President-elect Park Geun-hye's economic/industrial policy platform
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Investment Focus
President-elect Park Geun-hye’s economic/industrial policy platform
Shawn Oh, Strategist 822-769-3803 oshoon99@daishin.com
President-elect Park Geun-hye’s economic policy and sector implications
The ruling Saenuri Party’s Park Geun-hye claimed victory in Wednesday's presidential
election.
We forecast the future course of the incoming administration’s economic/industrial policies
and their implications on individual sectors by examining the president-elect’s pledges.
While Park’s pledges will be fleshed out more by the Presidential Transition Committee,
we expect the overall policy direction will remain unchanged.
As far as economic policy is concerned, we expect the Park administration will uphold free
market principles. But with regard to “economic democratization”, the presidential election
buzzword, the new administration is expected to introduce policies to address inequalities
between big and small businesses and crack down on conglomerates’ (chaebol) illegal
business practices.
As part of her economic growth strategy, Park stresses the importance of striking a
balance between exports and domestic demand and fostering future strategic industries
including software technology, start-ups and content.
While Park’s policy platform did not officially include currency policy, the comparison of
candidates’ policy pledges provided by the Citizens’ Coalition for Economic Justice reveals
that Park is against the government’s intervention in currency rates and favors a balance
between exports and domestic demand over a government-led export drive.
Park’s economic policy and sector implications
In our view, Park’s economic policy has positive implications for retail, construction and
utilities (electric power) sectors.
No big change is likely for the retail sector since government regulations on new store
openings are already in place under the Retail Industry Development Act and the
Cooperation Between Big And Small Businesses Act. We expect further regulatory
uncertainty will be eliminated, which is positive for the retail sector.
For the construction sector, expectations for real estate market deregulation will rise. The
Park administration’s policy is favorable for the real estate market as it supports the
abolition of new apartment price caps and no increases in real estate property tax and
capital gains tax on multi-home owners. Thus, it will have a positive impact on investor
sentiment toward construction stocks.
In the utilities sector, the possibility of a power mix deterioration has decreased.
Furthermore, Park is considering revamping the electricity tariff system to curb power
demand growth, which is positive for Korea Electric Power Corporation. In addition, any
major change in nuclear power policy looks unlikely, and the outlook is positive for nuclear
power-related machinery and heavy industries stocks.Investment Focus
Economic democratization – Chaebol reform
Chaebol reform
1. To exempt existing cross-shareholdings that are already and restrict future cross-
shareholding practices.
2. To strengthen the separation of industrial capital from bank ownership.
Financial institution and insurance company voting rights on non-financial affiliates will be
gradually reduced to 5% over the next five years. The bank stockholding limit for industrial
capital will be lowered. The review of eligibility as the biggest shareholder currently
confined to banks and savings banks will be expanded to include all types of financial
institutions.
[Sector implications]
ü The impact of stricter separation of industrial capital from bank ownership will be
limited because no conglomerate currently owns a more than 4% stake in non-
financial affiliates.
ü Reduction of financial companies’ voting rights on non-financial affiliates (down
to 5%; -1% on a yearly basis over the course of five years) will have a significant
impact on conglomerates: Currently, Samsung Electronics is 7.33% owned by
its financial affiliates, and Hotel Shilla is 11.47% owned by its financial affiliates.
3. To bolster the holding company system: If financial subsidiaries of a holding company
meet certain conditions, the holding company must establish an “intermediary financial
holding company.”
[Sector implications]
ü Conglomerates with control over securities/insurance/credit card units and
assets/market share in excess of a certain threshold must establish an
intermediary financial holding company to separate financial affiliates from non-
financial affiliates. The introduction of the intermediary financial holding company
system will give rise to the need for conglomerates to trim their stakes in existing
financial units.
4. To prevent unfair cross-subsidiary transactions: Conglomerates must separate affiliates
majority owned by family and relatives from those that aren’t.
2Investment Focus
Economic democratization – Fair competition
Fair market competition
1. To abolish the exclusive right held by the Fair Trade Commission to act against fair
trade act violations, to introduce punitive compensation and class action lawsuits, and to
strengthen laws against unfair subcontract practice of conglomerates.
[Sector implications]
ü Negative for Hyundai Glovis, Hyundai Steel and Hyundai Hysco.
2. To better protect SMEs: Policy programs will better reflect SMEs’ needs, protections for
markets traditionally occupied by small firms will be strengthened by enhancing
efficiency.
3. For small businesses: Big discount stores will be subject to tougher regulations (ex.
business permits).
[Sector implications]
ü Given the scope and magnitude of existing regulations, new measures will likely
have limited impact.
Taxation
Principle: To increase tax revenue by reducing tax breaks and fiscal spending, rather than
raising tax rates.
1. Alternative minimum rates on corporate tax will be raised.
2. Capital gains on securities: The scope needs to be widened, but taxation on capital
gains on securities is premature.
3. Cautious stance on taxing derivatives gains.
[Sector implications]
ü Corporate tax scheme will remain intact.
ü Uncertainty on capital gain taxation has been removed.
ü Tax on derivatives should promote fairness in taxation, but a prudent approach
is needed as the stock market is different from the derivatives market.
3Investment Focus
Privatization, housing market and infrastructure (public projects)
Privatization
Privatization of state-owned enterprises requires a national consensus: the privatization of
the Incheon International Airport and KTX should be based on national consensus,
President-elect Park opposes privatizing Korea Aerospace Industries (KAI).
[Sector implications – KAI privatization]
ü Korean Air: Uncertainty has been removed as the company dropped out from
the bid. But the stock’s rebound will be limited as concerns rise over worsening
market conditions.
