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SK Holdings 2017 Investment Report Summary

Core Content

SK Holdings (034730) is the holding company of the SK Group, which is experiencing a rise in value due to increased oil prices and a semiconductor industry boom. The report reinstates a BUY rating with a target price of KRW300,000, based on a sum-of-the-parts valuation that discounts the value of stakes in subsidiaries by 20%. Shares are currently trading at KRW229,500, offering a 30.7% upside potential.

Main Points

1. SK Group Value Growth

• The value of the SK Group is increasing due to:
  • Rising oil prices.
  • A booming semiconductor industry.
• The report suggests that an overhaul of group governance could provide additional catalysts, particularly by granting SK Hynix greater M&A flexibility.

2. SK E&S Turnaround

• SK E&S, a major revenue source for SK Holdings, has been struggling since 2013 due to:
  • Increased competition from coal and nuclear power plants.
  • Low oil prices.
• Expected turnaround in 2017:
  • Operating profit is projected to rise by 108% to KRW321.7 billion.
  • Factors include:
    • Increased system marginal prices (SMPs).
    • Higher capacity with new plants in Paju and Wirye.
    • Environmental concerns favoring LNG over coal and nuclear.
• The company is valued at KRW3.8 trillion based on a 12x 2017 P/E.

3. Drug Successes at SK Biopharmaceuticals

• SK Biopharmaceuticals is expected to gain approval for two innovative drugs:
  • Cenobamate for epilepsy.
  • SKL-No5 for sleep disorders.
• The drugs are anticipated to be best-in-class, and the company is expected to directly sell them, unlike most Korean firms that out-license.
• The drug pipeline is estimated to be worth KRW1.57 trillion, with SK Biopharm's value at KRW1.8 trillion.

4. Group Governance Overhaul

• A proposed restructuring of SK Group governance could benefit minority shareholders by aligning their interests with the largest shareholder.
• This could involve transferring SK Telecom's stake in SK Hynix to SK Holdings, enabling the holding company to collect dividends and allowing SK Hynix to acquire partially-held subsidiaries.
• The report suggests that splitting SK Telecom into operating and holding entities could increase SK Holdings' stake in the telco.

Key Financial Data

Investment Points

• SK E&S:
  • Expected to see a significant increase in operating profit due to rising SMPs and capacity payments.
  • New plants in Paju and Wirye will increase power-generating capacity by 149% in 2017.
• SK Biopharmaceuticals:
  • Likely to receive FDA approval for two innovative drugs in 4Q17.
  • Direct sales of these drugs could boost the company's value significantly.
• Group Governance Overhaul:
  • Could improve shareholder alignment and provide M&A flexibility for SK Hynix.
  • Expected to increase SK Holdings' stake in SK Telecom.

Market Performance

• Current Price: KRW229,500
• Target Price: KRW300,000
• Market Cap: KRW16.1 trillion / USD14.2 billion
• 52-Week High/Low: KRW245,000 / KRW200,000
• Avg Daily Trading Value (60-day): KRW26.2 billion / USD23.0 million
• 1-Year Performance:
  • SK: 0.2%
  • Vs Kospi: -5.8%

Summary of Key Drivers

• Rising oil prices have positively impacted system marginal prices (SMPs), improving profitability for SK E&S.
• Environmental regulations are shifting electricity generation toward LNG, benefiting SK E&S.
• Corporate governance changes could provide additional value through M&A flexibility for SK Hynix.
• FDA approvals for SK Biopharmaceuticals are expected to boost its valuation.

Conclusion

The report highlights the potential for SK Holdings to benefit from the rising value of its subsidiaries, particularly SK E&S and SK Biopharmaceuticals, as well as potential governance changes. The BUY rating and target price of KRW300,000 reflect the analysts' belief in the company's future growth and value creation.