The author is an analyst of NH Investment & Securities. He can be reached at soohong.cho@nhqv.com. — Ed.

We believe that the impact on Hankook Tech’s share price from a recent change in its majority shareholder will prove to be neutral. We believe that key to solving an undervaluation issue is to be either: 1) using the firm’s cash to implement an active shareholder return policy; and/or 2) boosting the company’s earnings growth potential via business diversification efforts.

Needs to boost growth potential

Although adhering to a Hold rating, we raise our SOTP-derived TP on Hankook Technology from W11,500 to W13,000. With 2Q20 operating results for flagship subsidiaries Hankook Tire and Hankook Atlas BX having come in better than feared, we revise up 2020E EPS by 20.2%. In addition, we reflect an increase in market value of Hankook Tire (which accounts for roughly half of overall NAV).

Hankook Tech’s strengths lie in its stable financial structure and solid cash generating capabilities. While negative effects on earnings from the Covid-19 crisis look inescapable over the near term, we draw attention to: 1) the firm’s sound cash inflow (dividends and royalties income) as a holding company player; and 2) Hankook Atlas BX’s stable business structure. That said, in order to resolve an undervaluation issue, we believe that meaningful ROE improvement will be needed via efficient capital allocation (such as using the firm’s solid cash holdings to implement an active shareholder return policy) and/or business diversification efforts.

Majority shareholder change: Impact to be neutral

On Jun 30, there was a change in Hankook Tech’s majority shareholder. Via a block deal amongst related parties during off-trading hours, the largest stakeholder has now shifted from Chairman Yang-Rae Cho (23.6% stake) to President Hyun-Beom Cho (42.9% stake). In the wake of the move, the firm’s share price volatility has amplified amid concerns that there might be disputes over the succession of management rights.

But, a look at the firm’s stake structure shows Hyun-Beom Cho wielding a dominant stake. Thus, it is doubtful that a management rights dispute will actually break out. Rather, we believe that the primary factor conditioning Hankook Tech’s share price for now will be whether management stabilization can be achieved quickly.