Credit Rating Agencies Maintain SK Inc.'s Credit Rating at 'AA+'... "Strong Financials of Key Subsidiaries like SK Inno"

Major Subsidiaries Exhibit Strong Business Stability and Cash Generation
Dividend Inflows and Trademark Royalties Also Provide Stable Revenue Sources
SK Inno, SKT, and SK E&S, the Three Core Companies, Have Contributed Over 80% Since 2016

View of SK Seorin Building, the headquarters of SK Group in Jongno-gu. Photo by Moon Honam munonam@

[Asia Economy Reporter Choi Seoyoon] The three domestic credit rating agencies?Korea Ratings, Korea Investors Service, and NICE Investors Service?recently decided to maintain SK Inc.'s credit rating as is.

According to industry sources on the 4th, the three credit rating agencies evaluated SK Inc. at AA+ (stable) due to the excellent business stability and cash-generating capability of SK Inc.'s major business subsidiaries.

Korea Ratings stated, "The creditworthiness of SK Telecom, SK Innovation, SK E&S, and others forms the foundation of SK Inc.'s credit profile," adding, "The major subsidiaries have secured leading market positions within their respective businesses and a solid profit-generating base, and their financial stability is also at a very high level."

They further assessed that among SK Inc.'s operating revenues, which consist of the holding and business divisions, the holding division generates a substantial amount of cash flow through dividend inflows from key subsidiaries and trademark usage income linked to affiliate sales.

Korea Ratings explained, "Trademark usage income is recognized as revenue at about 0.2% of the previous year's sales of companies using the 'SK' brand, generating around 200 billion KRW annually, serving as a stable source of income," and added, "Dividend income contributions from the three main companies?SK Innovation, SK Telecom, and SK E&S?have exceeded 80% since 2016."

Korea Investors Service also cited the subsidiaries' strong business positions and diversified revenue structures across investment and business sectors as reasons for maintaining the AA+ rating.

KIS stated, "The business risk correlation among key affiliates is low, and the level of risk diversification due to governance and regulatory environments is high," and explained, "While maintaining a stable revenue structure in both the business and investment sectors, operating profits on a separate basis reached 1.1 trillion KRW in 2018, 1.5 trillion KRW in 2019, and 1.7 trillion KRW in 2020 through expanded dividend income."

NICE Investors Service noted, "SK Group's operating performance has improved, centered on the semiconductor and refining & chemical sectors, supported by economic recovery trends due to major governments' stimulus measures and easing of COVID-19 restrictions."

They added, "In particular, SK Innovation recorded an EBIT (earnings before interest and taxes) of 1.7 trillion KRW on a consolidated basis in 2021, driven by inventory-related profit effects from rising oil prices and product spread recovery due to demand recovery," and explained, "In the first half of this year, supply chain disruptions caused by the Russia-Ukraine war led to sharp increases in oil prices and refining margins, generating an EBIT of 4 trillion KRW, significantly higher than 1 trillion KRW in the first half of 2022."

They continued, "SK Hynix has shown improved operating performance based on strong non-face-to-face demand due to COVID-19 in 2020 and expanded demand following economic recovery since 2021," and assessed, "Other sectors such as information and communication, power generation, and city gas have shown stable operating performance trends due to relatively low economic sensitivity."

However, the three rating agencies pointed out that aggressive investment activities act as a burden on cash flow. In fact, SK Inc.'s borrowings have been increasing due to acquisitions of subsidiary shares to secure management rights, M&A and equity investments for new business initiatives. SK Inc.'s net borrowings on a separate basis rose from 6.7388 trillion KRW in 2017 to 10.1311 trillion KRW as of the end of June this year.

Korea Ratings commented, "High capital requirements continue due to aggressive investment plans focused on advanced materials and bio sectors, share repurchases, and expanded dividend payout policies as part of strengthened shareholder return policies," and added, "Monitoring of investment expansion trends and borrowing fluctuations is necessary."

Korea Investors Service and NICE Investors Service also noted that although some investment funds were recovered through the sale of SK Biopharm shares (11.0%, 1.1 trillion KRW) in 2021, large-scale new investments related to bio-pharmaceuticals, advanced materials, green, and digital businesses continue amid declining dividend income, resulting in investment fund requirements exceeding internal cash generation, and thus monitoring changes in the financial structure is necessary.

This content was produced with the assistance of AI translation services.