Kang Sung-boo Fund DB Hitech's 7.05% stake acquisition reason, after-hours limit

Outside of the 30-day period, DB Hi-Tech (000990) and DB (012030) hit the upper limit. DB Hi-Tech and DB hit the upper limit of KRW 67,200, up 9.98% from the closing price, and KRW 1,601, up 9.96%, respectively, after-hours. The reason for the upper limit is that there was a public announcement that KCGI acquired a 7.05% stake in DB Hi-Tech through Kang Sung-boo Fund. Let's find out why Kang Sung-boo Fund acquired a stake in DB Hi-Tech.

Undervalued DB Hi-Tech

The biggest reason why DB Hi-Tech is undervalued compared to UMC and TSMC of Taiwan, which are peer groups, is conservative investment (12 inches in the new process) and stock prices to avoid DB's holding company requirements. The biggest problem among investors is the pressing of stock prices to avoid DB's holding company requirements.

DB Holding Company Requirements

Under Korea's Fair Trade Act, if the total amount of assets is more than 500 billion won and the total value of the subsidiary's stake is more than 50% of the total amount of assets, it must be registered as a holding company. If DB Hi-Tech meets the requirements for the establishment of a holding company, DB will have to purchase an additional 17.58% stake in DB Hi-Tech because it has to secure a 30% stake in DB Hi-Tech (12.42% stake as of the end of December 22). However, DB does not have many cashable assets (12.2 billion won), so if DB Hi-Tech meets the requirements of its subsidiary, it will be in trouble.

Alternative to DB

(1) How To Secure An Additional 17.58% Stake In DB Hi-Tech (2) How To Sell Stake In DB Hi-Tech (3) How To Significantly Lower Shares Of Subsidiary (DB Hi-Tech) DB tried to avoid the requirements of holding companies by choosing a method of significantly lowering stock prices (3) among the above three methods and making the equity value significantly lower and less than 50% of the total assets. To this end, a physical division card was offered and the stock price was significantly lowered, allowing it to escape the requirements of the holding company.

Kang Sung-boo Fund Secures 7.05% Stake in DB Hi-Tech

On March 30, KCGI, known as Kang Sung-boo Fund, announced the acquisition of a 7.05% stake in DB Hi-Tech with the aim of "influencing management rights." The Kang Sung-bu Fund is an activist fund aimed at improving governance and returning shareholders. KCGI saw that DB Hi-Tech's corporate value is extremely undervalued compared to its competitiveness based on future growth and excellent market status. As a major shareholder of DB Hi-Tech, KCGI demanded the incineration of treasury stocks and the formation of an independent board of directors. KCGI said, "We welcome the company's announcement of a plan to expand dividends and buy back 100 billion won worth of treasury stocks, but treasury stock purchases should not be used to secure friendly shares," adding, "When treasury stocks are incinerated, they can be returned to shareholder value." Securing independence of the board of directors was also a requirement. KCGI proposed (1) the introduction of an intensive voting system consisting of independent outside directors appointed by general shareholders, (2) the appointment of members of the audit committee, and (2) the establishment of a compensation committee consisting of all outside directors. "DB Group should use the conversion to a holding company as an opportunity for sustainable growth by expanding its stake in a legitimate way through treasury stock purchase and incineration, additional equity purchases through its own financing, or stock exchange under a resolution at a shareholders' meeting." With KCGI securing a 7% stake, DB Hi-Tech is likely to be embroiled in a management dispute in the future.

A representative case of Kang Sung-bu fund investment

Representative examples of Kang Sung-boo Fund's investment include Hanjin KAL and Ostinfant. On November 15, 2018, Kang Sung-boo Fund announced the purchase of Hanjin KAL's stake. He appeared splendidly as the second-largest shareholder of Hanjin KAL. Since then, the stock price has risen more than five times due to Hanjin KAL's brother and sister dispute. Since then, in early 22, most of the shares were sold to Hoban Construction, earning considerable profits.