3. Free Ginseng
What is Ginseng?
Ginseng is a Korean herbal supplement, that has traditionally been used as medicine but increasingly used as “health food” in recent years.
Please see below how ginseng changed from being used as mostly medicine to being consumed as food. (Source: Ministry of Agriculture, Food and Rural Affairs)
According to Korea Health Supplements Association, in 2021, ginseng accounted for close to one third of all health functional food in Korea. (Source)
KGC’s Brand Power in Ginseng
KGC’s brand is “Cheong Kwan Jang”. Its unique brand logo and identity, as shown below, is being copied by many competing brands in Korea.
Still, KT&G has over 70%-80% M/S thanks to KGC’s unmatchable brand built over the past 120 years, as well as product quality.
According to KT&G’s annual report (Mar 2022), KGC has a total of 265 patents.
KGC Performance in China
KT&G exports ginseng to China through two subsidiaries. Please see below the net income of these two companies. The companies only recently turned a profit.
Source: KT&G annual report
What's the Problem?
Ginseng and tobacco are completely different, in consumer profile, sales channel, and marketing regulation.
Under KT&G, KGC cannot have a profit-oriented high caliber CEO; KT&G repeatedly dispatched its domestic tobacco executive as KGC’s CEO. (Source)
In addition, because KGC is a wholly owned subsidiary of a tobacco company, KGC’s performance and potential are neglected by many investors and research analysts.
KGC is KT&G’s wholly owned subsidiary. Our proposal is to split KT&G into KT&G (that will continue tobacco business) and NewCo (a holding company that will own KGC), so that KT&G shareholders will directly own shares of KT&G and NewCo, both listed companies.
According to Korean law, spin-off is a shareholder approval agenda that needs a supermajority approval. Once the process is complete, shareholders will be given new shares of NewCo, a listed company.
Value of KGC
Below is KGC’s past track record (from KT&G annual report) and how we got to value of KRW3.7 trillion:
- EBITDA 2021: KRW177 billion
- EV/EBITDA: 20x
- EV: KRW3.6 trillion
- Net Cash: KRW190 billion
- Mkt Cap (EV + Net Cash): KRW3.7 trillion
Why 20x EBITDA?
Ginseng is a unique origin-centric high end agricultural product with no meaningful comparable valuation. But it’s clear that KGC is a great company. Between 2014 and 2019 (pre-COVIC) revenue grew at 12% CAGR. Also, KGC has exceptional M/S, over 70%.
Manuka Health New Zealand, the company that sells branded Manuka honey, was sold to Hong Leong Financial Group at 30.3x EBITDA (2018). (Source)
We believe 30x EBITDA is achievable, but conservatively assumed 20x for KGC valuation.
Effects of Spin-off
As mentioned above, the current stock price does not properly reflect the value of the tobacco and ginseng businesses.
We believe spin-off will bring better valuation to both listed entities; KT&G as a strong, global Top 5 tobacco company, and NewCo (that owns KGC) as a leading health food company that has exceptional market share in Korea and tremendous potential overseas.