Chip foundry DB HiTek's stock near 10-month peak on activist fund

South Korean leading foundry chipmaker DB HiTek’s stock price hit a near 10-month high this week as a domestic activist fund bought a stake to become the second-largest shareholder.

Korea Corporate Governance Improvement Fund (KCGI) said on Thursday it has secured a 7.05% stake in DB HiTek Co. The activist fund spent 196.4 billion won ($151 million) on buying the stake from the local stock market. The investment made KCGI DB HiTek’s No. 2 shareholder after DB Group, which holds a 12.39% stake.

The purchase along with investments from other institutions pushed up DB HiTek’s share price to 68,000 won on Wednesday, the highest since June 3, 2022. The share gained 32.5% in the previous four sessions.

KCGI said DB HiTek’s share prices have been “extremely undervalued” although the company reported an operating profit margin of 46% in 2022 and an average growth of 26% in the last four years. The fund was disappointed at conflicts with investors when the parent DB Group attempted to split off the fabless business from the foundry chipmaker.

The activist fund urged the group to transform into a holding company.

“If the controversy over the split off and the purchase of treasury stocks for 100 billion won are temporary measures to avoid restrictions on holding company activities under the Fair Trade Act, they would be very short-sighted governance reforms. So, we will try to fix them,” said KCGI CEO Kang Sung-boo.

“The group should make the transition to a holding company an opportunity for sustainable growth by expanding the stake in the holding company in a legitimate way.”

DB Group has been under pressure to convert to a holding company. Under Korea’s Fair Trade Act, a company must transfer to a holding firm if its total assets exceed 500 billion won and its first- and second-tier subsidiary shares make up more than 50% of its total assets. DB HiTek shares exceeded half the group’s total assets as of end-2021; they didn’t as of the end of last year.

Conversion to a holding firm will cause a substantial financial burden to DB Group. Under the Act, a holding company must own 30% or more stakes in its listed subsidiary. To increase DB Group’s ownership in DB HiTek to 30%, the parent needs to pour in nearly 500 billion won.

DB HiTek’s retail investors claimed that DB Group intended to get out of the holding company conversion requirement by leaking the split-off possibility to the market, causing DB HiTek's share price to fall.

But the chipmaker passed the split-off proposal at its general shareholders' meeting on Wednesday.