Flashlight Capital Submits Shareholder Proposals for KT&G's 2023 General Meeting
Flashlight Capital Partners Pte. Ltd ("Flashlight Capital" or "we"), a significant long-term shareholder of KT&G Corporation (KRX: 033780) ("KT&G" or the "Company"), today issued the below letter to shareholders outlining the proposals Flashlight Capital is putting forth for consideration at the Company's 2023 Annual General Meeting of Shareholders (the "General Meeting"). Notably, Flashlight Capital has nominated two highly qualified candidates for election to the Company's Board of Directors (the "Board").
Flashlight Capital encourages shareholders to visit www.FlashlightCap.com to learn how we plan to help KT&G deliver enhanced value to all stakeholders.
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January 18, 2023
Dear Fellow Shareholders,
Flashlight Capital is an Asia-based investment management firm that is focused on improving corporate governance and unlocking long-term value at its portfolio companies. We have been long-term investors in KT&G because of its exceptional assets, including well-established businesses that operate in sustainable, high-potential markets.
Over the past several weeks, Flashlight Capital has had the privilege of engaging in thoughtful conversations with many of you. We are encouraged by your supportive words and ideas for ways in which we can help close the unprecedented discount at which KT&G's shares trade. It seems we share a unified view that if KT&G can drive improved financial returns, it will support better outcomes for all of the Company's stakeholders.
Today, we are writing to make you aware that Flashlight Capital plans to submit formal proposals for shareholders to vote on at the 2023 General Meeting. We believe these initiatives will help improve KT&G's governance and support efforts to unlock up to 100% share price upside over the coming quarters. It is clear to us new perspectives are urgently needed in the Company's boardroom and the time for investor-driven change is now. It is Flashlight Capital's honor to be firmly aligned with you and to represent shareholders' interests by putting forth the following proposals:
- The Election of Two Highly Respected, Korea-Based Executives as Directors. We believe that shareholder-nominated directors with impressive track records of value creation can help align the Company's interests to that of its investors and catalyze a new, high-growth era for KT&G. Flashlight Capital's director candidates ? Suk Yong Cha and Ou Jin Hwang ? possess Chief Executive Officer ("CEO") and public company board experience, Korean consumer business leadership expertise and impressive track records of exceptional revenue growth and shareholder value creation. Mr. Cha has served as the CEO and Chairman of the Board of LG H&H (KRX: 051900), where he has been responsible for 18 years of consecutive growth (2,833.4%+ in stock price appreciation) and was recognized as one of the top leaders in Korea.1 Mr. Hwang was previously CEO of The Prudential Life Insurance Company of Korea, Ltd. (NYSE: PRU) ("Prudential Life Korea"), where he led changes in the Korean insurance market that more than doubled revenues over a seven-year period.
- A Corporate Spin-off of KT&G's Ginseng Business, Korea Ginseng Corp ("KGC"). Spinning-off KGC from the Company's tobacco business can strengthen KT&G's brand value, global competitiveness and unlock significant value for stakeholders. We believe that as a standalone company, KGC will get its fair valuation from the market and can have a market capitalization of KRW 3.6 trillion ($2.9 billion). Ginseng and tobacco are inherently different, so we believe a separation will also free KGC from certain environmental, social and governance ("ESG") investment restrictions that have prevented many institutional investors from venturing into the stock.
- The Issuance of a Dividend. Since 2007, KT&G has distributed 60% of its net income to shareholders, while relevant global peers have distributed close to 100%. Flashlight Capital is proposing KT&G return reserves amounting to KRW 10,000 per share (11% dividend yield) or KRW 1,163 billion to shareholders vs. over KRW 7 trillion in reserves accumulated over the past 15 years. As we outline below, Flashlight Capital is proposing the Board amends the Company's Articles of Incorporation to introduce quarterly dividends and retire treasury shares accounting for 15% of total shares in line with the practice of global peers.
- An Increase of KT&G's Share Repurchase Program. Among the global top five, KT&G is the only tobacco company that holds net cash. We propose KT&G buys back KRW 1,163 billion, which will still allow the Company to hold net cash while investing for future business growth. Together with the proposed cash dividend, this will deliver shareholder returns representing a third of the surplus KRW 7 trillion of cash on KT&G's balance sheet.
- Amending Articles of Incorporation to Create a Compensation Committee. Flashlight Capital believes that establishing a Compensation Committee consisting of three or more independent directors will help KT&G modernize its pay structures for leaders and establish more incentives. Creating more performance incentives aligned to shareholder value creation can lead to KT&G closing the Company's massive valuation gap.
In the coming weeks, we intend to issue a public presentation to provide the market with a very clear sense of our plan to unlock the Company's full value by improving KT&G's governance, operations and performance.
We thank you in advance for your consideration and willingness to evaluate our proposals. To learn more about our plan to help catalyze positive change at KT&G, visit www.FlashlightCap.com.
Sincerely,
Sanghyun Lee
Managing Partner
Flashlight Capital Partners
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DIRECTOR CANDIDATE BIOGRAPHIES
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Suk Yong Cha is the CEO and Chairman of the Board of LG H&H, where he has been responsible for 18 years of consecutive growth and was recognized as one of the top leaders in Korea. He has a track record of extraordinary value creation in the consumer goods industry, which would be additive to KT&G's Board.
- Since 2005, Mr. Cha has served as the CEO and Chairman of the Board of LG H&H (KRX: 051900), a producer of household goods that manages cosmetics, household goods and beverages business, where his leadership recognized him as one of the best managers in Korea.
- Former President of Procter & Gamble (NYSE: PG) ("P&G") Korea, multinational consumer goods corporation, and Former President and CEO of P&G Ssangyong Paper, a paper-making company.
- Former CEO of Haitai Confectionery and Foods Co Ltd. (KRX:101530), a manufacturer of instant foods, such as confectionery, beverages and ice creams.
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Mr. Cha lives in Korea and holds an MBA from Cornell University and a JD course of Indiana University School of Law.
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Ou Jin Hwang is the former CEO of Prudential Life Korea where he led changes in the Korean insurance market that more than doubled revenues over a seven-year period. His executive and board leadership experience improving governance, company operations and reorganizing non-core assets would be additive to KT&G's Board.
- Held roles of increasing responsibility at Prudential Life, including serving as the Chief Marketing Officer of Prudential International.
- Former board member of ADT Caps (now known as SK shieldus), the 2nd largest security services company in Korea, where he led business structure improvements and governance activities to improve communication between shareholders and management.
- Former Vice Chairman of Ceragem Group, a global healthcare company, and CEO of Ceragem Health & Beauty, a professional global health & beauty care company introducing cosmetic products made from natural ingredients.
- Mr. Hwang lives in Korea and holds a degree from Sogang University Graduate School of Business and from Sogang University English Literature.
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About Flashlight Capital
Flashlight Capital Partners Pte. Ltd is an investment management firm founded by Carlyle Group's former Head of Korea, Sanghyun Lee. Based in Singapore, Flashlight Capital's investment philosophy is grounded in improving corporate governance and unlocking long-term value at its portfolio companies. For more information about Flashlight Capital, please visit www.FlashlightCap.com.
1 LG H&H's adjusted share price as of market close on January 1, 2005 to January 16, 2023 realized gains of approximately 2,833.4%.
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