Mando plans big affiliate investment

Mando, Korea’s third-largest maker of car parts, is defying government efforts to limit the dominance of chaebol with plans to invest 378.6 billion won ($337 million), more than its operating income last year, in Halla Engineering & Construction, its biggest shareholder.

President Park Geun-hye has vowed to limit cross shareholdings to prevent the chaebol from practices the International Monetary Fund has said contributed to the nation’s 1997-99 financial crisis. Midas International Asset Management said it would sell its stake in Mando, while at least nine brokerages lowered their investment ratings on the stock on Monday.

“Investors are up in arms, and I expect shares to continue struggling for some time,” Lee Sang-hyun, an analyst at NH Investment & Securities. “The investment has nothing to do with Mando’s main business of making auto parts, and it also goes against the new government’s policy to ban cross shareholdings.”

Both companies have Chung Mong-won as chairman. Mando is 20 percent owned by Halla, whose biggest shareholder is Chung. Mando owns 5.4 percent of Halla through a wholly owned unit. Chung is a cousin of Hyundai Motor Chairman Chung Mong-koo.

Halla Group, the chaebol to which Mando and Halla belong, declined to allow their executives to be interviewed. “Through the share sale we expect the whole Halla Group’s stability to improve together with the mother company,” it said Monday in an e-mailed response to questions.

“This issue clearly invades shareholders’ profits,” said Midas Chief Executive Officer Heo Pil-seok. Midas oversees about $5.4 billion and owns more than 20,000 Mando shares.

“The investment is a big amount compared with Mando’s size, and also it’s questionable whether things will end at this,” Heo said. “The right thing to do is empty out our holdings.”

Korea’s National Pension Service, the nation’s biggest investor with about $350 billion in assets as of January, said it will review the Mando case “in a direction that boosts shareholders’ value, and react accordingly.”

Chaebol have used cross shareholdings to control their companies while holding minority stakes.

The government will ban new cross shareholdings and strengthen the voting rights of state-owned pension funds, the Finance Ministry said last month.

Mando said April 12 that it and wholly owned unit Meister plan to buy new Halla shares. The amount being invested is higher than this year’s 320 billion won estimated operating income, according to the average of 27 analysts, and is 76 percent greater than Mando’s cash and short-term investments on Dec. 31.

“Investors have no reason to hold Mando, a company that would invest an amount worth a whole year of operating profit into a struggling construction company when it should be concentrating on its auto-parts making business,” said Shin Chung-kwan, an analyst at KB Investment & Securities.

Halla posted a net loss of 239 billion won for last year and an operating loss of 202.2 billion won, according to data compiled by Bloomberg.

“The biggest concern for investors is that this may not be the end, that Halla Engineering may need yet another investment in six months, a year’s time,” said Shin.

Bloomberg