The Return of the Holding Companies... Shedding the "Undervalued" Label in the Second Half's Catch-Up Market

[Asia Economy Reporter Lee Seon-ae] Holding companies, which have long been labeled as "perennially undervalued" and marginalized in the market, are starting to stir. Their stock prices are rising as the performance of their subsidiaries is expected to improve following the reopening of the economy. As economic normalization gains momentum in the second half of the year, holding companies are likely to be revalued, leveraging the upward trend in the market.

According to the Korea Exchange on the 15th, the majority of the 85 domestic holding company stocks are trending upward. This is based on the expectation that they will benefit from the reopening across various subsidiaries. The consensus growth rate for operating profit among major holding companies this year averages 45%.

The most notable is Doosan. As of the closing price on the 14th, Doosan's stock price has risen by 71.53% this year. Namgon Choi, a researcher at Yuanta Securities, said, "Doosan was the most undervalued among holding companies, but if it graduates from creditor management in the second half of the year and successfully reduces net debt to around 2.4 trillion KRW, the group's credit rating will improve." He added, "Once the credit risk is resolved, Doosan will become a leading stock in the renewable energy and automation themes." He set Doosan's target price at 150,000 KRW, indicating an upside potential of 68.16%.

CJ's upward momentum is also considerable. The stock closed at 109,000 KRW on the 14th, marking an 18.34% increase since the beginning of the year. According to FnGuide, CJ is the holding company with the highest expected net profit growth rate this year compared to last year (142%). The visible improvement in subsidiary profitability suggests that the stock price still has room to gain further momentum.

The securities industry is also focusing on Lotte Holdings. The stock closed at 42,450 KRW on the 14th, with a year-to-date increase of 20.94%. Considering it stayed above 50,000 KRW in 2019, there is still room for growth. Seonghyun Nam, a researcher at Hanwha Investment & Securities, evaluated that "the operating value will improve sharply due to the performance improvement of major subsidiaries such as Lotte Chemical."

Hanwha and GS also attract attention. Hanwha holds stakes in Hanwha Life Insurance (18.2%), Hanwha Aerospace (33.95%), Hanwha Solutions, Hanwha Construction (95.77%), and Hanwha Hotels & Resorts (50.62%). It is expected that the stock price will gain momentum supported by these subsidiaries' performance. GS is also a representative undervalued holding company. The gap between the current stock price and the target price is significant. The discrepancy between the target price of 66,000 KRW suggested by Hyundai Motor Securities and the closing price of 46,900 KRW on the 14th is 40.72%. Dongjin Kang, a researcher at Hyundai Motor Securities, said, "GS's stock price will be revalued due to the strong performance of its subsidiary GS Caltex and the expansion of dividend attractiveness."

Among holding companies, Samsung C&T is a notable exception that has not risen. The stock closed at 130,900 KRW on the 14th, down 3.47% compared to 144,000 KRW on January 4th this year. Although the stock price has been sluggish, the securities industry still considers it one of the promising holding companies. With the possibility of a pardon for Samsung Electronics Vice Chairman Jaeyong Lee being discussed, investor sentiment is expected to recover in the second half. Kyungwan Eun, a researcher at Meritz Securities, said, "Samsung C&T, being at the top of the group's governance structure, is inevitably sensitive to governance or owner-related risks." He added, "Since it is currently applying a discount rate of about 60%, the highest among holding companies, on net asset value (NAV), a flexible stock price rebound is expected if related risks are resolved." Samsung C&T holds shares in affiliates such as Samsung Electronics (5%) and Samsung Biologics (43.4%), with this value alone reaching 53.6 trillion KRW, more than twice Samsung C&T's market capitalization.

Financial holding companies, which benefit from rising interest rates, are also in the spotlight. Dividend attractiveness is particularly increasing. At the beginning of this year, financial authorities recommended banks to limit dividends to within 20% of net profit to respond to economic uncertainties caused by COVID-19. However, as domestic financial holding companies have consecutively achieved record quarterly earnings in the first quarter, there is a high possibility that mid-year and quarterly dividends will be paid in the second half once the financial authorities' administrative guidance ends at the end of this month.

According to FnGuide, the consensus growth rate for operating profit of Woori Financial Group, KB Financial Group, Shinhan Financial Group, and Hana Financial Group this year is 19.5%, and the estimated dividend per share (DPS) growth rate is 51.8%.

Seongheon Lee, a researcher at Hi Investment & Securities, said, "As the domestic and international economies enter a low-growth phase, holding companies with stakes in various industries have been subject to high discount rates." He added, "With rising expectations for reopening, the value rebound of subsidiaries that have been sluggish so far will become possible, which can lead to an increase in the value of holding companies."