HD Hyundai Oil Bank, Low Profitability but High Dividend Reason...

[Korea Financial Times, Gwak Horyung] Chung Ki-sun, the eldest son of Asan Social Welfare Foundation Chairman Chung Mong-joon, Vice Chairman of HD Hyundai, was promoted to Senior Vice Chairman last month. HD Hyundai, which had been operated under a professional management system, is making a full-fledged transition to an owner-management system.

The situation is not bad. This is because Senior Vice Chairman Chung is at the optimal time to show off his management skills. The group’s main businesses, including shipbuilding and electric power equipment, are in a boom period.

The problem is that the other key pillar, HD Hyundai Oilbank, is seriously underperforming. Senior Vice Chairman Chung has been involved in the management of Hyundai Oilbank since March.
The initial public offering (IPO) of HD Hyundai Oilbank is considered a long-cherished project of the group. It has attempted it three times since 2012, but has suffered defeat due to poor industry conditions etc. It does not seem easy to go public on the stock market for the time being due to the deterioration of its financial structure caused by the economic downturn.

As of the end of the third quarter of this year, the debt ratio of HD Hyundai Oilbank was 230.7% based on consolidation. It has been steadily increasing: ▲139.3% at the end of 2020 ▲216.4% at the end of 2021 ▲184.9% at the end of 2022 ▲205.4% at the end of 2023.

In 2021, when the company's financial situation deteriorated rapidly, investment in the Daesan HPC project in Chungnam Province began in earnest. The HPC project is a large-scale petrochemical project in which more than KRW 3 trillion was invested in a joint venture with Lotte Chemical.

It aimed to strengthen cost competitiveness through vertical integration of oil refining and petrochemicals. However, the slump continued due to the COVID-19 situation and the oversupply from China.

The existing business, oil refining, is also seeing its performance decline due to the decline in international oil prices. In the third quarter of this year, HD Hyundai Oilbank recorded sales of KRW 7.5898 trillion and an operating loss of KRW 268.1 billion.
The deficit by business was KRW 263.4 billion for refining and KRW 71.8 billion for petrochemicals. Due to investments in gas station new businesses, the company had to pay KRW 360 billion in interest expenses alone.


Despite worsening profitability, it is not choosing to reduce dividends. Over the past four years (2020-2023), HD Hyundai Oilbank earned KRW 1.63 trillion in net profit and paid out about KRW 1.3 trillion in dividends. The dividend payout ratio is 80%.

Even when it was in deficit in 2020, it paid out about KRW 100 billion in dividends, and last year, its net profit decreased to KRW 147.1 billion, one-tenth of the previous year, but it spent KRW 339.7 billion on dividends. It also decided to pay an interim dividend of KRW 60 billion in the first half of this year.
Companies that coincide with the timing of major shareholder succession tend to insist on high dividends to resolve tax issues, etc. HD Hyundai Oilbank is 73.85% owned by the holding company HD Hyundai.

Chairman Chung Mong-joon owns 26.6% of HD Hyundai. Senior Vice Chairman Jeong Ki-sun increased his stake in HD Hyundai from 5.26% to 6.12% this year through active stock purchases.

Gwak Horyung (horr@fntimes.com)