Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<p>SK Chemicals will spin out the electricity and steam (utility) supply business unit through a physical division, which means the newly created entity will be SK Chemicals' wholly-owned subsidiary. The name of the subsidiary is SK Multi-Utility Co., Ltd. (tentative name).</p><div class="content-highlight"><p><strong>This announcement came out at 4:30 pm after the market close today.</strong></p></div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/531/original/Screen+Shot+2021-09-13+at+8.19.49+AM.png?1631536475" class="editor-image img-responsive" data-smartkarma-image-id="229531"></figure></section><p>SK Multi-Utility has been producing the energy necessary for plant operation at the SK Chemicals Ulsan plant. It<span> has been supplying the energy needed for the Ulsan plant and selling the surplus energy to SK chemicals' affiliates. Last year, the division's sales were ₩37.3B. </span>If the spin-off is approved at the SK Chemicals extraordinary general meeting held on October 25, SK multi-utility will be officially launched on December 1.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/550/original/Screen+Shot+2021-09-13+at+9.04.36+AM.png?1631538429" class="editor-image img-responsive" data-smartkarma-image-id="229550"></figure></section><p><strong>Then, the closing date of the shareholder register for the general meeting was set as September 28.</strong></p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/552/original/Screen+Shot+2021-09-13+at+9.03.31+AM.png?1631538441" class="editor-image img-responsive" data-smartkarma-image-id="229552"></figure></section><p>In addition, SK Chemicals announced that after this split, SK Multi-Utility would invest ₩428.1B in facilities to convert the current business structure to an eco-friendly business structure. This investment will begin in May next year.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/553/original/Screen+Shot+2021-09-13+at+9.09.51+AM.png?1631538608" class="editor-image img-responsive" data-smartkarma-image-id="229553"></figure></section>

SK Chemicals will spin out the electricity and steam (utility) supply business unit through a physical division, which means the newly created entity will be SK Chemicals' wholly-owned subsidiary. The name of the subsidiary is SK Multi-Utility Co., Ltd. (tentative name).This announcement came out at 4:30 pm after the market close today.SK Multi-Utility has been producing the energy necessary for plant operation at the SK Chemicals Ulsan plant. It has been supplying the energy needed for the Ulsan plant and selling the surplus energy to SK chemicals' affiliates. Last year, the division's sales were ₩37.3B. If the spin-off is approved at the SK Chemicals extraordinary general meeting held on October 25, SK multi-utility will be officially launched on December 1.Then, the closing date of the shareholder register for the general meeting was set as September 28.In addition, SK Chemicals announced that after this split, SK Multi-Utility would invest ₩428.1B in facilities to convert the current business structure to an eco-friendly business structure. This investment will begin in May next year.

SK Chemicals' Timely Spinoff Announcement Amid Metrica's Activist Move: What to Make of It

