[Governance] DH Autoware Affiliate Merger Increases Chairman Lee Jeong-gwon's Stake

DHOtoride Valuation Rises 35% in One Year
Chairman Lee Jung-kwon Achieves 'Two Gains with One Effort' by Lowering Average Acquisition Price of DH Autoware

DH Autoware, a KOSDAQ-listed company, is strengthening the control of Chairman Lee Jeong-kwon by absorbing and merging its affiliate DH Autoread. Chairman Lee acquired DH Autoware last year, and this merger is expected to have the effect of lowering the acquisition cost.

According to the Financial Supervisory Service's electronic disclosure, DH Autoware will absorb and merge its affiliate DH Autoread. The merger ratio is 1 to 12.006. Approximately 12 new DH Autoware shares will be issued for each share of DH Autoread.

DH Autoware is a car infotainment specialist company producing vehicle audio and video devices such as car audio and digital amplifiers. Over 90% of its sales come from Hyundai Mobis and the Japanese Alpine group. DH Autoread, which is being absorbed and merged, is a company mainly engaged in building automated automobile body equipment and manufacturing assembly jigs. Its major customers are also suppliers to Hyundai and Kia Motors.

The largest shareholder of DH Autoread is DH Global, holding 50%. DH Global is a company in which Chairman Lee Jeong-kwon holds 67.79%. DH Global is also currently the largest shareholder of DH Autoware, holding 37.21%. This merger unites the two companies under the control of DH Global.

Once the merger is completed, Chairman Lee's control over DH Autoware is expected to increase. Chairman Lee holds shares of DH Autoread not only through DH Global but also through DH Precision and in his own name. These are 30,000 shares (15.79%) and 65,000 shares (34.12%), respectively. DH Precision is also a company where Chairman Lee is the largest shareholder.

After the merger, DH Global, Chairman Lee, and DH Precision will receive 2,281,224 new shares of DH Autoware, accounting for 7.4% of the total shares. As a result, the shareholding ratio of Chairman Lee and his affiliates in DH Autoware will increase to 41.86%.

In this merger, the merger price per share of DH Autoware was set at 2,948 KRW based on the recent market price. The unlisted company DH Autoread set its merger price at 35,395 KRW per share by estimating future earnings value and asset value. The corporate value of DH Autoread was evaluated at 6.7 billion KRW.

The valuation of DH Autoread increased by more than 35% in about a year. In June last year, DH Precision purchased 30,000 shares of DH Autoread at 26,000 KRW per share. Earlier, at the end of 2021, the per-share valuation of DH Autoread was 26,924 KRW.

During this period, DH Autoread's performance declined. In 2020, it recorded sales of 13.8 billion KRW and operating profit of 800 million KRW, but in 2022, sales dropped to 11 billion KRW and operating profit to 100 million KRW. In 2022, it also recorded a net loss of 500 million KRW, turning to a deficit.

Nevertheless, the reason the company’s value could be evaluated more than 35% higher in one year is due to assumptions about DH Autoread’s overseas sales. The company announced that in the second half of last year, it secured a jig equipment line worth 3 billion KRW at the Stellantis plant in India, and based on this, it plans to expand into India, Uzbekistan, Kazakhstan, and other countries.

Accordingly, overseas sales, which were nonexistent in 2020 and 2021 and about 3.1 billion KRW last year, are expected to reach 13 billion KRW this year and 21.3 billion KRW next year. The corporate value was evaluated by converting this revenue estimate into present value.

For Chairman Lee Jeong-kwon to receive more shares of DH Autoware, it is advantageous for DH Autoware’s stock price to be low and DH Autoread’s value to be high. By absorbing and merging DH Autoread in this way, Chairman Lee was able to lower the overall acquisition cost of DH Autoware. Chairman Lee became the largest shareholder last July by purchasing existing shares of DH Autoware from Stick PE and conducting a paid-in capital increase. The total investment amount was 40.4 billion KRW, at about 3,813 KRW per share. Considering the merger price of DH Autoware this time is 2,948 KRW, he acquired shares at about 20% lower than last year.