Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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On 26 November, <a href="https://www.smartkarma.com/entities/lg-corp" target="_blank" data-smartkarma-citation="entities:6653:1" rel="noopener">LG Corp (003550 KS)</a> officially announced it would be splitting itself into two - the core electronics, chemicals, and telecoms business will stay in LG Corp, with the remaining non-core holdings transferred to NewCo, a new holding company, and subsequently spin-off to LG Corp shareholders.
<a href="https://www.smartkarma.com/profiles/douglas-kim" target="_blank" data-smartkarma-citation="accounts:342" rel="noopener">Douglas Kim</a> discussed this transaction beginning with <a href="https://skr.ma/BZgGp" target="_blank" rel="noopener">LG Group Announces the Formation of LG NewCo &amp; Split of 4 Companies from LG Corp</a>, and I added my thoughts in <a href="https://skr.ma/Tdpxs" target="_blank" rel="noopener">2021 High Conviction: LG Corp's Decade-Low Stub</a>.
The benefits of the demerger are projected to be two-fold. The NewCo is expected to improve the competitiveness and efficiency of the business (potentially re-rating the company); but also as an interim step to facilitate share swaps with the family with the two holding companies. This has been speculated since Koo Kwang-mo was inaugurated as chairman in 2018. NewCo's board of directors will be headed by Koo Bon-joon, the uncle of Kwang-Mo. 
The remaining Holdco will focus on steady earnings from its core operations (electronics, chemicals, and telecom), and via new opportunities. LG provided further rationale for the spin-off in its 4Q20 results - that is attached at the bottom of this insight.
It was noted, however, that LG Corp would maintain 91.5% of the group's assets - ₩9,779.8bn - as at 3Q20. This raises the question: just how much value can be unlocked by via spinning off ~8%?
The NAV and implied stub widened after the demerger announcement, and following a tepid reversal, narrowed around the time <a href="https://www.smartkarma.com/entities/lg-electronics-inc" target="_blank" data-smartkarma-citation="entities:8814:1" rel="noopener">LG Electronics (066570 KS)</a> announced a US$1bn JV with Magna on the 22 December to make electric car gears.
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/192/369/original/image_5243749941614909471522.png?1614909471" class="editor-image img-responsive" data-smartkarma-image-id="192369"></figure>
Source: my calcs, CapIQ
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On the 15 December, US-headquartered Whitebox said:
<blockquote>
The spin-off does nothing to address LG’s most pressing issue, which is the unprecedented discount at which the company trades relative to its assets and, accordingly, inferior return to shareholders.
Despite clearly favorable alternatives, the board (of LG) has unanimously approved a plan that, in our view, sacrifices minority shareholder return in order to resolve a family succession issue.
</blockquote>
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<div>
Whitebox has now issued a 30-page PowerPoint detailing its objection to the demerger. It's worth a read.
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More below the fold.
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On 26 November, LG Corp (003550 KS) officially announced it would be splitting itself into two - the core electronics, chemicals, and telecoms business will stay in LG Corp, with the remaining non-core holdings transferred to NewCo, a new holding company, and subsequently spin-off to LG Corp shareholders.
Douglas Kim discussed this transaction beginning with LG Group Announces the Formation of LG NewCo &amp; Split of 4 Companies from LG Corp, and I added my thoughts in 2021 High Conviction: LG Corp's Decade-Low Stub.
The benefits of the demerger are projected to be two-fold. The NewCo is expected to improve the competitiveness and efficiency of the business (potentially re-rating the company); but also as an interim step to facilitate share swaps with the family with the two holding companies. This has been speculated since Koo Kwang-mo was inaugurated as chairman in 2018. NewCo's board of directors will be headed by Koo Bon-joon, the uncle of Kwang-Mo. 
The remaining Holdco will focus on steady earnings from its core operations (electronics, chemicals, and telecom), and via new opportunities. LG provided further rationale for the spin-off in its 4Q20 results - that is attached at the bottom of this insight.
It was noted, however, that LG Corp would maintain 91.5% of the group's assets - ₩9,779.8bn - as at 3Q20. This raises the question: just how much value can be unlocked by via spinning off ~8%?
The NAV and implied stub widened after the demerger announcement, and following a tepid reversal, narrowed around the time LG Electronics (066570 KS) announced a US$1bn JV with Magna on the 22 December to make electric car gears.



Source: my calcs, CapIQ


On the 15 December, US-headquartered Whitebox said:

The spin-off does nothing to address LG’s most pressing issue, which is the unprecedented discount at which the company trades relative to its assets and, accordingly, inferior return to shareholders.
Despite clearly favorable alternatives, the board (of LG) has unanimously approved a plan that, in our view, sacrifices minority shareholder return in order to resolve a family succession issue.



