Quad Investment Management, through an open shareholder letter, demanded the merger and acquisition of a related-party corporation owned by the largest shareholder at DAEYANG Electric and an aggressive return to shareholders. Quad Investment Management argued that DAEYANG Electric's stock is undervalued due to governance issues and a low shareholder return rate.
Quad Investment Management posted an "open letter to enhance corporate value at DAEYANG Electric" on its website on the 10th.
In this letter, Quad Investment Management said, "DAEYANG Electric, despite strong competitiveness and earnings growth, is suffering from extreme undervaluation in the stock market both relative to peers and in absolute terms."
It then pointed to internal transactions with the related-party corporation Daeyang Jeonjang as a cause of profit outflows and said that low shareholder returns are reducing capital efficiency.
Daeyang Jeonjang is a privately owned related-party corporation in which Chief Executive Seo Young-woo, DAEYANG Electric's largest shareholder, holds 95.8%. Quad Investment Management said, "Daeyang Jeonjang's internal transaction ratio with DAEYANG Electric is 85%, and it is a corporation that would struggle to survive without DAEYANG Electric's manufacturing capabilities," adding, "If profit outflows to the unlisted related-party corporation Daeyang Jeonjang occur, DAEYANG Electric's structural undervaluation will be difficult to resolve."
It also raised the possibility of a violation of the Commercial Act. Quad Investment Management said, "DAEYANG Electric's internal transaction with its related-party corporation can be seen as a transaction that does not align with the interests of all shareholders, and under the revised Commercial Act there are significant concerns about conflicts of interest, so we judge that the possibility of violating the related provisions of the Commercial Act is very high."
On shareholder returns, it argued, "Since its listing in 2011, DAEYANG Electric has shown a low average payout ratio of 3.1%, and in 10 of the 14 fiscal years since listing it paid no dividends, showing a stingy stance on returning profits to shareholders."
According to Quad Investment Management, as of the end of the second quarter this year, DAEYANG Electric holds 118.5 billion won in cash and cash equivalents and financial assets.
Quad Investment Management said, "Despite posting an all-time high profit due to a swollen capital base, return on equity (ROE) is structurally declining," adding, "Accordingly, it is necessary to lighten equity through aggressive and tax-efficient shareholder returns to raise ROE and ultimately enhance corporate value through a higher price-to-book ratio (PBR)."
It then demanded: ▲ a merger and acquisition of Daeyang Jeonjang ▲ the pursuit of aggressive shareholder returns by raising the total shareholder return ratio to over 50%.
Quad Investment Management said, "We sincerely hope that DAEYANG Electric will reinvent itself as a strong small and medium enterprise in the capital market through transparent governance and aggressive shareholder returns."
Meanwhile, Quad Investment Management holds 380,711 common shares of DAEYANG Electric (4.0% of total shares outstanding).