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Korea Event-Driven and Corporate Governance, DewPoint Research

Yeaseul Lim

Korea Event-Driven and Corporate Governance

Independent Equity Research Provider - South Korea

DewPoint Research

At DewPoint, we aim to convey a clear understanding of a company’s approach to capital allocation. As a matter of corporate governance, capital allocation reflects whose interests a company prioritizes when making management decisions. Given the Korean context, it comes down to a question of whether the company undermines the interests of minority shareholders for private benefits of controlling shareholders. This is what we focus on as a fundamental starting point in our research.
 
Capital allocation principles and practices provide the foundation for a company’s sustainable value creation. Thus, investors need to be alert to any possible distortions in capital allocation, especially when they take a long-term perspective. They also want to find safe stocks with committed management, no separation between ownership and control, and robust business models. We seek to fulfill such needs in a disciplined manner.
 
We also work as a representative of foreign investors who are willing to exercise active ownership in their investee companies. Our service may include identifying stocks that are fundamentally strong but vulnerable to activist attacks.

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We first started paying attention to <a href="https://www.smartkarma.com/entities/hanssem-co-ltd" target="_blank" data-smartkarma-citation="entities:18502:1" rel="noopener">Hanssem Co Ltd (009240 KS)</a> given its low ownership stakes of controlling shareholders (31.3%), large amounts of treasury shares (25.1%), and the increased presence of institutional investors (National Pension Service of Korea 6.4% &amp; Teton Capital Partners 8.6%). Also, the company saw a sharp fall in profits and stock prices last year. We thought that this stock might be vulnerable to activist investors and/or could be re-rated if the company cancels its treasury shares. As we conduct our research, we found possible risks associated with the company's business models as well as appropriation of corporate opportunity and tunneling. Some risks have recently become a reality. This insight seeks to alert investors to those risks and suggest stewardship priorities. I will come back later with more research on South Korea's housing market and Hanssem's business valuations.  
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<a href="https://www.smartkarma.com/entities/hanssem-co-ltd" target="_blank" data-smartkarma-citation="entities:18502:1" rel="noopener">Hanssem Co Ltd (009240 KS)</a> is not just an interior furniture manufacturer or home improvement company. It has embarked on aggressive expansion plans to be a platform that brings suppliers, designers, architects, contractors, and consumers under the brand name of Hanssem Rehaus. Yet, it must be overly ambitious - Hanssem is facing a brand reputation crisis and litigation risks. Below explains how this Hanssen Rehaus model works.
<ul class="">
<li>
Salespersons and designers who work at the Hanssem Rehaus flagship and agency stores are not employees of Hanssem but of local interior renovation stores. Those stores sign a cooperation agreement with Hanssem in order to rely on its strong brand reputations and operating resources. Instead, the stores are in charge of providing human resources, which helps Hanssem reduce labor costs. As a return, Hanssem provides them with an initial investment required for opening a new Rehaus agency store. After that, the stores have to bear 50% of the maintenance costs, while Hanssem pays another half. </li>
<li>
Customers sign a renovation contract with agency stores, not exactly Hanssem. Based on the contract, the stores place an order for products to Hanssem. Other than its own brand furniture, Hanssem purchases products (e.g. balcony windows, floor and wall tiles) from external manufacturers and then re-sell them to agency stores. </li>
<li>
Renovation contractors are matched with customers by agency stores. Each store has a pool of renovation contractors. Those contractors are freelancers and loosely managed by Hanssem.</li>
</ul>
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What are the possible problems that may inevitably arise out of this business model? First, it is not clear who is responsible for addressing consumer complaints filed against contractors or designers. Neither of them are employed or supervised by Hanssem. However, customers sign the deal because of Hanssem's brand reputations. Second, there must be conflicts of the interests of varied stakeholders when splitting revenue and costs. This issue is relevant to the Korea Fair Trade Commission's recent decision to levy a fine of over 1 billion KRW against <a href="https://www.smartkarma.com/entities/hanssem-co-ltd" target="_blank" data-smartkarma-citation="entities:18502:1" rel="noopener">Hanssem Co Ltd (009240 KS)</a> for abusing agencies. 
