Shares of Lotte Group units have been fluctuating amid a succession feud between brothers as investors fidget over the family-run conglomerate's murky governance structure and management risks, market watchers said Tuesday.

While core affiliates briefly enjoyed a rally on speculation that the founder's two sons would increase their stakes to take control of the retail giant, the unfolding drama rather has highlighted risks related to investing in the companies largely shrouded in secrecy. Seoul-based Lotte Group is controlled by Japan-based Lotte Holdings, whose major stakes are owned by a few unlisted companies in Japan.

As Shin Dong-bin, Lotte Group chairman and the founder's younger son, had a five-minute meeting with his father Shin Kyuk-ho upon his return to South Korea on Monday, seven affiliates listed on the main KOSPI market sank an average of 6.8 percent to wipe out 1.74 trillion won ($1.49 billion) in market value.

Their reunion was the first since the family feud surfaced on July 27, when the 93-year-old tycoon was fired from his chief executive posts by the board of directors at Lotte Holdings.

Lotte Shopping Co., the key retail affiliate, shed 3.17 percent, while Lotte Confectionery Co. and Lotte Chilsung Beverage Co. fell 1.39 percent and 6.85 percent, respectively. 

Non-retail affiliates also suffered. Lotte Chemical Co., a petrochemical unit faced with a bleak outlook amid falling oil prices, plunged 13.6 percent. Lotte Insurance Co., a non-life insurance unit, slid 2.53 percent.

On Tuesday, five out of eight rose to pare some of their earlier losses. Lotte Shopping edged up 0.82 percent and Lotte Chemical bounced back 3.33 percent, while Lotte Insurance declined 0.97 percent.

"Lotte Group shares lost allure because uncertainties over the shady corporate structure and management overwhelmed the expectations for the potential stake competition between (the founder's) two sons," Yang Ji-hye, a researcher at KB Investment & Securities, said.

Worsening profitability in the Chinese market is another risk that could wreak havoc on Lotte shares in the retail and food sectors, market watchers say. 

Shin Dong-ju, the first son and former vice president of Lotte Holdings, claimed Lotte Group had about 1 trillion won in accumulated loss in China and his younger brother did not report it to his father.

Lee Won-jun, Lotte Department Store CEO, immediately refuted the claim. He said the amount was exaggerated and Lotte's Chinese business has been on track to reap profits from earlier investment, noting the five department stores in China had 160 billion won of operating deficit from 2011 to 2014 in terms of earnings before interest, tax, depreciation and amortization (EBITDA).

The explanation further confused investors because retail companies rarely use EBITDA as an indicator for profitability, sparking speculation that Lotte was not doing so well in China.

Korea Ratings, one of the nation's three major ratings agencies, estimated Lotte Shopping, the flagship retail unit, booked over 500 billion won in operating losses in 2013-2014, and had a deficit in the first half of this year.
Including the initial investment for infrastructure and other financial expenses from merger and acquisition deals, Lotte Group's Chinese business may have suffered nearly 1 trillion won in losses, according to industry sources.

"We could reconsider the credit rating of major Lotte units once speculation over its deficit in China is unveiled in the earnings season," said an official at Korea Ratings, asking for anonymity.

"Lotte contains risks stemming from unstable management, which usually worsens a company's profitability like shown in cases of other companies," the official added. (Yonhap)