Key Investment Strategy Report on Holding Companies as Inheritance Tax Reform Takes Shape
1. Overview and the shift in market paradigm
The possibility is emerging that the practice of major shareholders deliberately suppressing share prices, a chronic problem in the Korean stock market, may come to an end.
Until now, major shareholders facing management succession have tended to deliberately keep their companies' share prices low to reduce the burden of inheritance and gift taxes.
However, as a bill is being pushed to change the basis for taxation from a company's market value, i.e. its share price, to its book value, i.e. its net asset value, the market landscape is fundamentally changing.
2. A new mechanism driving share prices up
If taxes are levied based on book value, the tax-saving benefit of keeping share prices low disappears at a stroke for major shareholders.
On the contrary, raising the share price as high as possible in line with corporate value becomes absolutely advantageous for maintaining control, since they would then need to sell only a small portion of their holdings when raising cash to pay inheritance tax in the future.
This means that the interests of major shareholders and those of ordinary investors become perfectly aligned around a single goal: a rising share price.
3. Undervalued holding companies with imminent succession to watch closely
Attention should be paid to key holding companies whose share prices trade far too low relative to book value, even though their group heads are advanced in age and management succession issues are just around the corner.
Hanwha
It has entered the phase where the third-generation management succession is getting into full swing. Restructuring of businesses across the group is actively under way, and it is a point at which enhancing the holding company's corporate value is essential to raise funds for succession. Its share price is very low relative to book value.
CJ
A company that urgently needs to reorganize stakes and raise funds for fourth-generation succession. Its current share price is extremely undervalued relative to book value, making it a key candidate in which the major shareholder's will to boost the share price could manifest most strongly if the tax law is revised.
GS
Its chairman is advanced in age, and it faces the task of clearly establishing its succession structure. As a holding company with traditionally high-quality asset value, it could come under strong value-up pressure if book-value taxation is introduced.
4. Companies to be cautious about or avoid
There are clearly also companies that should not be approached indiscriminately just by riding on the positive theme of inheritance tax reform.
Holding companies whose succession is already complete
Since the immediate issue of paying enormous inheritance taxes has been resolved for the major shareholder, there is little strong incentive to sharply boost the share price in the short term.
Companies with a history of split-off listings of lucrative subsidiaries
Companies with a history of physically splitting off and listing core business divisions have had the inherent value of the holding company damaged. Companies with governance structures that infringe on investor value will find it difficult to fully benefit from the legal revision.
Overvalued companies whose share prices are already high relative to book value
Even if the basis for taxation changes to book value, if the current share price is already well above book value, the issue will not act as an additional driver of share price gains.
5. Conclusion
This push for inheritance tax reform is a powerful trigger that could resolve the discount on the Korean stock market. As it is tied to succession, the biggest concern of major shareholders, a preemptive analysis of selected holding companies and a split-buying approach are highly effective.