[Business & Issues] Hanwha Aero's Stock Rise Due to 'Spin-off'... Why It Is Called a Means of Primogeniture Succession

⑭Surface Focus on Defense Industry
Behind the Scenes, Vice Chairman Kim Dong-gwan Strengthens Affiliate Control
Stock Volatility Increases... "Attention on Split Value"

Kim Dong-kwan, Vice Chairman of Hanwha Group

Hanwha Aerospace has officially announced its spin-off, and recently its stock price has been experiencing sharp fluctuations, increasing volatility. On the surface, there is optimism that Hanwha Aerospace will focus more on its core defense and aerospace industries, leading to enhanced business sophistication. There is also anticipation that the defense industry sector will bring significant profitability amid the prolonged conflicts in Ukraine and the Middle East.

Separately, some investors believe that the spin-off will further solidify Vice Chairman Kim Dong-kwan's control over the group's affiliates. It is seen as a means of primogeniture succession through Hanwha Aerospace's spin-off. This is also why the stock prices of listed affiliates involved in succession, not just Hanwha Aerospace, are moving together.

Hanwha Aerospace Spin-Off: "Focusing More on Core Areas"

[Image source=Yonhap News]

Hanwha Aerospace will hold an extraordinary general meeting of shareholders on August 14 to approve the spin-off as a key agenda item. The plan is to spin off the Industrial Solutions division, which includes artificial intelligence (AI) solutions and next-generation semiconductor equipment businesses, into a newly established holding company called 'Hanwha Industrial Solutions.' This new company will have Hanwha Vision and Hanwha Precision Machinery as 100% subsidiaries.

Hanwha Aerospace aims to enhance its business sophistication centered on the core defense industry through the business restructuring accompanying the spin-off, positioning itself as a global comprehensive defense company. Hanwha Vision and Hanwha Precision Machinery also aim to achieve management efficiency through independent operations.

The spin-off ratio between Hanwha Aerospace and Hanwha Industrial Solutions is 9:1. The goal is to complete the corporate split within September following the August extraordinary shareholders' meeting. The newly established Hanwha Industrial Solutions will be re-listed after the split and will later merge with Hanwha Vision. Once this process is completed, the governance structure will be reorganized so that two intermediate holding companies, Hanwha Aerospace and Hanwha Industrial Solutions, will be placed under Hanwha Corporation, which serves as the holding company within the Hanwha Group.

Alongside Hanwha Aerospace, some business restructuring is also underway within the Hanwha Group. On the 3rd, Hanwha Group decided to transfer the offshore wind power business of Hanwha Corporation's construction division and the global plant business to Hanwha Ocean. Additionally, through a physical spin-off of Hanwha Momentum division, Hanwha Solutions will acquire the solar equipment business. This disperses the major core businesses that were concentrated in Hanwha Corporation to respective affiliates to strengthen expertise by sector.

Vice Chairman Kim Dong-kwan Strengthens Control Over Key Affiliates... Behind Governance Restructuring

Restructuring of Hanwha Group's Governance Following Hanwha Aerospace's Demerger [Image Source=NH Investment & Securities Research Center]

While the main goal of this spin-off is ostensibly to focus on the defense and aerospace industries, some are paying closer attention to Vice Chairman Kim's strengthened control over the group's affiliates following this governance restructuring. This is because the companies highlighted as key affiliates in this split and business restructuring are all under Kim's influence.

Vice Chairman Kim serves as CEO of the Strategy Division of Hanwha Group and concurrently as CEO of the Strategy Divisions of Hanwha Aerospace and Hanwha Solutions. He is also a non-executive director of Hanwha Ocean and the largest shareholder of Hanwha Energy (holding 50%). He is registered as an executive and shareholder in all major core business affiliates within the group, including defense, aerospace, solar, and energy sectors.

The increased possibility of Hanwha Corporation transitioning into a holding company also suggests that Kim's control within the group will strengthen. At the regular shareholders' meeting held on the 26th of last month, Hanwha Corporation amended its articles of incorporation to add "business of controlling the business content of subsidiaries through ownership of shares (subsidiaries where the company holds majority voting rights or effectively controls)" as a business purpose.

Vice Chairman Kim holds 4.91% of common shares and 3.75% of preferred shares in Hanwha Corporation, and Hanwha Energy, where he is the largest shareholder, holds 9.70% of common shares and 5.10% of preferred shares in Hanwha Corporation. Considering Hanwha Energy's shares, Kim holds the second-largest stake after Chairman Kim Seung-yeon (22.65% common shares, 6.40% preferred shares).

Hanwha Aerospace Stock Volatility Increases: "Expecting Highlighted Value of Spin-Off Companies"

Amid the corporate spin-off and governance restructuring, Hanwha Aerospace's stock price, whose position within the group has been further elevated, is experiencing significant fluctuations. The stock price, which was 129,700 KRW per share at the beginning of the year, surged 85.81% to 241,000 KRW on the 2nd of this month when the spin-off news was reported. It then dropped 11.82% after the spin-off plan was officially announced on the 5th.

Although there are some concerns about earnings contraction due to the spin-off, experts predict a continued mid- to long-term upward trend in the stock price. Wi Kyung-jae, a researcher at Hana Securities, said, "If Hanwha Vision and Hanwha Precision Machinery are excluded from Hanwha Aerospace's earnings following the spin-off, sales are expected to decrease by about 14.8% and operating profit by about 19.4% compared to before the split. Even though earnings contraction is inevitable, this decision focuses on enhancing the business sophistication of the surviving company. More attention should be paid to the possibility of removing the discount factor caused by business mixture rather than the downside risk of the stock price."

There is also analysis that the highlighted earnings value of the spun-off companies brightens the stock price outlook. Lee Jae-kwang, a researcher at NH Investment & Securities, explained, "Theoretically, the spin-off does not affect shareholder value, but practically, the value of Hanwha Vision and Hanwha Precision Machinery is expected to be highlighted. The newly established company is expected to lead growth by investing in Hanwha Precision Machinery's high-growth industry based on Hanwha Vision's stable earnings, and the development of the hybrid bonder, a semiconductor equipment for HBM, is anticipated to attract attention."