Quad Asset presses Daeyang Electric to spend a quarter of its cash retiring shares

Work backwards from the fund's ratios and Daeyang Electric's market value comes out near 175 billion won ^[1]. The proposed 10 billion won a year is therefore about 5.7% of the company ^[2]. That sits just above the line Quad drew in its own study of 4,508 buybacks by listed Korean companies from August 2016 to August this year ^[12]. The sample is companies that chose to buy heavily on their own, which is a different situation from a board answering a shareholder's letter. The result is still specific: where a buyback exceeded 5% of market value, the fund found, shares rose an average of 22.8% during the program, 10.4 percentage points ahead of the index, and 37.1% through six months after it ended ^[12].

Daeyang is coming off a record year of 230.1 billion won in revenue and 27.1 billion won in operating profit ^[7]. It made 14.9 billion won of net profit in the first half ^[8]. That pace is about 29.8 billion won a year ^[4], so the full three-year buyback costs roughly one year of profit. Spending the 30 billion won would leave about 92.7 billion won of cash and financial assets before any new earnings, still more than half the current market value ^[5].

The suspension clause is the term I find most interesting. Buybacks stop in any quarter when the price-to-book ratio exceeds the 1.5 target ^[10]. That puts Quad's estimate of value into the policy. The company keeps buying while the price sits below 1.5 times book and stops once the market agrees with the fund. Quad argues that the build-up of non-operating assets is what depresses return on equity and produces the discount ^[16].

The board has options. It can take the plan close to whole. It can raise the dividend and skip the cancellations. Or it can argue that the cash already has a use, and the Daeyang Jeonjang stake is the obvious candidate. The report does not include a response from Daeyang Electric or a price for that stake. On these figures I think a refusal on grounds of capacity is hard to make; a refusal would be a choice about priorities, or rather about whose priorities set the payout. That view is wrong if the stake, once priced, takes most of the cash, or if the company shows the cash is working capital the business needs.

The money demand comes with the governance complaint still attached. "The audit function has failed to work as a substantive check on directors' execution of their duties," the fund said. "We believe a more active role is needed." ^[15] The letter is one fund pressing one company, with a numeric target and a stop condition. On its own it does not show that Korean activists in general have moved to balance-sheet demands of this kind.