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

The Korea Fair Trade Commission (KFTC) annually designates local conglomerates having an aggregate asset value of more than ₩5T as a Business Group Subject to Disclosure. These are the largest industrial conglomerates designated as a Business Group Subject to Disclosure as of the last yearend.









Rank
Conglomerate
Aggregate asset value
Number of subsidiaries
Holdco type


1
Samsung
₩424.9T
59
De-facto operating holdco


2
Hyundai Motor
₩234.7T
54
-


3
SK
₩225.5T
125
Legitimate operating holdco


4
LG
₩137.0T
70
Legitimate pure holdco


5
Lotte
₩121.5T
86
Legitimate pure holdco


6
POSCO
₩80.3T
35
-


7
Hanwha
₩71.7T
86
De-facto pure holdco


8
GS
₩66.8T
69
Legitimate pure holdco


9
Hyundai Heavy Industries
₩62.9T
30
Legitimate pure holdco


10
Shinsegae
₩44.1T
41
-


11
KT
₩36.3T
44
-


12
CJ
₩34.5T
77
Legitimate pure holdco


13
Hanjin
₩33.6T
31
Legitimate pure holdco


14
Doosan
₩29.3T
25
De facto pure holdco


15
LS
₩23.7T
54
Legitimate operating holdco


16
Booyoung
₩23.3T
23
-


17
DL
₩18.7T
32
Legitimate operating holdco

Source: Kore Fair Trade Commission

Of these 17 largest industrial conglomerates having an aggregate asset value of more than ₩20T, 6 business groups are suitable for pair trading with a synthetic subsidiary.
Samsung Group
SK Group
LG Group
Lotte Group
Hanwha Group
CJ Group
Hyundai Motor Group is a circular shareholding structure, not suitable for pair trading. POSCO, Shinsegae, KT, LS, and DL have substantial operating operations outweighing their respective listed subsidiaries. GS and Hyundai Heavy Industries have a significant presence from the unlisted companies: GS Caltex and Hyundai Oilbank. Hanjin and Doosan are more of single-subsidiary holding companies. Lastly, Booyoung is a privately-held company.Discount to NAV Samsung C&amp;T has the highest discount to the NAV at 62.77%, followed by SK Inc with 52.14%. On the other hand, CJ Corp has the lowest discount at 34.19%. Hanwha Corp also has a lower discount than the others at 38.87%.











NAV
LG Corp
Samsung C&amp;T Corp
SK Inc
Lotte Corp
Hanwha Corp
CJ Corp


Value of listed holdings
₩41,080.4B
₩52,346.7B
₩24,237.4B
₩5,377.5B
₩4,501.4B
₩5,038.1B


- % of Holdco market cap
188.20%
201.51%
128.30%
139.29%
195.29%
158.42%


Value of unlisted holdings
₩2,631.7B
₩2,528.3B
₩9,890.5B
₩1,147.7B
₩1,657.0B
₩311.7B


Stub value
-₩21,883.7B
-₩28,897.7B
-₩15,236.2B
-₩2,664.6B
-₩3,853.5B
-₩2,169.5B


Stub value per share
-₩126,820
-₩154,626
-₩216,545
-₩25,399
-₩51,408
-₩74,357


Value of operating assets
₩0.0B
₩6,100.3B
₩2,235.2B
₩0.0B
₩0.0B
₩0.0B


GAV
₩43,712.1B
₩60,975.2B
₩36,363.1B
₩6,525.2B
₩6,158.4B
₩5,349.8B


GAV per share
₩253,320
₩373,019
₩695,187
₩92,157
₩89,623
₩197,713


Discount to GAV (excl. treasury shares)
50.06%
62.74%
61.38%
60.07%
65.69%
44.87%


Holdco net cash/debt (de-consolidated)
₩1,941.8B
₩268.6B
-₩6,879.4B
-₩1,764.4B
-₩2,330.8B
-₩357.6B


