With Samsung’s plans opaque, investing in Cheil Industries is a crapshoot

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With Samsung’s plans opaque, investing in Cheil Industries is a crapshoot

Jung Hyang-sook, a 66-year-old housewife in Seoul, knew nothing about Cheil Industries when she bought shares in the theme-park operator controlled by Samsung Group, Korea’s biggest conglomerate.

“It was a blind investment,” said Jung, who purchased 35 shares in Cheil’s December initial public offering. “I only bought this because of the name of Samsung and people say this will become a very important one in the group.”

Jung’s lack of insight into Cheil is hardly unique. Nomura Holdings Inc., Japan’s biggest brokerage, says the company is impossible to analyze as Samsung’s controlling family keeps quiet on what role Cheil would play in a group restructuring. Brokerages who do give share-price targets are divided, with forecasts ranging from 54 percent gain to a 30 percent drop.

Speculation that Samsung Group, which accounts for about a quarter of Korea’s $1.2 trillion stock-market capitalization, will revamp its ownership structure has intensified since Lee Kun-hee, head of the founding family, was hospitalized in May. While bulls are betting Cheil will become the holding company of the chaebol, bears say there’s too much guesswork to justify a valuation that’s the priciest among Samsung’s 17 listed units.

“Cheil is un-researchable,” said Michael Na, a Seoul-based strategist at Nomura. “The company’s value basically depends on what the owners end up doing and no one knows the content of their minds.”

Cheil declined to comment on its share price and what role it may take in any restructuring by Samsung Group. Cheil complies with disclosure rules and there’s no obligation so far for the company to explain Samsung Group’s business plan, Korea Exchange spokesman Kim Kyeong-deok said

The stock trades at 88 times projected 12-month earnings, more than four times the average of the other listed Samsung Group companies, after jumping 144 percent since its Dec. 18 IPO through Monday.

Cheil was established in 1963 and was previously called Samsung Everland. In 2013, it added fashion to its interests, which include theme parks, zoos, food catering and construction. The Kospi has risen 1.5 percent this year after dropping 4.8 percent in 2014. The nation’s economy grew last quarter at the slowest pace in more than two years.

Cheil rose 4.25 percent to 135,000 won in Seoul. The Kospi added 0.86 percent.

While Cheil has “good” businesses, its stock performance has already priced in becoming Samsung Group’s holding company, said Sinn Min-seok, a Seoul-based analyst at Credit Suisse Group AG. Sinn has an underperform rating on the stock, which he predicts will fall 23 percent over the next 12 months from Monday’s close.

Even some professional money managers who own Cheil shares say it’s unclear exactly how the company will create value for stockholders.

“We’re investing in unrealized future value,” said Huh Nam-kwon, chief investment officer at Shinyoung Asset Management, which oversees $12 billion and bought shares during the company’s IPO and first day of trading. “We don’t know how yet, but Cheil will eventually be at the top of Samsung Group.”

Samsung Group heir-apparent Jay Y. Lee, 46, is the largest Cheil shareholder with a 23 percent stake, while his two sisters each hold 7.75 percent and Samsung Electronics Chairman Lee has 3.45 percent, according to data compiled by Bloomberg.

Under a group restructuring, Cheil would probably be merged with part of Samsung Electronics to become the holding company for the entire group, Hyundai Securities analyst Jun Yong-ki wrote in a note on Dec. 22. Cheil would then receive brand-use fees and profit contributions from affiliates, said Jun, who has a buy rating on the stock and estimates it will gain around 54 percent over the next year.

A similar bet on rival Hyundai Motor Group went sour this month when the patriarch and his only son unexpectedly tried to sell a stake in a logistics affiliate Hyundai Glovis, dashing speculation Glovis would become the holding company for the group. Glovis fell 23 percent in the two days through Jan. 14 on the news, after surging 26 percent in 2014.

Whatever Samsung’s plans for Cheil, the stock is still overvalued, according to Kiwoom Securities analyst Park Joong-sun. Cheil has a market capitalization of 17.7 trillion won, making it the 13th-largest company in the 760-member Kospi. The stock is eight times more expensive than the benchmark index on an estimated price-earnings basis.

“It’s hard to explain the current market cap,” said Park, who cut his rating on the stock to underperform this month. “The stock is clearly overheating.”

Bloomberg

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