ü Hyundai Heavy Industries: Market worries have subsided as the bid collapsed.
Housing market
To introduce caps on monthly rents and “jeonse” deposits. Ceilings on home sale price,
introduced during the housing boom, will be lifted.
For the "house poor": Partial home equity sales, home equity conversion mortgages.
For the "rent poor": Happy-Home project (residential complex), a new jeonse scheme (the
landlord finances the deposit through mortgage loans and the tenant pays the interest),
universal housing welfare, more public interest for permanent rental housing.
[Sector implications]
ü Construction: A soft-landing is the primary goal, market-boosting measures
(abolishing new apartment price caps, no home ownership tax hike, no tax raise
for multiple home owners) will help improve investors’ sentiment towards the
construction sector.
ü Steel: Steel demand will rise as the apartment complex redevelopment market
comes back to life.
Public works
Support for private projects beneficial for public interests will continue in a more
transparent manner as fiscal funding alone cannot meet all necessary infrastructure-
building projects.
Besides the main contractor, specialized construction companies will be allowed to
participate in public contracts worth more than W10bn.
Projects that require timely or urgent execution will be exempted from full feasibility review.
[Sector implications]
ü Construction: Guarded optimism as welfare issues carry more weights than
construction. Market-boosting measures for provincial areas are expected.
4Investment Focus
Industry-specific policy issues: telecom services and games
Telecom services
Policy emphasis will be placed on network neutrality and telephone bill reduction.
All-out liberalization of VoIP. Assessment of appropriateness of telephone tariffs.
Disclosure of telephone service costs. Abolition of service enrollment fee. Cut in basic
telephone service fees.
[Sector implications]
ü Telecom services: The Korea Communications Commission, responsible for
network neutrality, has already set guidelines that allow carriers to administer
their network independently to maintain service quality.
ü Telecom services: All-out liberalization of mVoIP would not hurt wireless revenue
in this LTE era. Unlimited data plans are unavailable for LTE subscribers, and
they have no strong reason to choose free voice calls at the expense of data
allotments.
ü Telecom services: On the issue of appropriateness assessment of telephone
service tariffs and the disclosure of telephone service costs, a court has ruled
that some telephone service cost items should be made public. Carriers do not
have to disclose marketing strategies, etc. Thus, there is no significant impact
expected.
ü Telecom services: Abolition of enrollment fees would entail a W500bn drop in
combined annual revenue. A W1,000 cut in basic service fees would lead to a
W600bn reduction in combined annual revenue. Carriers will be free from direct
pressure to cut service rates if low monthly plans become more available.
Games
Implementation of mobile game shutdown on top of existing game shutdown scheme.
The shutdown policy is not a complete solution, but rather a minimum necessary solution.
In order to boost its effect, the shutdown policy should include mobile games.
[Sector implications]
ü Online game shutdown policy is already in place. If mobile game shutdown
policy is implemented, some negative impacts are expected for game company
revenues.
5Investment Focus
Industry-specific policy issues: utilities and healthcare
Utilities
Existing nuclear power plants will be tightly regulated, while new reactor construction will
go through careful review.
Approval of extension of operational lives of aging nuclear power plants will be strictly
restricted. EU-style stress tests will be conducted to determine whether to shut down aging
reactors. The electricity mix for the next 20-year period will be re-established. Construction
of additional nuclear power plants currently under consideration will be reviewed if other
energy sources are secured. Renewable energy push will be boosted.
[Sector implications]
ü Machinery: Positive for Doosan Heavy Industries. Orders for Singori #5 and #6
will be placed as planned in 1H13.
ü KEPCO: Nuclear power plants whose design life has already expired can be
allowed to remain operational if safety can be ensured. Thus, there are no
concerns over possible aggravation of power plant mix. A positive for KEPCO’s
share price. President-elect Park is in favor of raising the proportion of renewable
energy sources, but will take action only after securing alternative power
generation capacity. Thus, the impact on KEPCO will be minimal. If the new
government decides to increase the proportion of renewable energy sources,
KEPCO will be forced to increase capex. It will not have significant negative
impact as long as policy mandates remain clear.
ü Construction: Park is in favor of building new nuclear power plants. This is
positive because government support is essential for nuclear power plant
exports.
Healthcare
In order to boost national health insurance coverage, public hospitals' role as public health
care service providers will be strengthened. Dual penalties against doctor rebates will
become more sophisticated. Drug prices should be standardized to bring down prices.
Health insurance coverage expansion priority will be given to four major disease
categories (cancer, cerebropathia, cardiac disorders, and rare incurable diseases).
[Sector implications]
ü Impact on the pharmaceutical sector will be limited as doctor fees, care giver
expenses, and other drug-related items are not affected. Drug price
standardization policy is already in place.
6Investment Focus
▶ Compliance Notice
In accordance with Subparagraph 5 of Paragraph 1 of Article 4-20 of the supervisory regulations for the financial investment industry, we confirm that no information or
content has been shared prior to its release on Daishin’s website, and that the analyst has not received nor will receive direct or indirect compensation in exchange for
expressing specific opinions. Daishin is not affiliated with the company presented in this report. This report has been presented without any undue external influence or
interference, and accurately reflects the personal views of the analyst who is responsible for its content.
This report is distributed for the purpose of helping investors make informed decisions. This report has been prepared from the data and information believed to be
correct and reliable, but Daishin Securities does not make any guarantee as to the accuracy thereof. Investors reading this report should make final decisions based on
their own judgment.
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