<p>Many of the market participants were targeting the value disparity of SK Chemical vs. SK Chemicals. In the end, Metrica Partners became the first to make a move.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/700/original/Screen+Shot+2021-09-08+at+6.05.10+PM.png?1631139447" class="editor-image img-responsive" data-smartkarma-image-id="228700"></figure></section><div class="content-caption">(Source: Metrica Partners website)</div><hr><p>SK Chemicals vs. SK Bioscience was still a tight pair until the end of July, maintaining its NAV discount at around 70%. It is hard to see a NAV discount of 70% as severely distorted among Korean holding company/subsidiary pairs. Yes, it is still a harsh discount, but it isn't unprecedented either.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/692/original/Screen+Shot+2021-09-08+at+6.09.08+PM.png?1631138966" class="editor-image img-responsive" data-smartkarma-image-id="228692"></figure></section><p>But as SK Bioscience's stock price began to soar from August, the pair's coupling level completely collapsed.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/693/original/image_94055596421631139004681.png?1631139006" class="editor-image img-responsive" data-smartkarma-image-id="228693"></figure><p>Despite a significant correction in yesterday's stock prices (both SK Chemicals and SK Bioscience), thanks to Metrica, SK Chemicals is posting a discount to NAV of close to 80% based on yesterday's closing price.</p><table class="table table-striped">
<colgroup>
<col width="70">
<col width="70">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"NAV"}' data-sheets-note="Sang Hyun Park: Cases when a company's net cash position and the value of its publically traded interests are worth more than its market cap create the opportunity of a stub trade, in which investors can take a view that the company's core business will rise by shorting the minority stakes whilst going long the underlying. Such an opportunity has arisen in the wake of the Alibaba listing which has seen early investing company Yahoo trade at a discount to the value of its stake in Alibaba.">SK Chemicals NAV</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of listed holdings"}'>Value of listed holdings</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":15024.148650000001}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[8]C[5])">₩15,024.1B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - % of Holdco market cap"}'>- % of Holdco market cap</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":4.401029440164908}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[-1]C[0]/((R[3]C[-3]*R[0]C[-3])/1000000000)">440.10%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of unlisted holdings"}'>Value of unlisted holdings</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":82.819}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[7]C[5])">₩82.8B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stub value"}'>Stub value</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-11693.187112}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=(R[1]C[-3]*R[-2]C[-3]/1000000000)-R[-3]C[0]-R[-1]C[0]">-₩11,693.2B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stub value per share"}'>Stub value per share</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-995046.6405863609}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]*1000000000/R[-3]C[-3]">-₩995,047</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of operating assets"}'>Value of operating assets</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1500}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[8]C[5])">₩1,500.0B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"GAV"}'>GAV</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":16606.96765}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[-6]C[0]+R[-4]C[0]+R[-1]C[0]">₩16,607.0B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"GAV per share"}'>GAV per share</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1414711.2925308687}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]/R[4]C[-3]*1000000000">₩1,414,711</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Discount to GAV (excl. treasury shares)"}'>Discount to GAV (excl. treasury shares)</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.7946577499354616}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-4]C[-3])/R[-1]C[0]">79.47%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Holdco net cash/debt (de-consolidated)"}'>Holdco net cash/debt (de-consolidated)</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-6.7}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[5]C[5]">-₩6.7B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of pref shares"}'>Value of pref shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":237.033875}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=(R[-5]C[-3]*R[-2]C[-3]+R[-5]C[-2]*R[-2]C[-2])/1000000000">₩237.0B</td>
</tr>
<tr><td colspan="2"></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NAV"}'><strong>NAV</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":16363.233774999999}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[-5]C[0]+R[-2]C[0]-R[-1]C[0]"><strong>₩16,363.2B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NAV per share (excl. treasury shares)"}'><strong>NAV per share (excl. treasury shares)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1393948.1362098644}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]/R[-1]C[-3]*1000000000"><strong>₩1,393,948</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Discount to NAV"}'><strong>Discount to NAV</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.7915991330998386}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-9]C[-3])/R[-1]C[0]"><strong>79.16%</strong></td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: KRX &amp; DART","6":1}'>Source: KRX &amp; DART</td></tr>
</tbody>
</table><div class="content-highlight"><p><strong>The discount rate of 80% compared to NAV is still very badly distorted even with the local average. This means that, despite yesterday's price corrections, there is still more room to trade for value disparity on SK Chemicals vs. SK Bioscience.</strong></p></div>

Many of the market participants were targeting the value disparity of SK Chemical vs. SK Chemicals. In the end, Metrica Partners became the first to make a move.(Source: Metrica Partners website)SK Chemicals vs. SK Bioscience was still a tight pair until the end of July, maintaining its NAV discount at around 70%. It is hard to see a NAV discount of 70% as severely distorted among Korean holding company/subsidiary pairs. Yes, it is still a harsh discount, but it isn't unprecedented either.But as SK Bioscience's stock price began to soar from August, the pair's coupling level completely collapsed.Despite a significant correction in yesterday's stock prices (both SK Chemicals and SK Bioscience), thanks to Metrica, SK Chemicals is posting a discount to NAV of close to 80% based on yesterday's closing price.





SK Chemicals NAV

Value of listed holdings
₩15,024.1B


- % of Holdco market cap
440.10%


Value of unlisted holdings
₩82.8B


Stub value
-₩11,693.2B


Stub value per share
-₩995,047


Value of operating assets
₩1,500.0B


GAV
₩16,607.0B


GAV per share
₩1,414,711


Discount to GAV (excl. treasury shares)
79.47%


Holdco net cash/debt (de-consolidated)
-₩6.7B


Value of pref shares
₩237.0B



NAV
₩16,363.2B


NAV per share (excl. treasury shares)
₩1,393,948


Discount to NAV
79.16%

Source: KRX &amp; DART

The discount rate of 80% compared to NAV is still very badly distorted even with the local average. This means that, despite yesterday's price corrections, there is still more room to trade for value disparity on SK Chemicals vs. SK Bioscience.