Whitebox has now issued a 30-page PowerPoint detailing its objection to the demerger. It's worth a read.

More below the fold.




LG Corp (003550 KS): Whitebox States Its Case

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<ul>
<li>
LS EV Korea is getting ready to complete its IPO in the Korean stock market in March. <a href="https://www.smartkarma.com/entities/ls-ev-korea-ltd" target="_blank" data-smartkarma-citation="entities:28866:1" rel="noopener">LS EV Korea Ltd (1566799D KS)</a> makes automotive EV related parts including high voltage connectors, battery parts, wiring harness, power transmission devices, and other related products.The IPO price range is from 5,500 won to 6,100 won. The IPO base deal size is from 83 billion won ($69 million) to 92 billion won ($76 million).</li>
<li>
Concerns about LSCW Affiliate in China - Nearly two-thirds of the company's sales are generated by its LSCW affiliate in China. Given the massive supply disruption caused by the COVID-19 in China, it is highly likely that the sales and profits out of its Chinese operation in 2020 will fall far short of the management's internal targets as well as historical 2019 numbers.</li>
<li>
Concerns about financial investors selling - After the IPO sale, Paratus Investment and KDB Capital will hold a 17.3% stake in the company (7.2 million shares), of which 2.5 million shares can be sold right after the IPO. The remaining 4.7 million shares will have a 3 months lock-up. This remaining stake in the company by the financial investors post IPO will remain one of the key investment risks of the company. Paratus Investment and KDB Capital invested in LS EV Korea in 4Q 2017. </li>
</ul>



LS EV Korea is getting ready to complete its IPO in the Korean stock market in March. LS EV Korea Ltd (1566799D KS) makes automotive EV related parts including high voltage connectors, battery parts, wiring harness, power transmission devices, and other related products.The IPO price range is from 5,500 won to 6,100 won. The IPO base deal size is from 83 billion won ($69 million) to 92 billion won ($76 million).

Concerns about LSCW Affiliate in China - Nearly two-thirds of the company's sales are generated by its LSCW affiliate in China. Given the massive supply disruption caused by the COVID-19 in China, it is highly likely that the sales and profits out of its Chinese operation in 2020 will fall far short of the management's internal targets as well as historical 2019 numbers.

Concerns about financial investors selling - After the IPO sale, Paratus Investment and KDB Capital will hold a 17.3% stake in the company (7.2 million shares), of which 2.5 million shares can be sold right after the IPO. The remaining 4.7 million shares will have a 3 months lock-up. This remaining stake in the company by the financial investors post IPO will remain one of the key investment risks of the company. Paratus Investment and KDB Capital invested in LS EV Korea in 4Q 2017. 


Equity Bottom-Up

The Huawei crisis has finally erupted in Korea. The Huawei crisis will now likely be one of the most important events facing the Korean economy in the coming months. <a href="http://news.chosun.com/site/data/html_dir/2019/05/22/2019052203503.html" target="_blank">Chosun Daily </a>reported yesterday that the US government has requested the Korean government for an "eventual ban" of Huawei products in Korea. In the past several weeks, the US government has privately communicated to the Korean government that there could be severe security issues if Korea continues to use Huawei products. It is clear that if the South Korean government takes a firm stance to ban Huawei products, the Chinese government will certainly retaliate against this. In our view, it is highly unlikely for the Korean government to make any changes to the current stance on Huawei in the next several months, mainly because of the Moon Jae-In administration's attempts to maintain a close relationship with the Chinese government. The more likely scenario is that this issue gets extended until next year after the South Korean National Assembly election in April 2020, mainly due to the enormous political consequences if the status quo is changed.For the prudent investors in the Korean stock market, if they believe that this Huawei crisis will morph into something bigger, it may make sense to become more cautious in key sectors of the Korean economy, including the cosmetics, apparel, and hotels &amp; leisure which the Chinese government can really cause some damage quickly with a few damaging words from Xi Jinping.

The Huawei crisis has finally erupted in Korea. The Huawei crisis will now likely be one of the most important events facing the Korean economy in the coming months. Chosun Daily reported yesterday that the US government has requested the Korean government for an "eventual ban" of Huawei products in Korea. In the past several weeks, the US government has privately communicated to the Korean government that there could be severe security issues if Korea continues to use Huawei products. It is clear that if the South Korean government takes a firm stance to ban Huawei products, the Chinese government will certainly retaliate against this. In our view, it is highly unlikely for the Korean government to make any changes to the current stance on Huawei in the next several months, mainly because of the Moon Jae-In administration's attempts to maintain a close relationship with the Chinese government. The more likely scenario is that this issue gets extended until next year after the South Korean National Assembly election in April 2020, mainly due to the enormous political consequences if the status quo is changed.For the prudent investors in the Korean stock market, if they believe that this Huawei crisis will morph into something bigger, it may make sense to become more cautious in key sectors of the Korean economy, including the cosmetics, apparel, and hotels &amp; leisure which the Chinese government can really cause some damage quickly with a few damaging words from Xi Jinping.

