One of the areas where significant slush funds can be created is in situations like this. Shinsegae Construction, in particular, could also potentially generate slush funds when engaging in massive projects worth over 10 trillion or even 20 trillion won. This aspect raises some concerns. Currently, Shinsegae Construction is gaining attention as there are news reports about its plans for an IPO. So, let's examine the background of Shinsegae Construction's IPO and how it connects with the real estate business strategy of the E-Mart Group.

First, regarding Shinsegae Construction's IPO, the decision for delisting is expected to be made around the end of September. After the delisting, Shinsegae Construction plans to acquire 100% of its shares, aiming to strengthen its business and enhance its future prospects.

There has been some discussion about strategizing, and while a delisting does not mean that the company ceases to exist, it does mean that all assets and liabilities the company holds will remain intact. Therefore, one could view the acquisition of Shinsegae Construction by E-Mart as a situation where the various negative conditions, including the debts of Shinsegae Construction, will also be inherited by the E-Mart Group. 

At one point, the stock price of Shinsegae Construction soared to around 80,000 won, but it has since plummeted to 12,000 won. Following the decision to delist, there was some positive momentum due to share buybacks, causing the price to rise temporarily to around 18,000 won. The delisting price, or the share buyback price, was declared at 18,400 won, which is where the stock seems to have stabilized. If the acquisition happens at 18,300 won, it would involve over 30 billion won.

The Emart Group will invest again, leading to a process where Shinsegae Construction will repurchase its own shares. While this will place some burden on the group, another issue that has arisen is that after the listing page was determined, these matters should have remained confidential and concluded quickly. However, prior to this, there was a leak of information, as Shinsegae Construction began to rise significantly after mid-September. It surged from 12,000 won to 18,000 won in just two weeks, making the process somewhat opaque. Because of this breach of information security, there are suspicions that some individuals may have gained an advantage internally. For reference, Shinsegae Construction has shown consecutive growth in 2022 and 2023.

As a result, there has been a continuous accumulation of deficits. In the first half of 2024, there was a deficit of 64.4 billion won, leading to an enormous accumulated deficit of 260 billion won since 2022. In the case of Shinsegae Construction, at one point, the debt ratio reached 950%. If that happens, it would naturally lead to bankruptcy or corporate rehabilitation. However, Shinsegae and the Emart Group managed to rescue the situation by procuring what is known as hybrid capital securities, which are essentially a type of corporate bond. For the general public, this concept may be somewhat unfamiliar, but hybrid capital securities, despite their name, are essentially a form of debt. This debt has a duration...

The 30-year repayment term means that there is a premise of repaying over 30 years. Because of this, it has been treated as capital, effectively processing it as a kind of virtual capital. Originally, the debt for Shinsegae was over 1.2 trillion won, but the capital is now only about 1.2 to 1.4 billion won. Therefore, the debt ratio was close to 950%. However, with the 650 billion won being reclassified from debt to capital, this has effectively lowered the debt ratio to around 200%. This is the situation currently being promoted. The issue is that the interest rate on these new capital securities is extremely high, approaching around 7%, with rates exceeding 7%. Additionally, these new capital securities have a provision for early repayment.

There are conditions in place that require repayment within three years. Most, of course, come with the stipulation of repayment within this timeframe, which means it can be considered a high-interest debt. However, if repayment cannot be made within three years, the interest rate will increase to 7% and could rise by another 0.5% to 1% annually. If, within those three years, Shinsegae Construction, which has been operating and executing various construction projects, fails to manage these projects properly, it could lead to a much greater risk. Previously, Shinsegae Construction faced its own crisis, but if things go wrong now, it could trigger a crisis for the entire Emart Group. Therefore, if the plan for a 100% share buyback goes well, it could mitigate some of that risk.

There may be, but if the real estate market here continues to stagnate and this issue is not resolved, it could be seen as a very risky gamble that could plunge the entire E-Mart Group into crisis. The reason is that even the interest on the 2 trillion won debt that Shinsegae Construction has, if we assume a 5% interest rate, would amount to 100 million won per year. Additionally, as I mentioned regarding the new capital securities, the minimum rate is 7%, and it could rise to 8% or 9%. Therefore, it seems unlikely that this will head in a positive direction. The projects currently being marketed, such as residential buildings by Shinsegae Construction, are almost non-existent in Seoul. In Seoul, it is very difficult for anyone other than major construction companies to enter the market.

Most of the concerns revolve around cities like Daegu, Busan, Ulsan, and Goseong, as well as Namyangju, where a private guarantee of 1 trillion won is at stake, along with contingent liabilities amounting to 4 trillion won. If we add the 2 trillion won in debt, it raises worries that Shinsegae Construction could essentially become a very large minefield. Nevertheless, the E-Mart Group has stated that it will rescue Shinsegae Construction. The background to this decision, in my view, is that Shinsegae Construction, originally under Chairman Jeong Young-jin, declared that he would fully commit to the core business. He had decided to invest 20 trillion won by 2027. However, upon further examination, I see that the core business is almost non-existent, as it is largely dominated by real estate ventures. This, in turn, poses another risk factor for Shinsegae. We can identify about five different business areas.