Value of pref shares
₩329.8B
₩219.7B
₩140.4B
₩63.2B
₩371.0B
₩510.3B


NAV
₩45,324.1B
₩61,024.1B
₩29,343.3B
₩4,697.6B
₩3,456.7B
₩4,481.9B


NAV per share (excl. treasury shares)
₩262,662
₩373,318
₩560,983
₩66,346
₩50,304
₩165,638


Discount to NAV
51.84%
62.77%
52.14%
44.53%
38.87%
34.19%

Source: KRX &amp; DART

Synthetic subsidiary weightThe number of subsidiaries in a synthetic varies from 2 to 4, representing 67.91% to 130.22% of the NAV. LG Corp has 4, the most, having a synthetic weight of 87.87% of the NAV. SK Inc has 3 subsidiaries in its synthetic, representing 67.91% of the NAV. 









Holdco pair
Number of subsidiaries in a synthetic
Synthetic subsidiary weight in NAV
Synthetic subsidiary weight in GAV


LG Corp
4
87.87%
91.11%


Samsung C&amp;T Corp
2
76.04%
76.10%


SK Inc
3
67.91%
54.80%


Lotte Corp
2
80.47%
57.93%


Hanwha Corp
3
130.22%
73.09%


CJ Corp
2
99.77%
83.58%

Source: KRX

Sigma on a 20-day moving averageWhen I'm writing this post (2 PM in Korea local time today), SK Inc and Hanwha Corp are in a diversion below -1.0σ on a 20-day moving average relative to their respective synthetic subsidiary. In contrast, CJ Corp is in a 2.0σ diversion, just the opposite way.











Sigma (σ) on a 20-day moving average
Today
T-1
T-2
T-3
T-4


LG Corp
0.87
1.02
1.26
1.39
1.56


Samsung C&amp;T Corp
-0.47
-0.55
0.30
-2.25
-2.53


SK Inc
-1.41
-1.64
-1.67
-1.74
-1.81


Lotte Corp
0.86
1.44
1.91
1.97
2.64


Hanwha Corp
-1.16
-0.77
-0.96
0.44
1.35


CJ Corp
1.92
1.03
0.54
0.82
1.83

Source: KRX



Korea Top Conglomerates Synthetic Pair Trading

<p>SK Telecom made another surprising announcement. It just said that it would cancel 8.7M treasury shares (all of them are ordinary shares) on May 6.</p><p>They represent 10.76% of the total shares and 90.61% of the current treasury shares. They are worth ₩2.64T at the last close. After this cancellation, SKT's treasury shareholding comes down to only 900,000 shares, representing a meager 1.11% of the shares outstanding.</p><table class="table table-striped">
<colgroup>
<col width="300">
<col width="300">
</colgroup>
<tbody>
<tr><td colspan="2" style="width: 723.636px;" data-sheets-value='{"1":2,"2":"Cancellation overview (₩B)"}'>Cancellation overview</td></tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Shares outstanding"}'>Shares outstanding</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":80745711}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=sum(R[1]C[0]:R[2]C[0])">80,745,711</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Treasury shares"}'>Treasury shares</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":9585568}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=sum(R[1]C[0]:R[2]C[0])">9,585,568</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Target qty."}'><strong>Target quantity for cancellation</strong></td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":8685568}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=R[2]C[0]"><strong>8,685,568</strong></td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of SO"}'><strong>- % of shares outstanding</strong></td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":0.10756692699132961}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[-1]C[0]/R[-7]C[0]"><strong>10.76%</strong></td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of common treasury shares"}'><strong>- % of treasury shares</strong></td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":0.9061088503049585}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[-2]C[0]/R[-6]C[0]"><strong>90.61%</strong></td>
</tr>
<tr>
<td style="width: 351.818px;"><strong>Shares outstanding after cancellation</strong></td>
<td style="text-align: right; width: 350.909px;"><strong>72,060,143</strong></td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Treasury shares after cancellation"}'>Treasury shares after cancellation</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":900000}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=R[-11]C[0]-R[-6]C[0]">900,000</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of SO"}'>- % of SO</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":0.011146102856162849}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[-1]C[0]/R[-15]C[0]">1.25%</td>
</tr>
<tr><td colspan="2" style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of pref"}'>Source: DART</td></tr>
</tbody>
</table><p><strong>Why canceling shares now?</strong></p><ul>
<li>SKT's treasury shares should come in handy for an eventual merger with SK Holdings. So, the initial speculation was transferring all the treasury shares to SKT intermediary Holdco so that SK Holdings can enjoy an increased amount of voting shares in SKT Opco after a merger.</li>
<li>That means, if there is no such merger in the future, SKT's treasury shares would not be much of use. The announced split is an equity spinoff, but this isn't a typical holding company conversion requiring a post-split tender offer to move SKT Opco under SKT intermediary Holdco. That is, these treasury shares regaining voting rights for SKT Opco wouldn't mean much for the major shareholder.</li>
<li><strong>So, keeping the treasury shares can send a wrong signal to SKT shareholders that a merger with SK Holdings may not be completely thrown away even though the management confirmed no such plan.</strong></li>
<li><strong>Obviously, the short-term priority is getting approval on the split from SKT shareholders, and anything that may impede it should be addressed now.</strong></li>
</ul>