Metrica's Activist Move on SK Chemical Is a Well-Thought-Out Strategy

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<p>A Singapore based activist hedge fund called Metrica Partners wrote a letter to the BOD of Sk Chemicals Co Ltd/New (285130 KS) which has become publicly available. The key highlights of the letter is that SK Chemicals should take partial profits on its stake in SK Bioscience (302440 KS) and pay higher dividends. Today, there was a big divergence in the share prices of SK Chemicals (up 8.8%) and SK Bioscience (down 6.7%). </p><p>Basically, the hedge fund believes that the shares of SK Chemicals are excessively undervalued, given its big stake (68.4%) in SK Bioscience. Metrica Partners currently has less than 5% stake in SK Chemicals. </p><div class="content-highlight">
<div>We believe that a higher probability scenario is for SK Chemicals to sell down about 3-5% stake in SK Bioscience which could be announced in the next 3-6 months. SK Bioscience currently has a market cap of 21.95 trillion won (287,000 won), If we take a 10% discount to this amount, it would be 19.76 trillion won and a 5% stake sale would involve 1 trillion won. </div>
<div></div>
<div>In other words, we would put a higher probability of SK Chemicals selling about 5% of its stake in SK Bioscience which could raise about 1 trillion won for the company. While this would be laudable, it would be much smaller than the measures proposed by Metrica. Of the 1 trillion won, we think that the BOD of SK Chemicals could allocate about 30-40% of this amount for special dividends.</div>
</div><div>All in all, a hedge fund going activist on SK Chemicals is likely to further rally the share price and we believe that the price gap between SK Chemicals and SK Bioscience is likely to narrow further in the weeks ahead. </div>

A Singapore based activist hedge fund called Metrica Partners wrote a letter to the BOD of Sk Chemicals Co Ltd/New (285130 KS) which has become publicly available. The key highlights of the letter is that SK Chemicals should take partial profits on its stake in SK Bioscience (302440 KS) and pay higher dividends. Today, there was a big divergence in the share prices of SK Chemicals (up 8.8%) and SK Bioscience (down 6.7%). Basically, the hedge fund believes that the shares of SK Chemicals are excessively undervalued, given its big stake (68.4%) in SK Bioscience. Metrica Partners currently has less than 5% stake in SK Chemicals. 
We believe that a higher probability scenario is for SK Chemicals to sell down about 3-5% stake in SK Bioscience which could be announced in the next 3-6 months. SK Bioscience currently has a market cap of 21.95 trillion won (287,000 won), If we take a 10% discount to this amount, it would be 19.76 trillion won and a 5% stake sale would involve 1 trillion won. 

In other words, we would put a higher probability of SK Chemicals selling about 5% of its stake in SK Bioscience which could raise about 1 trillion won for the company. While this would be laudable, it would be much smaller than the measures proposed by Metrica. Of the 1 trillion won, we think that the BOD of SK Chemicals could allocate about 30-40% of this amount for special dividends.
All in all, a hedge fund going activist on SK Chemicals is likely to further rally the share price and we believe that the price gap between SK Chemicals and SK Bioscience is likely to narrow further in the weeks ahead. 

Metrica Partners Urges SK Chemicals to Partially Sell SK Bioscience & Pay Higher Dividends

<p>Starting this year, KRX will rebalance the KOSPI size index series (LargeCap, MidCap, and SmallCap) twice a year. Until last year, it was done once a year in March (the option expiration date). <span>However, from this year, the rebalancing is done twice a year, in March and September.</span></p><div class="content-highlight"><ul>
<li><strong>The screening method is simple and clear. It is based on the 3-month average daily market cap.</strong></li>
<li><strong>LargeCap includes 1st to 100th, and MidCap takes 101st to 300th.</strong></li>
<li><strong>The screening base date is the last trading day of February and August. So, this September rebalancing review period is June 1 to August 31.</strong></li>
</ul></div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/227/642/original/Screen+Shot+2021-09-02+at+10.06.47+PM.png?1630634901" class="editor-image img-responsive" data-smartkarma-image-id="227642"></figure></section>

Starting this year, KRX will rebalance the KOSPI size index series (LargeCap, MidCap, and SmallCap) twice a year. Until last year, it was done once a year in March (the option expiration date). However, from this year, the rebalancing is done twice a year, in March and September.
The screening method is simple and clear. It is based on the 3-month average daily market cap.
LargeCap includes 1st to 100th, and MidCap takes 101st to 300th.
The screening base date is the last trading day of February and August. So, this September rebalancing review period is June 1 to August 31.


