Is the Stock Price Unrelated to Earnings?... Seoul Auction, Shinsegae M&A Increases Stock Price Volatility

Seoul Auction Soars 16% Yesterday... Early Trading Sees 3% Drop
Q2 Operating Profit 2.5 Billion KRW... Poor Performance
"Stock Volatility Increases Amid Shinsegae Acquisition Uncertainty"

[Asia Economy Reporter Hwang Yoon-joo] The stock price of Seoul Auction, the leading player in the domestic art auction market, is fluctuating amid M&A (mergers and acquisitions) news. Despite weak second-quarter earnings, the stock price volatility is expected to increase depending on whether Shinsegae acquires the company.

According to the Korea Exchange on the 19th, Seoul Auction closed at 24,100 KRW, up sharply by 16.14% (3,350 KRW) from the previous day. Over the past month, the stock price has jumped 26.18% from 19,100 KRW.

The surge in stock price was driven by news of Shinsegae's imminent acquisition. Seoul Auction is currently in acquisition negotiations with Shinsegae. It was reported yesterday that Shinsegae has agreed to pay a management premium, settling on an acquisition price in the 40,000 KRW range per share.

The largest shareholder of Seoul Auction is Chairman Lee Ho-jae, who holds a 13.31% stake. The combined stake of related parties, including his eldest son Lee Jung-yong, CEO of Gana Art Center (6.39%), and his second son (3.0%), totals 31.3%. Shinsegae had already secured a 4.82% stake by investing approximately 28 billion KRW at the end of last year.

Shinsegae's recognition of the management premium is due to Seoul Auction's dominant position. Seoul Auction holds a 56.9% market share in the domestic art auction market, making it the industry leader.

Besides being known as the auction operated by Gana Art Center, the largest gallery in Korea, it also owns Print Bakery, a subsidiary with a 19% stake, which excels at discovering emerging artists. It is truly a ‘fundamental’ house in the art industry.

However, the second-quarter performance this year was disappointing. The second-quarter sales amounted to 13.15237 billion KRW, down 47.1% year-on-year. Operating profit and net profit dropped sharply by 65.2% and 88.3%, to 2.47731 billion KRW and 789.98 million KRW, respectively.

Even considering that 2021 sales recorded the largest growth rate since the adoption of IFRS (2011), the decline in performance is significant. This is far below the first-quarter sales (21.63317 billion KRW) and operating profit (6.59257 billion KRW).

According to the Arts Management Support Center Foundation, the size of the Korean art distribution market in the first half of 2022 is estimated at 532.9 billion KRW. Among this, the auction market is about 145 billion KRW, slightly up from 144.8 billion KRW in the first half of 2021.

Kim Tae-hyun, a researcher at the Korea IR Association, said, "Despite concerns about global inflation and economic recession dampening investment sentiment, the Korean art auction market showed relatively solid performance in the first half of the year," adding, "There is a risk factor that demand for art purchases may decline if COVID-19 resurges or the economy slows down."

He further stated, "Stock price volatility is expected to increase depending on whether Shinsegae proceeds with the acquisition."

Seoul Auction actually recorded losses of 1.6 billion KRW and 300 million KRW in 2020 and 2021, respectively, when the COVID-19 pandemic occurred.

Meanwhile, offline auctions in Hong Kong are scheduled to resume in November this year. Researcher Kim explained, "Typically, offline auctions in Hong Kong can expect bid amounts of around 15 to 20 billion KRW," adding, "Although this may be flexible depending on the COVID-19 situation, Seoul Auction plans to handle auctions domestically if auctions in Hong Kong become difficult."