Yuanta Securities Co’s (元大證券) acquisition of a South Korean peer would gradually enhance the Taiwanese firm’s profitability by making better use of its redundant capital, JPMorgan Securities Ltd said yesterday.
However, there are risks associated with industry consolidation and a deteriorating operating outlook in the South Korean market that could have been “underestimated” by Yuanta’s management, JPMorgan analysts led by Jemmy Huang (黃聖翔) said in a research note.
Still, JPMorgan retained its “overweight” rating on Yuanta Financial Holding Co (元大金控), which owns the nation’s biggest securities brokerage, citing potential earnings upside as the local bourse’s turnover rises.
JPMorgan set a target price of NT$17.90 for Yuanta Financial, which closed at NT$15.90 on Thursday. The stock market was closed yesterday for 228 Memorial Day.
Yuanta has long been interested in expanding into South Korea, Deutsche Bank analyst Pandora Lee (李懿璇) said.
“The company had strategic alliances with Good Morning Securities from 2000 to 2003, until Good Morning Securities was acquired by Shinhan Financial Group,” Lee said. “The company also submitted a bid in 2004 for a 21 percent stake in LG Investment & Securities, but lost the deal to Woori Finance Holdings.”
On Thursday, Yuanta Securities announced that it had won a South Korean court’s approval to secure a 27.06 percent stake in Tongyang Securities Inc, whose parent company is selling off assets as a part of a restructuring plan.
In a filing to the Taiwan Stock Exchange, Yuanta said it would pay 124.94 billion won (US$117.07 million) for the 27.06 percent stake in the South Korean broker.
The company will invest another 150 billion won to secure 71.43 million new shares that Tongyang is to issue after the proposal is approved by its shareholders this month.
“Following the two-phase investment scheme, Yuanta Securities will hold a controlling stake of 50.3 percent in Tongyang Securities, with a total investment of 275 billion won (or NT$7.84 billion),” the company said in the filing.
Yuanta’s finances are not expected to be dented by the Tongyang deal, which will be fully funded by the company’s divestment of its 29.12 percent stake in Singapore-listed brokerage Kim Eng Holdings Ltd in 2011, according to JPMorgan.
Tongyang has 106 outlets across South Korea, with a market share of 3 to 4 percent. JPMorgan said the acquisition should be potentially earnings and return on equity (ROE) accretive to Yuanta.
“However, retail brokerage commission rates in [South] Korea have plummeted to as low as 1.5 basis points and thus business turnaround might not be as easy as management expects and ROE could stay at low to mid single digits,” JPMorgan analysts said.
Tongyang’s earnings have been declining in recent years, too. The company reported 118 billion won in net income in 2010, 37 billion won in 2011, 25 billion won in 2012 and a net loss of 186 billion won for the first half of last year, according to Deutsche Bank.