[Beginner's Guide to Stock Investing] Isuhwa Chemical Soars to Upper Limit After Demerger... The Magic of Division?

Editor's Note[Beginner's Guide to Stock Investing] is a smart investment guide for 'Joorini' (stock + beginner) investors. We will kindly and easily explain stock stories that may be unfamiliar to Joorini.

Last week, there was a stock in our market that hit the daily limit up for two consecutive days.

It was Isu Chemical's spin-off, Isu Specialty Chemical.

‘Spin-off’ is a familiar term but might be a bit confusing.

Sometimes it acts as a positive factor for the stock price, and other times as a negative factor.

What is the purpose of a spin-off, and what impact does it have on the stock price?

Let's find out through the case of Isu Chemical.

Isu Chemical’s Spin-off Leads to Isu Specialty Chemical’s Consecutive Limit-Ups

In November last year, Isu Chemical held a board meeting and decided to carry out a ‘spin-off’ by dividing into the petrochemical division (Isu Chemical) and the precision chemical division including all-solid-state battery business (Isu Specialty Chemical).

Isu Chemical stated that the purpose of the spin-off was to maintain the strengths of the petrochemical business while actively fostering the precision chemical business, including all-solid-state battery materials.

Among Isu Chemical’s new growth businesses, the green bio and hydrogen businesses will be handled by the continuing company, Isu Chemical, while the lithium sulfide business used as an electrolyte material for all-solid-state batteries will be managed by the newly established company, Isu Specialty Chemical.

Isu Chemical confirmed the spin-off on May 1 through the regular general meeting in March 2023, and the listing date of the new company, Isu Specialty Chemical, was set for May 31.

After deciding on the spin-off, Isu Chemical’s trading was suspended from May 27 and resumed on May 31.

On May 31, the day trading resumed for Isu Chemical and the listing day for Isu Specialty Chemical,

Isu Specialty Chemical soared from the opening price of 83,000 KRW straight to the daily limit up (30%) right after the market opened, closing at 107,900 KRW.

On the same day, Isu Chemical also opened at 20,750 KRW and closed at 26,950 KRW, up 29.88%.

Especially, Isu Specialty Chemical hit the daily limit up (29.94%) again immediately after opening on June 1, the day after listing, with both opening and closing prices at 140,200 KRW.

Spin-off: Equity Spin-off vs Asset Spin-off

So, why does a ‘spin-off’ have such a big impact on our stock market?

There are two types of spin-offs: equity spin-off and asset spin-off.

As mentioned earlier, Isu Chemical divided its business units into Isu Chemical and Isu Specialty Chemical through an ‘equity spin-off’.

The purpose of an equity spin-off can be broadly divided into two.

As Isu Chemical stated, equity spin-offs are carried out for management efficiency.

It is more advantageous to operate as independent companies rather than having two or more unrelated business units under one company.

When divided into separate companies and listed, it becomes easier to evaluate corporate value, and investors can invest only in the businesses they want.

Another purpose of equity spin-offs is to transition into a holding company.

By establishing a holding company through an equity spin-off and separating the operating companies, complex shareholding structures can be resolved, and one holding company can efficiently control multiple operating companies.

From the major shareholder’s perspective, securing stable shares of the holding company alone can effectively control the entire group.

On the other hand, asset spin-offs involve dividing the company’s assets, with the representative example being the LG Chem-LG Energy Solution case.

A new company called LG Energy Solution is created, but instead of other investors holding shares, LG Chem owns 100% of it.

In other words, an asset spin-off creates a separate company, but the original company holds 100% of its shares.

Is Equity Spin-off Always a Positive Factor?

Earlier, I mentioned two purposes of equity spin-offs.

However, in cases like Isu Chemical-Isu Specialty Chemical, if the purpose is to strengthen subsidiary control through a holding company rather than management efficiency, an equity spin-off can have a negative impact on the stock price.

A representative example is OCI.

OCI announced that it would incorporate OCI as a subsidiary through a paid-in capital increase using a public tender offer and contribution in kind for OCI Holdings, which remains as the continuing company.

The market viewed this as an attempt to strengthen the owner family’s control through a holding company system, which negatively affected the stock price.

Dear Joorini investors,

If a company announces a spin-off, please examine it carefully.

Not only whether it is an equity spin-off or asset spin-off,

but also the purpose of the equity spin-off should be carefully considered.

Companies may state management efficiency or enhancing investment value as the official purpose,

but in reality, they might be aiming for the magic of a holding company controlling all subsidiaries with a small shareholding,

or genuinely seeking to improve business performance for management efficiency.

If you can discern this well, you might be lucky enough to see a ‘limit-up from the opening price’ on the first day of re-listing like Isu Specialty Chemical.

The more you know, the more you see, and that will translate into investment returns.

Wishing wise investments to all Joorini investors today, I will end this article here.

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This article is from [Beginner's Guide to Stock Investing], published weekly by Asia Economy. We explain stock-related financial news and difficult economic stories in an easy and friendly way so that stock beginners can understand. By subscribing, you can receive articles for free.

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