April 29, 2024

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[THE INVESTOR] Hanwha Group’s equity ownership structure is laid out in a highly cost effective way for Kim Seung-youn, enabling the chairman to control the 55.4 trillion won ($50 billion) empire with 0.9 percent of the equities, worth about 610 billion won.

Changes will be inevitable, however, once Kim begins preparations to hand over the reins to his sons amid increased shareholder activism and toughening corporate governance rules.

“Succession seems distant at Hanwha now, with the sons owning only marginal equity stakes,” said Park Ju-kun, the co-head of CEO Score, a Seoul-based corporate research firm. 

But beneath the surface, covert succession planning may have already begun, he said.

The succession factor also weighs on analysts reviewing Hanwha stocks. 

They say that as with Samsung and other family-run conglomerates, or chaebol, Hanwha’s Kim may take strategically calculated moves in the coming years to transfer wealth and management controls to his children. Pundits pay keen attention to any stock transactions and intragroup deals at Hanwha for their potential implications on future succession.

“Hanwha S&C, wholly owned by the chairman’s three sons, will be a key vehicle in the group’s succession planning,” said Choi Nam-gon, an analyst at Yuanta Securities in Seoul.  


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Going forward, the group will seek to bolster the firm’s value, he predicted.

“The sons will benefit from improved valuations of Hanwha S&C,” he explained.   

Hanwha S&C is similar to what Samsung SDS is for Samsung Group and SK Holdings C&C is for SK Group.

The systems integration and IT solutions provider has grown exponentially on intragroup trades after being acquired by Kim’s three sons in 2005.

Its operating profit went from a negative 3.7 billion won in 2004 to 20.6 billion won in 2015. Revenue skyrocketed from 126.8 billion won to 398 billion won during the period.

The company’s core asset is a 100 percent stake in subsidiary Hanwha Energy, which is more profitable than Hanwha S&C itself, generating 414 billion won of revenue and 130 billion won of operating profit in 2015.

 

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Hanwha Energy owns 30 percent of Hanwha General Chemical and 50 percent of Hanwha Total -- two of four former Samsung assets that the group acquired in late 2014.

This is why CEO Score’s Park thinks the group is already planning succession steps.

“The deal with Samsung, which bolstered Hanwha’s existing core -- defense and chemicals -- may have been a step toward future succession,” he said.

A succession scenario prevailing in the market involves Hanwha S&C merging with Hanwha Corp., the group’s de facto holding firm, effectively crowning Kim’s first son, Kim Dong-kwan, the executive vice president of Hanwha Q Cells, as successor. 

One hint to Dong-kwan’s place in the succession line: the 33-year-old Harvard graduate holds the second-largest stake, 4.4 percent, in Hanwha Corp. after the chairman. His two younger brothers Dong-won and Dong-sun have an identical 1.7 percent stake.

The eldest son’s shareholding in Hanwha S&C is 50 percent, double that of his brothers.

Despite speculation, Hanwha Group says leadership transition is not a present issue.

“The chairman has given no hint whatsoever as to who will succeed him and when,” a group spokesperson said.

The current chairman inherited Hanwha from his father and founder Kim Chong-hee in 1981 at age 29.

Now 64 and at the helm for 35 years, Kim Seung-youn owns 22.5 percent of Hanwha Corp., which sits at the peak of the group’s equity ownership structure, holding stakes in nine affiliates including Hanwha Techwin, Chemical, Construction & Engineering, Life Insurance and Q Cells.

His stake is supplemented by a combined 9.14 percent owned by his family including his sons, 2.14 percent held by Hanwha S&C and 7.79 percent in treasury stocks. This adds up to a comfortable 43.45 percent for the chairman.

The sons, aged 33, 31 and 27, have all joined Hanwha companies and now work in the distinctively different fields of solar energy, finance and construction. 

“The first son was promoted late last year to executive vice president of Hanwha Q Cells in recognition of his dedication and contribution to the group’s solar energy future. Compared to him, the younger ones are in a stage of learning corporate affairs,” the Hanwha spokesperson said.

Solidarity for Economic Reform, a local corporate governance crusader, has its eye on Hanwha. 

It is fighting against the group at the Supreme Court, claiming the eldest son was sold Hanwha S&C shares at below-market price by Hanwha Corp., at the expense of general shareholders.  

Experts see much room for improvement in the corporate governance of Hanwha companies. 

Every year, the Korea Corporate Governance Service reviews corporate governance practices of Hanwha’s seven publicly traded firms. 

It currently gives Hanwha Chemical a rating of “C,” the second lowest on its seven-level rating scale, and Hanwha Life “A”, the third highest. Hanwha Corp. and Techwin are a notch down at “B+,” while Hanwha Galleria Time World, General Insurance, Investment & Securities are given “B.” 

The KCGS does not disclose the reasons behind its appraisals, but cited concerns over intragroup trade as reasons behind its downgrade of the insurer and securities brokerage this year.  

Global proxy advisor Institutional Investor Services, in its Governance Quick Score released at the end of last year, placed Hanwha Chemical at the very bottom of its one to 10 scale, citing poor scores in shareholder rights and audit-and-risk oversight. Hanwha Corp. was given the second-lowest grade of 9 for the same reason.


By Lee Sun-young/The Korea Herald (milaya@heraldcorp.com)