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SK Holdings Summary

Core Content

SK Holdings is being recommended with a BUY rating and a KRW300,000 target price, representing a 30.7% upside from the current price of KRW229,500. The firm is valued using a sum-of-the-parts basis with a 20% discount on the value of stakes in subsidiaries. The analysis highlights the growing value of the SK Group due to rising oil prices and a booming semiconductor industry, along with potential catalysts such as the turnaround of SK E&S, drug approvals by SK Biopharmaceuticals, and a corporate governance overhaul that could enhance shareholder value.

Key Investment Points

1. SK E&S Turnaround

• Overview: SK E&S is a key subsidiary involved in city gas distribution and electricity generation through LNG plants.
• Performance: Earnings have been sluggish since 2013, but are expected to turn around in 2017.
• Drivers of Turnaround:
  • Increase in system marginal prices (SMPs) and Kepco capacity payments.
  • Expansion of power-generating capacity with new plants in Paju and Wirye.
  • Environmental concerns leading to reduced reliance on coal and nuclear plants in favor of LNG.
• Expected Operating Profit: KRW321.7b in 2017, a 108% increase from 2016.
• Dividend Contribution: SK E&S contributes a significant portion of dividends to SK Holdings, with a payout ratio above 80%.

2. Drug Successes at SK Biopharmaceuticals

• Pipeline: Expected to gain approval for two innovative drugs from the US FDA in 4Q17: Cenobamate for epilepsy and SKL-No5 for sleep disorders.
• Potential: Cenobamate is expected to become a best-in-class drug.
• Sales Strategy: SK Biopharmaceuticals is anticipated to directly sell the drug, unlike most Korean firms that out-license new drug candidates.
• Pipeline Value Estimate: KRW1.57t for the drug pipeline.
• Company Value Estimate: KRW1.8t for SK Biopharmaceuticals.

3. Group Governance Overhaul

• Objective: To enhance M&A flexibility for SK Hynix.
• Impact: Benefits minority shareholders in SK Holdings by aligning their interests with the largest shareholder.
• Proposal: Transfer SK Telecom's stake in Hynix to SK Holdings to enable dividend collection and the chipmaker to add partially-held subsidiaries.
• Catalyst: The split of SKT into operating and holding entities is seen as a possible way to achieve this.

Key Financials

Market Position

• Market Cap: KRW16.1t/USD14.2b.
• Shares (float): 70,360,297 (48.4% of total shares).
• 52-week High/Low: KRW245,000/KRW200,000.
• Avg Daily Trading Value (60-day): KRW26.2b/USD23.0m.
• Comparison to Kospi: Positive performance in 1M, 6M, and 12M periods.

Key Changes

Valuation and Performance

• Upside: 30.7%.
• Discount to NAV: 19.4%.
• NAV Growth: Expected to rise due to rebounding subsidiaries.
• Peer Comparison:
  • LG Corporation: 48.7% discount to NAV.
  • CJ Corporation: 17.2% discount to NAV.

Subsidiary Value

• Value of Stakes in Subsidiaries:
  • SK Innovation: 33.4% ownership, market cap of KRW14,967b, book value of KRW18,305b.
  • SK Telecom: 25.2% ownership, market cap of KRW19,662b, book value of KRW16,116b.
  • SK Networks: 39.1% ownership, market cap of KRW1,922b, book value of KRW2,406b.
  • SKC: 42.3% ownership, market cap of KRW1,073b, book value of KRW1,524b.
  • SK Biopharm: 100% ownership, estimated value of KRW1,793b.
  • SK E&S: 100% ownership, estimated value of KRW3,756b.

Conclusion

The report outlines a positive outlook for SK Holdings, driven by the increasing value of its subsidiaries and the potential for a governance overhaul. The firm's key areas of focus include the turnaround of SK E&S, the approval of new drugs by SK Biopharmaceuticals, and the restructuring of SK Group governance. The BUY recommendation is based on the expectation of improved earnings and a rising valuation, with the target price of KRW300,000 reflecting these positive outlooks.