The Board of Directors
SK Chemicals Co., Ltd.
310, Pangyo-ro, Bundang-gu, Seongnam-si, Gyeonggi-do, 13494 Korea

Attention:
Mr. Jeon Kwang-Hyun
Mr. Kim Cheol
Mr. Moon Sung-Hwan
Mr. Park Jeong-Soo
Mr. Cho Hong-Hee
Mr. An Yang-Ho

 

15 December, 2021

 

Dear Mr. Jeon and other Members of the Board,

On 8 September, we wrote to you on behalf of various investment funds that own shares in your company.

We expressed our concern over the extreme discount to net assets at which your shares trade on the Korea Exchange, and we proposed various measures to reduce the discount, including a sale of SK Bioscience shares upon the expiry of the lockup, or a share buyback.

We are grateful for your letter of 1 October, in which you described ongoing efforts by the company to examine “various practical ways to increase […] shareholder value.”

Subsequently, your company announced several new initiatives, including a new dividend policy, a stock bonus issue, and a sale of the loss-making polyphenylene sulphide business.

While these measures are a welcome sign that SK Chemicals’ board and management are responsive to feedback from the shareholder base, in Metrica’s view they fall short of what is required to drive a true, long-lasting improvement in shareholder returns. This is because they fail to address the main issue – that is, your company’s excessively large stake in SK Bioscience.

The market appears to agree. At the time of our previous letter, your shares were trading on the Korea Exchange at an 83% discount to net assets[1]. Today, the discount is almost unchanged at 82%.

It is no secret as to why the discount exists, in Metrica’s opinion:

  1. Prior to March 2021, SK Chemicals’ shareholders owned 100% of a successful vaccine business – SK Bioscience – with dramatically improving prospects due to the pandemic.
  2. SK Chemicals sold 7.65 million of its SK Bioscience shares at ₩65,000 in the March IPO.
  3. These shares are valued in the market at ₩258,000 today, an increase of four times in just nine months.
  4. If the SK Bioscience IPO had not happened, SK Chemicals’ share price would now conceivably be ₩936,000 instead of ₩149,000[2].
  5. In other words, SK Chemicals shareholders may have missed out on gains of up to ₩13.9 trillion[3].
  6. Post the IPO, although SK Chemicals maintains a 68% stake in SK Bioscience, there is no guarantee that dividends paid by the latter will flow to SK Chemicals’ shareholders, as the new dividend policy appears to apply only to non-consolidated earnings.
  7. SK Chemicals is now a less liquid stock[4] with a lower market capitalisation[5], and both factors are associated with lower valuation multiples[6].
  8. Around 93% of SK Chemicals’ net asset value is derived from its exposure to SK Bioscience[7]. It means there are effectively two stocks listed on the Korea Exchange with almost identical underlying fundamentals. All else being equal, investors in the Korean market generally prefer operating companies over holding companies[8], causing the latter to trade at a valuation discount.

Since the publication of our first letter to you, Metrica has received messages of support from hundreds of SK Chemicals shareholders, both retail and institutional, Korean and non-Korean.

Many of these shareholders have expressed unhappiness at the handling of the SK Bioscience IPO process, and nearly all of them are dissatisfied with the current market valuation of SK Chemicals shares.

Many shareholders also agree with Metrica that the recently announced initiatives are insufficient to address these issues.

Metrica therefore calls on the board and management of SK Chemicals to launch a formal strategic review within the next two months, aimed at providing shareholders with opportunity to realise the true and fair value of their investment in the company.

SK Chemicals must consider taking actions such as the following:

  1. Selling 14 million SK Bioscience shares and paying a special dividend with the proceeds, leaving SK Chemicals with a 50.1% stake in its subsidiary.
  2. Spinning off 0.8 SK Bioscience shares for each SK Chemicals share, which would also leave SK Chemicals with a 50.1% stake.
  3. Buying back SK Chemicals shares at the current price, which represents an effective price-to-book multiple of less than 0.2 times, and cancelling the shares.

Several parties have asked Metrica to call an extraordinary general meeting, to give all shareholders – including those representing the 65% of shares that are not affiliated with the SK Group – an opportunity to express their views directly on the above proposals, e.g. via a resolution to elect new directors that would support them.

While not ruling anything out, Metrica believes that the best outcome for all stakeholders would likely be for the current directors and management, who should know the company better than anyone else, to address these issues themselves within the current governance framework.

Metrica estimates that a successful restructuring of the SK Bioscience stake along the lines described above could unlock value of around ₩3.0 trillion[9], the vast majority of which would flow to Korean investors, who own 83% of your company[10].

In a time of increasing interest in ESG investment, Metrica believes such an outcome would be extremely well received by the market and improve the perception of the entire SK Group as well as its founding family.

Yours sincerely,

Damian L. Edwards

Damian L. Edwards
Chief Investment Officer
Metrica Partners Pte. Ltd.

[1] Metrica’s analysis. Assumes market value for the stake in SK Bioscience, and book value for the other businesses, which is comparable to the valuation derived by various securities company research analysts surveyed by Metrica.

[2] Assuming SK Chemicals still held 60 million shares of SK Bioscience and valuing the other businesses at one times book (which is close to the multiple at which SK Chemicals’ shares traded in the two most recent pre-pandemic years of 2018 and 2019 – source: Bloomberg).

[3] SK Chemicals shares outstanding times (theoretical SK Chemicals share price without the IPO less current share price).

[4] Average daily value traded, 20-day average: ₩196 billion for SK Bioscience, ₩19 billion for SK Chemicals (source: Bloomberg).

[5] Market capitalisation: ₩19.7 trillion for SK Bioscience, ₩2.6 trillion for SK Chemicals (source: Bloomberg).

[6] Source: Metrica research.

[7] Source: Metrica research.

[8] Source: Metrica research.

[9] Source: Metrica research.

[10] Source: Bloomberg.