Why do Korean Holding Companies Trade at a Steeper Discount to Net Asset Value?

Abstract

This case deals primarily with the valuation of holding companies in Korea and the significant gap between its market price and net asset value (NAV), which is the sum of the estimated values of the assets in the portfolio of the holding company minus debt. Typically in the developed markets, holding company discount (as measured by price to NAV minus one) ranges between 15 to 30 percent according the various empirical studies.

In Korea, however, holding company discount could stretch up to 30 to 60 percent, and often times, 30 to 40 percent has been used as a rule of thumb among the investment community. A steep discount of current market price to NAV might be interpreted as a convincing rationale for investment opportunity, but this could be a dangerous simplification of idea unless underlying reasons are properly understood.

Therefore, the purpose of this case is to understand the valuation of holding companies, especially in the context of capital markets in Korea as compared to other developed markets, and develop a proper sense of investment opportunities therein.