Chung Yoo-kyung.
Shinsegae Group governance structure

Chung Yong-jin
Chung Yoo-kyung


↓
↓



Discount store chain
Shopping mall


Department store chain
Duty free


Source: Sanghyun Park
But due to various reasons including massive inheritance taxes (50% if inheritance amount exceeds ₩5bil), Lee Myung-hee still owns a 18.22% stake in both E Mart and Shinsegae and remains as the largest shareholder. Chung Yong-jin owns a 9.83% stake in E Mart and Chung Yoo-kyung own a 9.83% stake in Shinsegae. So, they need to get their mother's 18.22% stake.

Shinsegae Group shareholding structure
E Mart Inc (139480 KS)
Shinsegae Co Ltd (004170 KS)


Lee Myung-hee
18.22%
18.22%


Chung Yong-jin
9.83%
-


Chung Yoo-kyung
-
9.83%


Treasury shares
0.04%
0.09%



Korea NPS
10.00%
12.60%

Source: FnGuide, KRX
Shinsegae Group restructuring is relatively very straightforward. There is no need to do a holdco conversion. The governance structure has already been set up to operate as a holding company structure. Of course, there are some benefits by going for an official holdco structure. But unlike other peer conglomerates, they don't have a lot of treasury shares to potentially capitalize on. This means they will have to spend a lot more money to meet the 20%/40% subsidiary stake requirement. Moreover, as far as the Korea FTC is concerned, Shinsegae Group is relatively free of any intra-group deals controversy. Even to make sure that they are really clean, they recently moved the remaining portion of the owner family's personal stake in the group's three key affiliates to E Mart (July 10 this year). This means they really don't need to change their group governance structure. In other words, there is no need to go for a holding company structure.(E Mart regulatory filing on July 10 about acquiring stakes in Shinsegae I&amp;C, Shinsegae Construction and Shinsegae Food from the owner family - source: KIND)

E Mart's affiliate company stake acquisition from the owner family
Shinsegae Construction
Shinsegae Food
Shinsegae I&amp;C


Acquisition shares
411,374
29,938
114,170


Acquisition value (₩ mil)
14,357
4,566
15,413


Acquisition price per share (₩)
34,900
152,500
135,000


Shareholding after acquisition
1,707,907
1,815,223
613,170


Shareholding % after acquisition
42.70%
46.87%
35.65%

Source: KIND
So, only thing that will have to be done is to move Lee Myung-hee's 18.22% stake in both E Mart and Shinsegae Co., Ltd. to her two children. Any weird expedient would be employed? Well, Korea's local market doesn't think so for this case. Believe or not, unlike their cousin Lee Jae-yong, the Shinsegae family's two children have been very honorable when it comes to their tax duty in the past. Moreover, given the current political moon under the Moon administration, it'd be foolish to do something too imaginative. So, I guess it's pretty much 100% sure that Lee Myung-hee's two children will choose the only legitimate way: inherit directly from their mother and pay a full 50% inheritance tax. Then how much would they have to pay for inheritance tax? The amount of inheritance tax is to be calculated based on a 60-day average stock price from the inheritance date. So, if they inherited yesterday (July 19), they would have to pay ₩623.4bil for Chung Yong-jin and ₩353.5bil for Chung Yoo-kyung. Obviously, this is a lot even for these chaebols, but substantially lower than even several months ago when Chung Yong-jin would have to pay nearly ₩800bil.

Inheritance tax calculations

E Mart Inc (139480 KS) for Chung Yong-jin

Shinsegae Co Ltd (004170 KS) for Chung Yoo-kyung


Market cap as of July 19 (₩ bil)
6,132.7
3,032.3


Value of a 18.22% stake based on July 19 market cap (₩ bil)
1,117.4 
552.5


60-day average stock price from July 19 (₩)
245,476
394,098


Shares outstanding
27,875,819
9,845,181


Total estimated value of inheritance tax at 50% tax rate (₩ bil)
623.4
353.5

Source: FnGuide, KRX


Shinsegae Information & Communication Co (035510 KS)

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