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We also suspect that <a href="https://www.smartkarma.com/entities/hanssem-co-ltd" target="_blank" data-smartkarma-citation="entities:18502:1" rel="noopener">Hanssem Co Ltd (009240 KS)</a>  has pocketed some cash at the expense of minority shareholders by using the same tricks as other Korean conglomerates. This might surprise foreign investors given that Hanssem has been run by a non-family CEO &amp; Chairman for years. The thing is that its non-family top executives have also reaped benefits from such unfair trade practices. There are three private companies whose majority stakes are owned by founding families and executives as follows: 
<ul class="">
<li>
Hanssem Effex (Top mgt. 32% / Family 25% / Hanssem 38%) polishes raw marble and supplies it to Hanssem. Marble dining tables and kitchen cabinets are one of the Hanssem's flagship products. Within Hanssem Effex's unconsolidated revenue, Hanssem-related revenue commands roughly a 45% share. It also started to provide high-end office furniture called Hanssem Viitz, which is led by a son of Choi Yang-ha, a former CEO &amp; Chairman of Hanssem. </li>
<li>
Hanssem Nexus (Top mgt. 31% / Family 31% / Hanssem 37%) offers high-end European kitchen brands. Those brands inevitably compete with Hanssem's own kitchen brand (KitchenBach). If a consumer can afford, he (or she) may likely choose global luxury brands. If visiting KitchenBach stores, you can see promotional flyers of Hanssem Nexus lying on the KitchenBach dining table. </li>
<li>
Hanssem Domus (Top mgt. 35% / Family 26% / Hanssem 38%) imports high-end sofas from overseas, mostly Europe. It also competes with Hanssem's own sofa brands. Domus uses one entire floor of the Hanssem flagship stores, while Hanssem sofas are displayed downstairs. </li>
</ul>
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Why this matters especially now when <a href="https://www.smartkarma.com/entities/hanssem-co-ltd" target="_blank" data-smartkarma-citation="entities:18502:1" rel="noopener">Hanssem Co Ltd (009240 KS)</a> struggles with growth and margins? Hanssem recently saw a big drop in revenue and profits partly due to a downturn of domestic housing markets, which I will cover later. As described above, Hanssem Effex, Hanssem Nexus, and Hanssem Domus offers high-end brands that possibly attract affluent consumers and/or ones with exquisite taste. This could help the company restore growth and improve margins. <a href="https://www.smartkarma.com/entities/hyundai-livart-co-ltd" target="_blank" data-smartkarma-citation="entities:15584:1" rel="noopener">Hyundai Livart (079430 KS)</a>, a major competitor of Hanssem, has also been eager to bring overseas high-end brands to a domestic market so that it can capitalize on consumers' increasing inclination to spend more on furnishing the house. Hyundai Livart's luxury brands are run by itself, not by its subsidiaries or affiliates. Given that, it makes no sense that Hanssem does not wholly own those three companies but just gives up its business opportunities for the interests of controlling shareholders. 
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We first started paying attention to Hanssem Co Ltd (009240 KS) given its low ownership stakes of controlling shareholders (31.3%), large amounts of treasury shares (25.1%), and the increased presence of institutional investors (National Pension Service of Korea 6.4% &amp; Teton Capital Partners 8.6%). Also, the company saw a sharp fall in profits and stock prices last year. We thought that this stock might be vulnerable to activist investors and/or could be re-rated if the company cancels its treasury shares. As we conduct our research, we found possible risks associated with the company's business models as well as appropriation of corporate opportunity and tunneling. Some risks have recently become a reality. This insight seeks to alert investors to those risks and suggest stewardship priorities. I will come back later with more research on South Korea's housing market and Hanssem's business valuations.  

Hanssem Co Ltd (009240 KS) is not just an interior furniture manufacturer or home improvement company. It has embarked on aggressive expansion plans to be a platform that brings suppliers, designers, architects, contractors, and consumers under the brand name of Hanssem Rehaus. Yet, it must be overly ambitious - Hanssem is facing a brand reputation crisis and litigation risks. Below explains how this Hanssen Rehaus model works.


