Korea Zinc: Impressive Capital Return Plans and a Big Price Gap Between Korea Zinc and Young Poong

• On 7 August, Korea Zinc (010130 KS) announced several impressive capital return plan that should help to increase shareholder value.

• The separation of Korea Zinc between the Choi and Jang families has been in progress in the past several years. The exact timing of when this occurs remains uncertain.

• Our NAV Analysis of Young Poong is NAV per share of 470,065 won, representing a 52% upside from current levels.

Korea Zinc: Impressive Capital Return Plan

On 7 August, Korea Zinc (010130 KS) announced several impressive capital return plan that should help to increase shareholder value. First, it announced that its board of directors has approved the decision to implement an interim cash dividend of 10,000 won per common share, representing 205.5 billion won. The interim dividend amount represents 71.4% of net profit in 1H 2024. This is the second consecutive year that the company has decided to pay out interim dividends.

• In February 2023, Korea Zinc announced that it would maintain a dividend payout ratio of 30% or more based on non-consolidated net profit for the next three years and implement an interim dividend once a year.

• At the end of 2023, Korea Zinc announced that it would use a total of more than 4 trillion won for shareholder returns over the next 10 years (about 400 billion won per year). Korea Zinc currently has a market cap of 10.5 trillion won. Thus, the shareholder return would represent 3.8% of its market cap on an annual basis (400 billion won/10.5 trillion won).

• Share Buyback Program - Korea Zinc has also decided to buyback shares worth about 400 billion won in order to improve ROE and enhance corporate value.

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Separation of Korea Zinc Between the Choi and Jang families

The separation of Korea Zinc between the Choi and Jang families has been in progress in the past several years. The history of Young Poong Group goes back nearly 75 years ago in 1949 when two young men Ki-ho Choi and Byeong-hee Jang founded Young Poong. They were friends and business partners.

• The crown jewel of the Young Poong Group is Korea Zinc which was established in 1974. A main reason why Young Poong and Korea Zinc have become more interesting in recent years have been because there are credible signs that the two families (Choi and Jang) may finally be ready to form two separate business groups.

• Young Poong Group and Korea Zinc could be separated from each other with the Choi family controlling Korea Zinc and related entities and Jang family controlling Young Poong and related affiliates. Before the separation takes place, each family wants the best deal so this is where the uncertainty comes into play as the exact details of how this separation takes place has not been set in stone.

• Korea Zinc (010130 KS) is mainly engaged in the manufacture and sale of non-ferrous metals including zinc, lead, gold, silver, and sulphuric acid. Korea Zinc is especially viewed positively given its gold and silver business.

• Young Poong Group specializes in mining, electronics, real estate, and books. It is among the top 30 conglomerates in Korea. Young Poong (000670 KS) currently has a market cap of 568 billion won. Young Poong's 25.45% stake in Korea Zinc is worth 2.7 trillion won, which is 4.8 times Young Poong's market cap. To put it another way, Young Poong's market cap is only 21% of its stake in Korea Zinc. Even if we attach at 50% discount on Young Poong's stake in Korea Zinc, this would still be worth 1.4 trillion won (238% of Young Poong's market cap).

• The bullish case for Young Poong and Korea Zinc would be that once they are officially separated, there could be greater management transparency and ownership structure between the Jang and Choi families which could boost overall efficiency and capital returns.

• For more than a decade, the Jang family has exercised practical control over the Young Poong Group, and the Choi family has been in control of Korea Zinc's management.

• In terms of governance, the independence of the two families could be achieved by swapping the Young Poong and Korea Zinc shares.

• Despite the repeated calls for separation of Korea Zinc between the Jang and Choi families, the exact timing of when this would occur remains uncertain. In fact, due to the recent sharp underperformance of Young Poong relative to Korea Zinc, any kind of a major share swap does not likely in the near term since this would be negative to the major shareholders of Young Poong Corp.