‘Stingy’ Payout at Korea Conglomerate Prompts an Investor to Act

(Bloomberg) --

When one of South Korea's conglomerates cut its dividend last month, its second-biggest shareholder was quick to protest.

KB Asset Management, a Seoul-based firm overseeing 59 trillion won ($50 billion) in assets, sent a letter to Hyosung TNC Co. earlier this week demanding that 30% of its free cash flow be paid to investors as dividends. With an almost 16% stake in the spandex maker, KB is its largest shareholder after the holding firm. It is protesting a cut in Hyosung's payout ratio to 9% from 20% at a time of growing profits.

Activism has been on the rise in Korea's stock market, one of the world's most discounted. Encouraged by the nation's biggest pension fund, which adopted a so-called stewardship code in 2018 to improve governance and increase shareholder payouts, investors -- including Paul Singer -- have taken an interest in the nation's companies, pushing for corporate changes.

Read more: Hedge Fund Makes Huge Bet on Korean Governance Change

“Since the stewardship code was introduced into the country, listed companies can't avoid setting a dividend policy any more,” KB said in a letter posted on its website March 3. “We want to know the company's plans for its future dividends, capital expenditure and debt repayment. We need an explanation on why they calculated the dividend this way.”

KB proposed a payout policy in its first letter to Hyosung in December 2018, to which the company responded it will pay “dividends at a rational level if the business improves,” according to the fund.

Hyosung's operating profit jumped to 323 billion won last year from 125 billion won in 2018. And the outlook for 2020 is positive thanks to an increase in production capacity, a decline in raw-material prices and a shutdown of underperforming Chinese rivals, according to Shinyoung Securities.

KB also criticized Hyosung Group, the parent company, for its “excessive” cash dividend payments to an unlisted subsidiary in which the group's chairman holds more than 50%. Most of the group's listed subsidiaries are “stingy” with their payouts, the fund said.

“Units of Hyosung Group, including Hyosung TNC, will continue shareholder-friendly policies,” Hyosung Group said in a text message. “Hyosung TNC needs to reduce its debt ratio to stabilize its finances. A cut in the debt ratio is a top priority, so we will prioritize paying back debt for now.”

KB adopted the stewardship code in December 2017 and asked for changes at several listed companies. One of them, K-pop agency SM Entertainment Co., declined its proposal for a revised dividend policy.

“Activism is rising in Korea, sparked by Paul Singer who target Hyundai Motor,” said Park Ju-gun, president of corporate-research firm CEOScore. “It's a good way for local funds to boost stock prices as well as promote their funds to the public by attacking the owner family. Honestly, it's not easy to win over owner families in Korea -- they have many supporting shareholders -- but the trend will keep rising this year.”

To contact the reporter on this story: Heejin Kim in Seoul at hkim579@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Cecile Vannucci

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