Trump Pressures the Korean Government to Ban Huawei in Korea - The Biggest Gray Rhino Event of 2019?

Founder, Riedel Research

David Riedel

Founder

Independent equity research on GEM Markets

Riedel Research

Riedel provides equity research and analysis to leading financial organizations. By becoming members of a region (Asia, Latin America, Emerging Europe or Global), organizations have access to an integrated set of services including:

Regular company coverage reports
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Customized company reports and unlimited on-line access to the program's services.

Riedel provides research coverage of companies across the full range of market capitalization. Experienced research professionals in each market develop company reports and analysis as well as earnings models and projections. Ratings are Buy, Hold and Sell with a focus on compelling investment ideas - both long and short. Downloadable, dynamic earnings models are built to facilitate sensitivity analysis.

Please feel free to contact us for complimentary access to our written research.  We want to show you that our unique research flow can add value and help develop a long-term, high value-add relationship.

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<ul>
<li>Our proprietary corporate governance scoring system now covers over 1,985 stocks including over 200 in Korea.</li>
<li>We recently added a coverage of 28 new names in Korea.</li>
<li>The two lowest scores in this group are Samsung Electro-Mechanics and Advanced Process Systems both with scores of 40/100.</li>
<li>The involvement of a former executive at Samsung Electro-Mechanics in the Park scandal and ouster highlights the governance risk.</li>
<li>Companies with good governance include LS Corp, and Lotte Shopping. Past issues with the founding family of Lotte should be noted and taken into consideration. We welcome requests from clients of names they want to see added to the universe.</li>
</ul>


Our proprietary corporate governance scoring system now covers over 1,985 stocks including over 200 in Korea.
We recently added a coverage of 28 new names in Korea.
The two lowest scores in this group are Samsung Electro-Mechanics and Advanced Process Systems both with scores of 40/100.
The involvement of a former executive at Samsung Electro-Mechanics in the Park scandal and ouster highlights the governance risk.
Companies with good governance include LS Corp, and Lotte Shopping. Past issues with the founding family of Lotte should be noted and taken into consideration.  We welcome requests from clients of names they want to see added to the universe.


RRG Proprietary Corporate Governance Scoring System Identifies Poor Governance in Korea

This week I briefly look at recent bifurcations in <a href="https://www.smartkarma.com/entities/7615" target="_blank" data-smartkarma-citation="entities:7615:1">Orion Holdings Corp (001800 KS)</a>, <a href="https://www.smartkarma.com/entities/3287" target="_blank" data-smartkarma-citation="entities:3287:1">Avic International Holdings Ltd (161 HK)</a>, amongst others.These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % - of at least 20%.A detailed NAV for a number of these parent/holding relationships highlighted can be found in our holdco monitor.

This week I briefly look at recent bifurcations in Orion Holdings Corp (001800 KS), Avic International Holdings Ltd (161 HK), amongst others.These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % - of at least 20%.A detailed NAV for a number of these parent/holding relationships highlighted can be found in our holdco monitor.

StubWorld - Set-Up & Unwind Extremes: Orion Holdings, AVIC

South Korea

LS Corp is a holding company, which operated subsidiaries including LS Industrial Systems, LS Cable, LS-Nikko Copper and LS Mtron.

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LS Corp (006260 KS)

LG Corp (003550 KS): Whitebox States Its Case

A ~64% discount to NAV - or 66% if using Whitebox's calcs - is non-sensical, and provides a good risk-adjusted return. The downside appears limited...

David Blennerhassett

LS EV Korea IPO Preview

LS EV Korea is getting ready to complete its IPO in the Korean stock market in March. LS EV Korea Ltd (1566799D KS) makes automotive EV related...

Douglas Kim

Trump Pressures the Korean Government to Ban Huawei in Korea - The Biggest Gray Rhino Event of 2019?

The Huawei crisis has finally erupted in Korea. The Huawei crisis will now likely be one of the most important events facing the Korean economy in...

Douglas Kim

RRG Proprietary Corporate Governance Scoring System Identifies Poor Governance in Korea

Our proprietary corporate governance scoring system now covers over 1,985 stocks including over 200 in Korea. We recently added a coverage of 28...

David Riedel

StubWorld - Set-Up & Unwind Extremes: Orion Holdings, AVIC

This week I briefly look at recent bifurcations in Orion Holdings Corp (001800 KS), Avic International Holdings Ltd (161 HK), amongst others.These...

David Blennerhassett

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