There is a significant amount of 20 trillion won, which is not a small amount. Currently, Shinsegae views E-Mart separately, meaning there is a debt of 10 trillion won, and when looking at a consolidated basis, there is a debt of 20 trillion won. Despite having this debt of 20 trillion won, they are investing another 20 trillion won. Last year, the Shinsegae Group reported a loss, and E-Mart Group was also in the red. E-Mart is now expected to operate without generating operating profit, and the investment of 20 trillion won will almost entirely rely on reinvestment or debt, which could potentially lead to a high-risk situation if things do not go well. Among the five business areas, the first is the renewal of the Shinsegae department store, which will require an investment of 3.3 trillion won. Since this accounts for about 19.5%, I believe this part is not bad. This is because the department store business is still...

Activation is underway, and with various developments like the MAPA Park, this could also become a source of revenue, making it a reasonable decision. Secondly, the new openings of E-Mart Traders and the renovations of existing stores have been allocated about 1 trillion won. One of the recent renovations by E-Mart was the E-Mart Jukjeon store, which was transformed into a Starfield Market. This change has attracted many customers, and it has performed so well that it ranks first among all E-Mart locations. Of course, it has only been a month since the renovation, so we are currently in a period of attracting new customers. However, if we look at the direction, E-Mart’s original strengths in fresh food and grocery items are still evident.

While leveraging those strengths, we are significantly reducing the remaining space of E-Mart and, in that space, we are considering bringing in brands that customers love, such as Uniqlo and Muji. By decreasing the share of direct sales and increasing specific segments, we aim to enhance rental income. These strategies are not only applicable to E-Mart but also to Lotte and Homeplus, which are moving in the same direction. Therefore, both the new stores and the renovations of existing stores have been relatively good choices. However, the amount allocated is only 1 trillion won out of 20 trillion won, which is just 5% of the total. Chairman Jung Young-jin has declared an all-in commitment to the core business, which, in fact, refers to E-Mart Traders, including new openings and renovations of existing stores.

This is actually the main business, but only 5% of the total cost has been accounted for. This is actually a hidden issue. So, where is it going? Looking at the third point, Shinsegae Health Club's content and new business will receive an investment of 2 trillion won. This part is of course an investment from the department store, so it aims to attract customers through health products and various cultural content. However, it raises some questions, but I believe this is not something to discuss immediately. 

The fourth point is the online logistics center and the development of the logistics system, which will receive an investment of 3 trillion won. This accounts for 15% of the total 20 trillion won. In fact, this part has already begun to show signs of concern, as all of the next-generation logistics centers, known as Neo Centers, that Emart owned are...

Right now, the operating rights have already been contracted, and the decision to sell the assets is in progress. Therefore, if there are any hiccups in this area, the business related to the online logistics center and logistics system may inevitably slow down. However, rather than making excessive investments in the online logistics center, if we can redirect resources to existing stores or new stores as mentioned earlier, that could provide some additional benefits. Nevertheless, saying that we are giving up on the online logistics center means that E-Mart and Shinsegae as a whole will significantly reduce their efforts in the market, including those initiatives they have been managing independently, such as Starcom. If that happens, it would mean stepping back in the online sector and focusing more on offline operations.

It seems that this will lead to a discussion about entering the main business. The problem now is about real estate. If Shinsegae is entering the real estate business, it might be somewhat unexpected. However, generally speaking, the areas where Shinsegae is entering the real estate market involve Shinsegae Property, which is a subsidiary of Shinsegae. The representative project has actually been Starfield. They acquired the Starfield business and are now working on developing it in collaboration with Shinsegae Construction, establishing a concept around it. This isn't a bad approach. Currently, Shinsegae Property is engaged in real estate leasing, operating Starfield as part of its leasing business. There are, of course, E-Mart and Shinsegae, along with various other brands that have entered the space, and the sales from each of them are contributing in their own ways.

The sales figures are not very high for Shinsegae Property, specifically Starfield, due to the nature of the real estate leasing business. However, since it generates profits in the hundreds of billions annually, it could be considered a good long-term choice for the E-Mart Group. The issue is that Shinsegae Property has invested 11 trillion won in real estate development, with the largest allocations going to Starfield, the Dongseoul Terminal, the Hwaseong International Theme Park, and the Prima Hotel. Among these, Starfield is the core business of the E-Mart Group, with three Starfields being developed in Cheongna, Changwon, and Gwangju, requiring an investment of approximately 3.3 trillion won. The group has a 16.5% stake in this. However, the problem with Starfield Cheongna is that it is currently being developed as a Dong-gu decoration, which presents some challenges.

