Samsung Volatility Surges on Chaebol 2.0 Outlook: Korea Markets

Trading in South Korea’s stock market is rising from a seven-year low on speculation of an overhaul in shareholdings at the nation’s biggest family-run businesses.

Volumes on the Korea Exchange climbed 6 percent during the past month and the Kospi 200 Volatility Index increased 18 percent from a record low, versus a 15 percent drop in Hong Kong’s gauge. Swings in Samsung Electronics Co. (005930), the world’s biggest smartphone maker, reached a nine-month high in Seoul last week, while those for Hyundai Glovis Co. (086280) also jumped.

Signs that families who run the Samsung and Hyundai Motor conglomerates will change their ownership in ways that benefit minority shareholders has fueled a surge in bets on which of the two groups’ 28 listed businesses will be the biggest winners. LG Corp., which emerged from LG Group’s switch to a holding-company structure in 2003, has since gained more than nine-fold.

“Speculation of a revamp at South Korea’s big chaebols is adding vitality to the market,” said Seo Jae Hyeong, the chief executive officer at Daishin Asset Management Co., which oversees about $4.6 billion. His picks include Samsung Electronics and Hyundai Glovis, South Korea’s second-biggest shipper of cars. “Restructuring is an inevitable theme.”

Photographer: SeongJoon Cho/Bloomberg

Samsung Electronics Co. ultra high definition (UHD) televisions at the company's digital plaza store in Seoul, South Korea, on Jan. 3, 2014. Close

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Photographer: SeongJoon Cho/Bloomberg

Samsung Electronics Co. ultra high definition (UHD) televisions at the company's digital plaza store in Seoul, South Korea, on Jan. 3, 2014.

Samsung 2.0

Scrutiny of the two conglomerates has intensified after President Park Geun Hye’s government banned chaebol from creating new cross shareholdings and several Samsung Group companies announced deals that analysts predict will ease the transition to a holding-company structure. CLSA Asia-Pacific Markets says the changes will amount to a “Samsung version 2.0” that could boost shares of the Samsung Electronics by as much as 75 percent from current levels.

Samsung Group companies account for more than 20 percent of the South Korean economy, while shares of Samsung Electronics, Hyundai Motor Co. and Hyundai Mobis alone make up more than 24 percent of the Kospi’s weighting.

Contrasting views over the timing and specifics of any changes has fueled volatility in the stocks. Neither Samsung Group nor Hyundai Motor Group, the last among the country’s major chaebols to adopt a holding-company structure, have confirmed plans for a revamp. Spokespeople from both Hyundai Motor Group and Samsung Group declined to comment when contacted by Bloomberg News.

Swings Increase

The 30-day historical volatility of Samsung Electronics reached 25.3 on June 13, the highest level since September, while that of Hyundai Glovis climbed to 37.6 yesterday, the highest since November, according to data compiled by Bloomberg.

Samsung Electronics shares climbed 10 percent from May 9 to June 3, then fell 6.5 percent through yesterday. Hyundai Glovis surged 20 percent this year through June 3, before falling 7.6 percent from its high.

The 30-day average of volume of shares traded on the benchmark Kospi gauge has increased 6 percent during the past month. The Kospi 200 Volatility Index, a gauge of demand for protection against swings in Seoul-listed equities, surged to 12.1 at the end of last week from a record-low 10.2 on May 13.

Kim Jin Woo, an options trader at Hyundai Futures Corp., said the increase in volatility has helped more than double the amount of transactions in the past few weeks.

“The stock market has been seeing swings largely because of revamp speculation,” Kim Chul Min, a money manager at Mirae Asset Global Investments Co., which oversees about $50 billion, said by phone on June 13.

Kospi Target

Speculation over shareholder-friendly changes at the chaebol may be premature, said You Seung Min, the chief strategist at Samsung Securities Co., the nation’s biggest brokerage by market value. While higher dividends will become inevitable as Korea’s conglomerates enter a “mature growth phase” and capital expenditures slow, changes that spur a lasting increase in the nation’s equity valuations won’t happen any time soon, he said.

The Kospi is valued at about the same level as its companies’ net assets, versus a multiple of 2.1 for the MSCI All-Country World Index, according to data compiled by Bloomberg. The Korean gauge has slipped 0.9 percent this year through yesterday, while the won gained 3.5 percent against the dollar and the yield on three-year government notes has dropped 16 basis points to 2.72 percent.

The Kospi rose 0.4 percent to 2,001.55 at the close in Seoul, while Samsung Electronics was unchanged and Hyundai Glovis rallied 3.5 percent.

“We’re not changing our Kospi target based on this event for this year because these are only expectations and nothing has been done to have it price it into market performance,” You said by phone on June 13.

Hyundai Control

Analysts at brokerages including CLSA and Morgan Stanley have said Samsung Group is already taking steps to shift to a new shareholding structure. Samsung Everland Inc., the de facto center of the group due to a network of cross shareholdings, said this month it will seek an initial public offering.

Investors have speculated about restructuring at Hyundai Motor and the transfer of power from Chairman Chung Mong Koo to his son Chung Eui Sun since Hyundai Glovis was listed in 2005, according to Park Joong Sun, a Seoul-based analyst at Kiwoom Securities Co.

Selling Hyundai Glovis shares or swapping them with one of three main companies will enable the younger Chung to secure his position as the successor of the conglomerate, according to Chae Yi Bai, a researcher at Center for Good Corporate Governance, a chaebol watchdog.

Long Wait

LG Group provides an example of potential improvements in investor perception and corporate governance from a holding-company structure that aligns family interests with those of minority shareholders, according to Park at Kiwoom.

The group split its main chemical and electronics businesses into operating and holding companies in 2001 and 2002, and merged the holding companies to form LG Corp. (003550) in March 2003. That stock has since outperformed both Samsung Electronics and Hyundai Motor and has a price-to-earnings ratio at least 50 percent higher than the two.

Part of the excitement surrounding a revamp at Samsung and Hyundai Motor stems from expectations that dividends will increase under a holding-company structure, said Kim Hag Ju, the chief investment officer at Hangaram Investment Co. in Seoul.

“We’ve been waiting for a long time to see this happen,” he said. “It’s now beginning to unfold.”

To contact the reporters on this story: Sharon Cho in Seoul at ccho28@bloomberg.net; Kyunghee Park in Singapore at kpark3@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net; Stuart Biggs at sbiggs3@bloomberg.net Matthew Oakley

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