KG Inicis and the Korea Discount

Even though its PER is only 3.6 and it is a company with an Economic Moat, the steady revenue growth rate and the fact that it receives no attention from the market stood out. In particular, the PG industry was a structure I could understand—I knew how settlements worked—and at one time I did a lot of shopping mall outsourcing using the KG Inicis plugin.

KG Mobility, a mobile PG company, also had a similar valuation.

Governance Structure Issues

First, there is the complex governance structure caused by cross-shareholding and octopus-style expansion. Although KFC was recently sold, it operates far too many businesses, including KG Steel (formerly Dongbu Steel), Hollys Coffee, and even SsangYong Motor recently. And I have no idea why it still holds IT Bank (now KG Eduwin).

Not only that, while serving as the company's cash cow, it also provides a substantial amount of debt guarantees for affiliated companies relative to its market capitalization.

Octopus-Style Business Expansion

Even just up to March 2020, it was growing its size by acquiring a huge number of companies.

It even expanded into O2O services through its subsidiary KG Allat, but it appears to have withdrawn recently.

Moreover, it acquired KG Fresh for KRW 80 billion and is expanding its business scope into not only the coffee industry but also seasoned meat and home meal replacements. The problem is that it is squeezing money out of the group in the process of these acquisitions.

앞서 KG모빌리티와 KG ETS, KG스틸, KG이니시스, KG모빌리언스 등 KG그룹 계열사와 켁터스프라이빗에쿼티(PE), 파빌리온PE 등 투자자로 구성된 KG그룹컨소시엄은 지난 13일 약 9000억원의 인수금액을 써내면서 쌍용차 우선인수 예정자에 선정됐다.

The TMON/WeMakePrice Crisis

Moreover, losses from the current TMON/WeMakePrice crisis are estimated at hundreds of billions of won, which is a fairly large loss for a company of Inicis's size.

Conclusion

Because of the TMON/WeMakePrice crisis, there have been many positive developments, such as the implementation of separating PG companies from each intermediary platform. I was interested in KG Inicis, which had the best finances, and I paid close attention to its steady revenue growth, solid operating margin, and low valuation. However, the KG Group itself has too many problems related to the Korea discount. I want to look only at KG Inicis's business alone, but the connected governance structure problem is too large. As Buffett said, the greed of the Board of Directors is unmeasurable.