Therefore, in the case of Starfield Cheongna, it can be said that both Starfield Cheongna and Gwangju and Changwon are considered non-core commercial areas in the metropolitan area, as they are somewhat far from the capital region. There have been openings in the past, but the location conditions have been quite unfavorable. Particularly for Gwangju, being a local market, there are expectations that it will face difficulties due to the entry of large retailers. Additionally, in the case of Cheongna, the construction of the subway has currently come to a halt. This situation could lead to increased investment costs. The biggest issue for Starfield Cheongna is the construction of the Donggu district. Thus, it can be seen that it is transitioning from simple retail to a lifestyle and leisure-oriented space.

The fact that we are going out now is also a hint from Chairman Jung Yong-jin. If they are building the Starfield in Cheongna, the construction cost for the stadium in Cheongna is expected to be around 400 billion won. If that happens, the annual maintenance cost will exceed 10 billion won. Outside of the baseball season, the utilization rate will be very low. Therefore, it could lead to a significant annual deficit of several billion won. In fact, the cost of operating and maintaining the stadium could be greater than the revenue generated from the baseball games, which is a serious issue. Because of these factors, Lotte is currently not proceeding with the construction of the stadium in Busan, even though the city has urged them to do so. This presents some risks. As for Starfield, the upcoming constructions are expected to move down to the provinces.

There are some difficulties in generating immediate profits as we are currently experiencing. This is partly due to the fact that, in the case of the Dongseoul Terminal, there is a plan for mixed-use development that includes office spaces and shopping malls, with an investment of about 1 trillion won. However, this project is intertwined with the relocation of the Dongseoul Terminal, and there is opposition from the residents of nearby apartment complexes. The plan to build the new Dongseoul Terminal beneath the apartments has led to further resistance from the residents, resulting in a standstill. This situation is likely to contribute significantly to the rising construction costs. In fact, in the case of Starfield Cheongna and Dongseoul Terminal, from a perspective of having retail facilities come in, it is somewhat positive.

There are concerns that I have regarding the biggest part of this, which is the plan to build the largest theme park in the country, the Hwaseong International Theme Park. The plan states that they want to create the largest international theme park in Asia in Dongtan. However, it is not actually in Dongtan; it is located in Siheung, below it. Initially, there were plans to attract Universal Studios, but they found the business viability lacking and returned the project, leaving the site abandoned. The site was then acquired through a sole bid by Shinsegae Property. They are now planning to invest 4.6 trillion won to build a complex resort that includes a theme park, hotel, shopping mall, and golf course. Hwaseong is quite far from the metropolitan area, and Universal Studios...

I'm currently working on parts that were previously given up, and I've been proceeding with a single entrance. However, I have quite a few concerns about this. The business is also somewhat stagnant right now, as there are various legal issues involved. Additionally, there are several complications when it comes to selling the land, which has led to the business being somewhat stalled. If this project does not proceed properly, there are discussions that the Korea Water Resources Corporation might reclaim several hundred billion won in deposits from E-Mart and terminate the project. So, the situation is quite precarious at the moment. I believe that if we properly check the permits and ensure that everything goes smoothly, the project can proceed normally, but I see a greater risk in that. For reference, even Legoland is currently...

They provided a 100-year lease without charge, and the Gangwon Development Corporation invested another 200 billion won, continuing to push this enormous project forward. However, they have been reporting losses for the second consecutive year. In 2023, Legoland's revenue was 49.4 billion won, with a net loss of 28.8 billion won. Furthermore, Gangwon Province is also planning an additional investment of 20 billion won, which puts them in a bit of a bind. A representative example is the Alpensia Resort, where an investment of 1.6 trillion won resulted in a loss of 1 trillion won due to failure in sales. So, it raises concerns about whether creating such a truly global international theme park in an area that is not a central part of Seoul and the metropolitan area will actually succeed. Additionally, as I've mentioned several times, the core business is in retail and distribution, or even in the online sector.

If we consider this as a main business, creating various hotels and a golf course in such an international theme park will require an enormous investment of 4.6 trillion won. This part is seen as a significant risk by Shinsegae, as even one element could pose substantial challenges. For reference, the cost of the most representative building in our country, the Lotte World Tower, was 3.8 trillion won, so the amount of 4.6 trillion won is truly staggering. Just the interest alone, if we assume a high rate, could lead to annual interest expenses of several hundred billion won, exceeding 200 billion won. Given that this project could generate such high interest costs, one must wonder whether it can be successfully completed and, if so, whether it can generate enough profit to justify the investment. This raises significant concerns.

