Tcha demands Kumho burn ‘excessive’ treasury stocks
Aiming to raise Kumho Petrochemical’s shareholder values, Tcha Partners Asset Management has urged the company to cancel its excessive amounts of treasury stocks and appoint an outside board member who can represent the interests of general shareholders, the activist fund said Monday.
During a press conference in Seoul, Kim Hyung-kyoon, the asset management firm’s director leading its special situations division, emphasized that the petrochemical company’s deepening undervaluation is attributed primarily to excessive amounts of treasury stocks, accounting for over 18.4 percent of the entirety of issued shares.
“Among all domestic listed companies with a market capitalization of over 3 trillion won ($2.2 billion), Kumho Petrochemical ranks third-highest in terms of the proportion of treasury stocks,” Kim said. “Retiring treasury stocks is the most effective and straightforward means to immediately enhance shareholder value of Kumho Petrochemical without additional expenditure of resources,” he added.
He explained that the market concerns that these massive treasury stocks could be sold at any time to defend the company’s management control has been one of the core reasons behind the stock’s extended underperformance.
As of the end of January this year, the stock price of Kumho Petrochemical has dropped by approximately 58 percent, compared to its
Concerns over a potential disposal of treasury stocks at a low price can significantly undermine shareholder
value.
peak over the past three years. As a result, the firm’s total shareholder return (TSR) remains at the lowest level, when compared to its overseas counterparts of the same industry as well as leading domestic chemical companies.
“Concerns over a potential disposal of treasury stocks at a low price can significantly undermine shareholder value. In addition, lower stock prices are in general advantageous to controlling shareholders who aim to increase their ownership stake to defend their management right. Therefore, there exists an incentive for controlling shareholders to suppress stock price increases, if they hold a large amount of treasury stocks,” Kim explained, asking the company to retire the treasury stocks over the course of the next two years.
The asset management company also recommended Kim Kyung-ho, the chairman of the board of KB Financial Group, as an outside director for Kumho Petrochemical’s audit committee to represent the interests of ordinary shareholders, who hold more than 81 percent of shares in the petrochemical company altogether.
The business professor at Hongik University is recognized for his expertise in accounting. While his five-year term at KB Financial’s board is to end later this month, he’s been acknowledged for his contributions in raising shareholder value at KB Financial by canceling treasury stocks.
“All 10 board members, including seven outside directors, are considered to represent the interests of
management, as none of them have ever raised opposing views on the company’s previous decisions that wreak havoc on shareholder value of the stock,” Kim explained, stressing the need for at least one spot on the 10-member board being replaced with an outside director who can represent the interests of general shareholders.
The activist fund also claimed that its shareholder proposal moves to raise the shareholder value of the petrochemical company are not aimed to seek managerial control.
In mid-February, former Kumho Petrochemical Senior Vice President Park Chul-whan, the largest individual shareholder with a 9.1 percent stake, announced that he teamed up with Tcha Partners by entrusting the activist fund with the right to submit shareholder proposals.
Park Chul-whan is a nephew of Kumho Petrochemical Chairman Park Chan-koo, who holds a 7.14 percent stake, and also a cousin of Kumho Petrochemical President Park Jun-kyung, the son of Chairman Park, owning a 7.65 percent stake.
“Management disputes may have existed in the past, but our current shareholder proposals clearly target to represent the 81 percent of ordinary shareholders, aiming to add just one outside director to oversee the current management fairly and pressure the company to cancel the excessive treasury stocks,” Kim said.
Regarding a question over the activist fund’s goal in the alliance with Park against Kumho Petrochemical, Kim said the asset management firm hopes to contribute to improving the country’s corporate governance, particularly by tackling listed firms’ chronic problem of holding excessive treasury stocks as a means to defend the interests of controlling shareholders.
“We do not intend to sell the firm’s stake in Kumho Petrochemical for short-term gains. We have long been thinking that one of the biggest reasons for undervaluation in the Korean stock market lies in the treasury stock system. If a positive change is induced from this case, it will impact our other portfolio companies’ stock prices,” Kim said.
In the past, Tcha Partners has submitted various shareholder proposals, including ones on Namyang Dairy and Sajo Oyang, asking them to carry out measures to raise shareholder value.