Korea's top paper company, Hansol Paper, will reassess the value of its land after more than three years. If land prices are determined to have risen during this period, assets could increase while the liability ratio decreases.
However, despite the increase in assets on the books, the stock price has continued to be weak, which could lead to a significant drop in Hansol Paper's price-to-book ratio (PBR·market capitalization ÷ net worth). Efforts to reduce the liability ratio may inadvertently go against the new government's emphasis on resolving low PBR.
According to the Financial Supervisory Service's electronic disclosure system (DART) on the 10th, Hansol Paper has decided to reassess the value of its land in Daejeon and in Seocheon, Cheonan, Gongju in South Chungcheong Province, Paju in Gyeonggi Province, and Wonju in Gangwon Province. Valuation results are expected to be released around October to November.
Hansol Paper has previously reassessed the value of its land, and each time the value has increased. As of the end of September 2018, the reassessed value of land (based on book value) increased from 234.8 billion won to 264.4 billion won, a rise of 12.6% (29.6 billion won). Following another valuation as of the end of October 2021, the value reached 329.9 billion won, up 23.8% (63.5 billion won). As of the end of last month, Hansol Paper reflects a book value of 328.5 billion won for its land.
Under the Korean International Financial Reporting Standards (K-IFRS), asset reassessments are recommended every 2 to 5 years. It is not mandatory, so it is common for listed companies to conduct them at intervals of around 10 years.
Hansol Paper stated that it decided to reassess its land values to accurately reflect the asset values on its financial statements. However, industry insiders also view this as a self-help measure to lower the liability ratio. The liability ratio is a financial health indicator that shows how much the capital borrowed from others (liabilities) is compared to its own capital.
As of the end of March this year, Hansol Paper's liability ratio stood at 198.2%. This is an increase of about 12 percentage points compared to 186.33% during the same period last year, significantly affected by losses reported in the third and fourth quarters of last year. The poor paper market conditions and the occurrence of receivables from some projects in which its environmental business unit participated as a contractor contributed to this. Hansol Paper returned to profitability in the first quarter of this year, but its consolidated operating profit was 20.3 billion won, down 40.1% compared to the same period last year.
If the company's land value is evaluated to have increased due to this asset reassessment, it could lower the liability ratio. The concern is that as net worth increases, PBR may also drop.
Hansol Paper's PBR is at 0.31 times. With the paper business having entered the mature phase, coupled with high cost burdens, profitability is low, causing the stock price to continue declining. The stock price, which was around 20,000 won a decade ago, has steadily fallen and is now fluctuating in the 8,800 won range. Its market capitalization is approximately 210 billion won.
As the asset value increases while the stock price continues to decline, PBR will drop further. If the already low PBR decreases even more, this could pose a significant burden on the company. The new government and ruling party are considering measures that penalize low PBR corporations to stimulate the domestic stock market. Particularly, President Lee Jae-myung pointed out several times during his candidacy that there are too many low PBR stocks on the domestic market.
To lower the liability ratio and increase PBR, ultimately, a rebound in stock prices due to improved performance is necessary. Securities firms believe that taking into account the stabilization of the pulp prices, a raw material for paper, Hansol Paper's performance could also improve. The current dividend yield based on stock price is also around 5.6%. Eugene Securities and Heungkuk Securities set the target stock prices for Hansol Paper at 14,000 won and 11,000 won, respectively, last month.