[Governance] MDM Group Accelerates Development of Homeplus Site

MDM Plus, 1 Trillion KRW Sales Distribution Business After Acquiring Large Mart
Expanding Size by Taking Over Profitable Businesses

[Asia Economy Reporter Lim Jeong-su] The development project of the Homeplus site by MDM Group, the largest developer (real estate development company) in Korea, is being promoted through MDMplus. Recently, as lucrative development projects have been entrusted not to MDM led by Chairman Moon Joo-hyun but to MDMplus, which is essentially a company owned by his two daughters, there are criticisms that this is a push for group succession. MDMplus is an affiliate in which Chairman Moon's two daughters hold 95.24% of the shares, and it has recently taken on most of the development projects, expanding its scale.

MDMplus Takes Charge of Homeplus Site Development Project Worth 1 Trillion KRW in Sales

According to the investment banking (IB) industry on the 1st, MDMplus is raising funds to acquire Homeplus Busan Gaya branch. After acquiring the large mart building and site, MDMplus plans to carry out a residential-commercial complex development project with sales reaching 1 trillion KRW. The plan is to complete the acquisition by securing acquisition financing, go through development procedures such as permits, and start construction in 2023.

The project site covers about 4,000 pyeong (approximately 13,220 square meters) around 624-7 Gaya-dong, Busanjin-gu, Busan Metropolitan City. In 2001, Homeplus (then Samsung Tesco) selected Dongbu Construction as the contractor and built the discount store building, which has been in use since. Based on the total purchase price, MDMplus is acquiring the site and building at about 87.5 million KRW per pyeong. This is considered a relatively high price compared to surrounding land prices.

Moreover, if the residential-commercial complex apartments are built and sold out, the sales revenue is expected to approach 1 trillion KRW. The related industry estimates that the development project profit, excluding acquisition cost (land price), construction cost, and selling and administrative expenses, will reach 200 to 300 billion KRW. This is quite profitable for a single development project. Due to the good location, the possibility of unsold units is expected to be low.

Most Homeplus stores are located in large cities or new towns, making residential development projects highly viable. Furthermore, there is a significant advantage in increasing profitability by changing the use of low-rise retail stores to high-rise residential buildings. In a situation where development land in metropolitan areas is scarce, large retail stores are considered attractive properties for real estate development companies.

Earlier this year, MDM Group purchased about 10 business sites nationwide, which were held by Koramco Asset Trust through a REIT (Real Estate Investment Trust), for about 700 billion KRW. These include Seoul Gayang branch, Siheung branch, Goyang Ilsan branch, Incheon Gyesan branch, Suwon Woncheon branch, Ansan branch, Cheonan branch, Busan Jangnim branch, Daegu Dongchon branch, and Ulsan branch, totaling 475,228 square meters.

Taking Over Lucrative Group Projects, Increasing Share Value

The related industry expects that MDMplus will take charge of developing many of these Homeplus retail sites into residential use. This is because key domestic residential development projects in areas such as Seoul Gangnam, Magok district, Wirye district, and Suwon Gwanggyo district have been carried out through MDMplus rather than MDM.

Although MDMplus is owned by the owner family, Chairman Moon's actual shareholding is only 4.76%. The remaining 95.24% is equally divided between his two daughters, Hyun-jung and Cho-yeon, each holding 47.62%. The eldest daughter, Hyun-jung, was appointed as an inside director in December last year.

The value of MDMplus shares held by Chairman Moon's two daughters is rapidly increasing. As MDMplus is an unlisted company, it is difficult to evaluate the share value at market price, but its performance has grown exponentially every year. Separate basis sales, which were only 243.6 billion KRW in 2015, grew to 1.2327 trillion KRW last year. Operating profit increased from 68.7 billion KRW to 398.9 billion KRW during the same period.

On the other hand, MDM, wholly owned by Chairman Moon and his wife Min Hye-jung, posted rather modest results last year with sales of 6.4 billion KRW and an operating loss of 9.7 billion KRW. Although it once achieved sales exceeding 300 billion KRW and operating profits around 100 billion KRW through prominent development projects, its performance has significantly declined as it has almost withdrawn from development projects recently.

Because of this, there are criticisms that this is a push for development projects to facilitate second-generation succession within the group. An industry insider said, "Most development projects promoted by MDM Group are carried out through MDMplus, so while MDMplus's performance continues to improve, MDM is gradually shrinking. The reason for pushing key development projects to MDMplus is likely a strategic move for second-generation succession."

Meanwhile, MDM Group was newly designated last month by the Fair Trade Commission as a large business group (publicly disclosed business group) with assets exceeding 5 trillion KRW, and disclosed the group's governance status as of the end of the first quarter the day before. Going forward, it will be subject to Fair Trade Commission regulations such as restrictions on internal transactions and unfair profit extraction along with other large corporations.