Potential Sale of SK Specialty and Deleveraging of the SK Group - Impact on SK Inc and NAV Analysis

• In this insight, we discuss the potential sale of SK Specialty by SK Inc (034730 KS) which owns 100% stake in the company.

• If SK Inc could sell SK Specialty at about 3 trillion won to 4 trillion won, this could reduce significantly reduce debt burden of SK Inc.

• Our base case NAV value per share for SK Inc is 203,288 won per share, representing 38% upside from current levels.

Among the top 10 chaebols in Korea, two in particular (SK Group and Lotte Group) are in the process of deleveraging as they need to strengthen their balance sheets after aggressive increase of leverage to boost M&As in recent years.

In this insight, we discuss the potential sale of SK Specialty by SK Inc (034730 KS) which owns 100% stake in the company. At the end of 1H 2024, SK Inc had 12.4 trillion won in debt so if SK Inc could sell SK Specialty at about 3 trillion won to 4 trillion won, this could reduce significantly reduce debt burden of SK Inc.

SK Inc is considering on selling the controlling stake in SK Specialty for around 3 trillion won to 4 trillion won (US$2.3 billion to US$3 billion). SK Inc has decided to receive preliminary bids (letter of intent - LOI) from potential buyers on the 13 September. If the sale occurs at a market value of about 3.6 trillion won, this would represent about 15x SK Specialty's EBITDA in 2023. SK Inc is considering on various options on selling SK Specialty including selling a partial stake or the entire 100% amount.

Potential buyers of SK Specialty include private equity firms including Hahn & Company, Brookfield Asset Management, and Kohlberg Kravis Roberts (KKR). SK Specialty manufactures gases used in the production of semiconductors, display and solar cells. The company's major customers include SK Hynix (000660 KS), Samsung Electronics (005930 KS), and LG Display (034220 KS).

SK Specialty Main Products

Established in 1982, SK Specialty was formerly called SK Materials. SK Specialty is the world’s largest maker of nitrogen trifluoride (NF3), a gas used as a cleaning agent in semiconductors, with a 40% global market share. The company is also one of the largest global producers of tungsten hexafluoride (WF6), primarily used in the manufacturing of integrated circuits, with an annual production capacity of 2,000 tons. SK Specialty is also the world’s second-largest manufacturer of monosilane (SiH4), which is used to produce silicon-based anodes for electric vehicle batteries.