And one last project is the hotel business known as Lipid Cheongdam. This project involves the redevelopment of the Prima Hotel, which is located in Cheongdam-dong, Gangnam. Originally, this was not a project of E-Mart or the Shinsegae Group; there was another operator called Mirae In. This operator had a capital of 50 billion won and purchased the land for a staggering 400 billion won. They obtained financing from banks and other financial institutions to support this investment. The land price alone reached 400 billion won, which amounts to an extraordinary 290 million won per pyeong. Until then, even in Gangnam, the typical price was around 130 million to 150 million won per pyeong, so buying it at 290 million was indeed remarkable.

It was an astonishingly high amount, and ultimately, due to the tremendous land costs and rising construction expenses, the project was on the verge of failure. However, the company Miraein had partnered with Shinsegae Construction to enter this project together. Therefore, Chairman Jung Ji-young of Miraein decided to convert this into an investment from the entire Shinsegae Group. This meant that the project rights were now transformed into a joint venture with Miraein, while Shinsegae Construction provided payment guarantees. They then concentrated their investments back into the project, which has now become a Shinsegae Group project. The problem is that, originally, this was not meant to be a hotel; it was a project to sell luxury apartments. However, the cost of land was so high that the selling price per pyeong (3.3 square meters) reached 10 billion won.

There is 20 billion won available, and as a result, the possibility of developing apartments for sale has become almost impossible. To overcome this situation, it has been decided to convert the project back into a hotel. However, originally, this land was not suitable for building apartments with good profitability, so building a hotel is generally seen as a riskier option. Additionally, this site is located in Gangnam, and whether it's a hotel or a high-end residential complex, having a view of the Han River is essential. If it's not a high-rise building, there won't be a view of the Han River. The Prima Hotel itself is slightly set back from the Han River and is obscured by taller buildings, which adds to the costs involved in developing this hotel. It is estimated that this project will amount to nearly 1 trillion won.

There are significant challenges anticipated because of this. The consortium is continuously pressuring for the recovery of funds, which raises concerns, especially since the viability of the project itself has not been verified. This situation is quite worrying. In fact, Shinsegae Construction has been heavily involved in the real estate sector, and it has even launched the Rich business under Shinsegae's CEO, Yong-jin Jung. Shinsegae Property is considered to be a close associate of Yong-jin Jung, to the extent that it is often referred to as his subsidiary. Shinsegae Property has created developments like Starfield and has also acquired Napa Winery, among other ventures that Chairman Jung wishes to pursue through Shinsegae Property. So, within Shinsegae Property...

Currently, the representatives who are heading the Shinsegae Group are emerging as key figures. The representative director of Shinsegae Property has recently been appointed as the first head of the management strategy office, which serves as the control tower for the Shinsegae Group. This means that he is now in a position to oversee all core subsidiaries of Shinsegae. Since Shinsegae Property, which manages real estate, is at the forefront, Im Seong-rok has taken on this role, and similarly, the head of the management strategy office has also come from Shinsegae Property. In my view, if the Emart Group or Shinsegae Group were to fully commit to their retail operations, it would have been more appropriate to bring in retail experts rather than real estate specialists into the management strategy office.

This segment discusses how real estate experts are currently controlling the situation and managing the group. As I mentioned earlier, the Emart Group and Shinsegae Group plan to invest 20 trillion won in future projects. However, most of this investment, about 75%, is not related to the opening of new stores or department stores, but rather involves businesses intertwined with real estate or unrelated ventures. The individuals from Shinsegae Property are likely to carry forward these initiatives under the direction of Chairman Chung Yong-jin. One concerning aspect is that many companies involved in real estate have the potential to generate significant slush funds.

This is exactly the point. Because of this, the construction of Shinsegae also involves such enormous projects, truly exceeding 10 trillion or even 20 trillion won. When the headquarters sends down advance payments, there is always a possibility that slush funds could emerge from these transactions. This aspect is somewhat concerning. Now, regarding Shinsegae Construction, I mentioned earlier that there is a 20 trillion won investment planned, but there are only a few years left until 2027. Of course, some projects may be extended, but with only about two years remaining until 2027, we are looking at 2023 to 2030. If 20 trillion won is to be invested over the next five years, there will certainly be normal expenditures as well as some that may fail. However, most of these costs will be incurred by attracting massive debts, which will then be tied to real estate.

When we talk about investment ventures, can the Shinsegae Group really handle its enormous debt, especially when its core business is not generating operating profits? Currently, the Shinsegae Group has a debt of 20 trillion won. If that continues, and the debt increases to at least 30 to 40 trillion won, the viability of the business could be in jeopardy. This poses a significant risk to the core operations themselves. Therefore, as we observe the Shinsegae Group and E-Mart in the future, it might be necessary to pay closer attention to their commitment to their core business. I am viewing this situation with some concern.

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