Korean fund KCGI readies activist campaign against DB HiTek

KCGI logo [Image captured from KCGI homepage]

South Korean activist fund KCGI Co. has secured a 7.05 percent stake in DB HiTek Co., signaling an activist campaign against the mid-sized chip foundry company.

KCGI announced Thursday that it acquired the stake through Caropy Holdings Ltd. for the purpose of “management influence.”

Shares of DB HiTek soared by a limit of 10 percent to 67,200 won ($51.8) in after-hours trading on Thursday when it closed at 61,100 won.

KCGI said that it invested in DB HiTek as it judged the shares were undervalued.

“DB HiTek has maintained an outstanding market position in the global foundry market for several years based on its process technology specializing in analog chips,” the activist fund said. “The company’s corporate value is extremely undervalued given its growth potential and competitiveness based on the solid market position.”

The price-to-earnings ratio (PER) is 3.5 times and the corporate value divided by operating profit before deducting corporate tax, interest and depreciation is only 1.3 times, according to KCGI.

KCGI also says DB HiTek lacked communication with the shareholders in terms of major decision-makings including a split off, which caused conflict with minority shareholders.

“The decision should have been made after gaining Majority of Minority approval.”

DB HiTek Co. headquarters [Courtesy of DB HiTek]

DB HiTek approved the agenda to spin off its design business “Fabless” at the shareholders meeting. The plan is to separate the design business into another entity and develop DB HiTek into a foundry-dedicated company. DB HiTek had pushed for a split last year but withdrew the plan in the face of opposition from minority shareholders.

KCGI also stressed that DB HiTek’s plan for a share buyback worth 100 billion won must include treasury share retirement, insisting on the need of checks and monitoring through an independent board, and proposed the introduction of concentrated voting to exercise shareholder rights.

It draws attention to whether KCGI’s purchase of a big stake in DB HiTek will affect the overall governance structure of DB Group.

DB Inc., the holding company of DB Group, is the largest shareholder of DB HiTek but with a stake of 12.39 percent. The entire stake of the largest shareholder stands at a mere 17.78 percent even after including the shares of those in special relationships. Analysts note, therefore, that a management rights dispute over director appointment, among others, may arise when KCGI forms an alliance with minority shareholders.

Shares of DB HiTek have surged 64 percent this year alone. The stock is likely to rise further upon the intensifying competition to acquire more shares in the company.