KOSPI LargeCap & MidCap Rebalancing Preview on September 9

Equity Bottom-Up

<p><strong>In this insight, we provide an NAV valuation sensitivity analysis of SK Chemicals. SK Chemicals has an 68.4% stake in <a href="https://www.smartkarma.com/entities/sk-bioscience-co-ltd" target="_blank" data-smartkarma-citation="entities:31484:1" rel="noopener">SK Bioscience (302440 KS)</a> which is worth 17.6 trillion won versus SK Chemicals' current market cap of 3.4 trillion won. </strong></p><ul>
<li>In Case A, we used the current market value of SK Bioscience. In the NAV analysis Case A, it suggests a target price of 766,134 won, which is 168% higher than current price.</li>
<li>In Case B, we used the average of the high/low value of SK Bioscience's share price in the past five months. In the NAV analysis Case B, it suggests a target price of 546,265 won, which is 91% higher than the current price.</li>
<li>In Case C, we used the low price of SK Bioscience in the past five months. In the NAV analysis Case C, it suggests a target price of 267,389 won, which is 6.5% lower than the current price.</li>
</ul><div class="content-highlight">
<p>Clearly, SK Chemicals is trading at a steep discount to its NAV. Part of this reason may be because the market may not be fully willing to reflect SK Bioscience's current market value on its controlling stake. Since its IPO in March 2021, SK Bioscience has been a huge winner and it has also vastly outperformed against SK Chemicals.</p>
<p>However, there appears to be too much valuation gap between these two companies and in the coming months, we believe that there is a higher probability of SK Chemicals outperforming versus SK Bioscience, especially as the value investors try to pick up on SK Chemicals whose market cap is only 19% of its stake in SK Bioscience. </p>
</div>

In this insight, we provide an NAV valuation sensitivity analysis of SK Chemicals. SK Chemicals has an 68.4% stake in SK Bioscience (302440 KS) which is worth 17.6 trillion won versus SK Chemicals' current market cap of 3.4 trillion won. 
In Case A, we used the current market value of SK Bioscience. In the NAV analysis Case A, it suggests a target price of 766,134 won, which is 168% higher than current price.
In Case B, we used the average of the high/low value of SK Bioscience's share price in the past five months. In the NAV analysis Case B, it suggests a target price of 546,265 won, which is 91% higher than the current price.
In Case C, we used the low price of SK Bioscience in the past five months. In the NAV analysis Case C, it suggests a target price of 267,389 won, which is 6.5% lower than the current price.

Clearly, SK Chemicals is trading at a steep discount to its NAV. Part of this reason may be because the market may not be fully willing to reflect SK Bioscience's current market value on its controlling stake. Since its IPO in March 2021, SK Bioscience has been a huge winner and it has also vastly outperformed against SK Chemicals.
However, there appears to be too much valuation gap between these two companies and in the coming months, we believe that there is a higher probability of SK Chemicals outperforming versus SK Bioscience, especially as the value investors try to pick up on SK Chemicals whose market cap is only 19% of its stake in SK Bioscience. 


SK Chemicals - Its Market Cap Is Only 19% of Its Stake in SK Bioscience

South Korea

SK Chemicals Co.,Ltd manufactures environmentally friendly materials. The Company produces and sells composites, high-performance materials, energy saving materials, and other products. SK Chemicals also offers total healthcare solutions services. SK Chemicals serves customers worldwide.

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SK Chemicals (285130 KS)

SK Chemicals' Timely Spinoff Announcement Amid Metrica's Activist Move: What to Make of It

SK Chemicals announced a very timely spinoff of one of its internal business divisions. This post discusses what we should make of this decision...

Sanghyun Park

Metrica's Activist Move on SK Chemical Is a Well-Thought-Out Strategy

This post discusses why Metrica's activist move against SK Chemicals is a well-thought-out strategy that can further and structurally reduce the...

Sanghyun Park

Metrica Partners Urges SK Chemicals to Partially Sell SK Bioscience & Pay Higher Dividends

Metrica Partners wrote a letter to the BOD of SK Chemicals which highlights that SK Chemicals should take partial profits on its stake in SK...

Douglas Kim

KOSPI LargeCap & MidCap Rebalancing Preview on September 9

This post previews KOSPI Size Index Series rebalancing that is again scheduled for September 9, the same day as the KRX BBIG index.

Sanghyun Park

SK Chemicals - Its Market Cap Is Only 19% of Its Stake in SK Bioscience

SK Chemicals has an 68.4% stake in SK Bioscience (302440 KS) which is worth 17.6 trillion won versus SK Chemicals' current market cap of 3.4...

Douglas Kim

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