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Samsung's hopes for biotech arm hinge on fraud ruling

Lee Jae-yong faces another blow if unit is delisted

Samsung BioLogics insists it followed international accounting rules. (Photo courtesy of Samsung BioLogics)

SEOUL -- Samsung's long-term growth strategy will come under scrutiny on Wednesday when South Korean regulators review allegations of accounting fraud at the group's biotech arm, its vehicle for expansion beyond the mobile and semiconductor sectors.

Shares in Samsung BioLogics, the world's third-largest contract drugmaker by market share, have fallen 40% over the last month amid concerns that authorities could delist the company following an investigation into claims that it violated accounting rules three years ago.

A delisting could hit sentiment surrounding Samsung's main listed businesses, Samsung Electronics, which accounts for three-quarters of the conglomerate's total revenues and holds 31.49% of the biotech unit, and Samsung C&T, its de facto parent, which holds 43.44%. The remaining shares are held by retail and institutional investors.

Samsung group announced in August that it will invest 25 trillion won in artificial intelligence, 5G and biotech for the next three years, betting these businesses could become the tech giant's new cash cows."Biotech is one of Samsung's new growth engines," said Park Ju-keun, president of CEO Score, a corporate analysis company. A ruling against BioLogics would be "a blow to the company," he added.

South Korea's five-member Securities and Futures Commission will review the findings on Wednesday of the BioLogics investigation. In July, the Financial Services Commission ruled that BioLogics had violated accounting rules by intentionally omitting crucial information that could have affected its valuation ahead of an initial public offering in 2016.

BioLogics has insisted it followed international accounting rules.

A ruling on the company's future could be decided the same day or postponed for further investigation, an official said. In the worst case scenario, authorities have the power to delist BioLogics.

This would be another blow to Samsung's heir apparent, Vice Chairman Lee Jae-yong, son of ailing Chairman Lee Kun-hee, who has been the architect behind the semiconductor and smartphone empire over the last few decades.

Samsung is the world's biggest smartphone company, but mobile sales are slowing as the market matures. Lee now wants to carve out his own legacy for the group by diversifying into the biotech and health sectors, analysts said.

But Park of CEO Score said he expected an adverse ruling given the seriousness of the investigation. "The financial watchdog has filed the case two times," he said. The Financial Supervisory Services filed the complaint with the regulator again last month, after the SFC returned its initial complaint in July, asking the agency to make it clearer.

An adverse ruling would be another hit to the group's reputation, already tarnished by scandals over corruption and allegations of union sabotage. The 50-year-old Samsung heir is serving a suspended sentence for corruption pending an appeal at the Supreme Court.

Kim Kyung-min, an analyst at Hana Financial Investment, was confident that Samsung Electronics would be able to ride out the BioLogics investigation thanks to its robust financial position. "Samsung Electronics has abundant cash flow with an average of 41 trillion won by 2020. The impact of Samsung BioLogics' accounting case will be limited," Kim said.

But analysts say that the ruling will directly hit the market value of Samsung C&T, the major shareholder of BioLogics. Mirae Asset Daewoo cut the target share price of Samsung C&T by 7.9% to 175,000 won, referring to risks stemming from BioLogics.

"Samsung C&T improved in its own business, but we cannot help but lower its target stock price due to plunging market value of Samsung BioLogics in which it owns a stake," said Jeong Dae-ro, an analyst at Mirae Asset Daewoo.

Samsung Electronics declined to comment on the possible impact from the regulator's ruling on BioLogics.

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