Salespersons and designers who work at the Hanssem Rehaus flagship and agency stores are not employees of Hanssem but of local interior renovation stores. Those stores sign a cooperation agreement with Hanssem in order to rely on its strong brand reputations and operating resources. Instead, the stores are in charge of providing human resources, which helps Hanssem reduce labor costs. As a return, Hanssem provides them with an initial investment required for opening a new Rehaus agency store. After that, the stores have to bear 50% of the maintenance costs, while Hanssem pays another half. 

Customers sign a renovation contract with agency stores, not exactly Hanssem. Based on the contract, the stores place an order for products to Hanssem. Other than its own brand furniture, Hanssem purchases products (e.g. balcony windows, floor and wall tiles) from external manufacturers and then re-sell them to agency stores. 

Renovation contractors are matched with customers by agency stores. Each store has a pool of renovation contractors. Those contractors are freelancers and loosely managed by Hanssem.


What are the possible problems that may inevitably arise out of this business model? First, it is not clear who is responsible for addressing consumer complaints filed against contractors or designers. Neither of them are employed or supervised by Hanssem. However, customers sign the deal because of Hanssem's brand reputations. Second, there must be conflicts of the interests of varied stakeholders when splitting revenue and costs. This issue is relevant to the Korea Fair Trade Commission's recent decision to levy a fine of over 1 billion KRW against Hanssem Co Ltd (009240 KS) for abusing agencies. 


We also suspect that Hanssem Co Ltd (009240 KS)  has pocketed some cash at the expense of minority shareholders by using the same tricks as other Korean conglomerates. This might surprise foreign investors given that Hanssem has been run by a non-family CEO &amp; Chairman for years. The thing is that its non-family top executives have also reaped benefits from such unfair trade practices. There are three private companies whose majority stakes are owned by founding families and executives as follows: 


Hanssem Effex (Top mgt. 32% / Family 25% / Hanssem 38%) polishes raw marble and supplies it to Hanssem. Marble dining tables and kitchen cabinets are one of the Hanssem's flagship products. Within Hanssem Effex's unconsolidated revenue, Hanssem-related revenue commands roughly a 45% share. It also started to provide high-end office furniture called Hanssem Viitz, which is led by a son of Choi Yang-ha, a former CEO &amp; Chairman of Hanssem. 

Hanssem Nexus (Top mgt. 31% / Family 31% / Hanssem 37%) offers high-end European kitchen brands. Those brands inevitably compete with Hanssem's own kitchen brand (KitchenBach). If a consumer can afford, he (or she) may likely choose global luxury brands. If visiting KitchenBach stores, you can see promotional flyers of Hanssem Nexus lying on the KitchenBach dining table. 

Hanssem Domus (Top mgt. 35% / Family 26% / Hanssem 38%) imports high-end sofas from overseas, mostly Europe. It also competes with Hanssem's own sofa brands. Domus uses one entire floor of the Hanssem flagship stores, while Hanssem sofas are displayed downstairs. 


Why this matters especially now when Hanssem Co Ltd (009240 KS) struggles with growth and margins? Hanssem recently saw a big drop in revenue and profits partly due to a downturn of domestic housing markets, which I will cover later. As described above, Hanssem Effex, Hanssem Nexus, and Hanssem Domus offers high-end brands that possibly attract affluent consumers and/or ones with exquisite taste. This could help the company restore growth and improve margins. Hyundai Livart (079430 KS), a major competitor of Hanssem, has also been eager to bring overseas high-end brands to a domestic market so that it can capitalize on consumers' increasing inclination to spend more on furnishing the house. Hyundai Livart's luxury brands are run by itself, not by its subsidiaries or affiliates. Given that, it makes no sense that Hanssem does not wholly own those three companies but just gives up its business opportunities for the interests of controlling shareholders. 


Deep Dive Into Hanssem's Money Making: Risks Becoming A Material Concern For Investors