SK Telecom made another surprising announcement. It just said that it would cancel 8.7M treasury shares (all of them are ordinary shares) on May 6.They represent 10.76% of the total shares and 90.61% of the current treasury shares. They are worth ₩2.64T at the last close. After this cancellation, SKT's treasury shareholding comes down to only 900,000 shares, representing a meager 1.11% of the shares outstanding.





Cancellation overview

Shares outstanding
80,745,711


Treasury shares
9,585,568


Target quantity for cancellation
8,685,568


- % of shares outstanding
10.76%


- % of treasury shares
90.61%


Shares outstanding after cancellation
72,060,143


Treasury shares after cancellation
900,000


- % of SO
1.25%

Source: DART

Why canceling shares now?
SKT's treasury shares should come in handy for an eventual merger with SK Holdings. So, the initial speculation was transferring all the treasury shares to SKT intermediary Holdco so that SK Holdings can enjoy an increased amount of voting shares in SKT Opco after a merger.
That means, if there is no such merger in the future, SKT's treasury shares would not be much of use. The announced split is an equity spinoff, but this isn't a typical holding company conversion requiring a post-split tender offer to move SKT Opco under SKT intermediary Holdco. That is, these treasury shares regaining voting rights for SKT Opco wouldn't mean much for the major shareholder.
So, keeping the treasury shares can send a wrong signal to SKT shareholders that a merger with SK Holdings may not be completely thrown away even though the management confirmed no such plan.
Obviously, the short-term priority is getting approval on the split from SKT shareholders, and anything that may impede it should be addressed now.


SK Telecom Share Cancellation: Why Doing It Now & Potential Impacts

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<div class="content-highlight"><p>In this insight, we highlight the closing of the pricing gaps between the major Korean holdcos and opcos, especially with the upcoming end of the ban on the short selling of shares in Korea in May. In this insight, we highlight 26 pair trades that involve Korean holdcos and opcos.</p></div><p>Just a reminder that the ban on short selling of KOSPI 200 and KOSDAQ 150 included stocks will remain in place until May 2nd and investors will be able to resume their shorting on these 350 stocks starting on May 3rd. Once this ban on short selling of stocks ends, there could be more investors that may look to add to the holdco shares and short the opco shares (especially among the pairs where the holdco shares have underperformed the opco shares in the past year). However, some of these moves have already started to take place in the past few weeks, which could reduce the overall profits on the pair trades. </p><p>Traditionally, the pair trades involving Korean holdcos and opcos have been a trading strategy that many hedge funds have employed for many years. However, the ban on short selling of stocks in Korea have prevented many of these funds from employing these pair trade strategies. Once the ban ends, you will likely see these funds becoming more active in these trading methods once again. </p><div class="content-highlight">
<p>In the section below, we separated the pair trades into two different sections. The first table involves major opcos outperforming holdcos (regular and quasi) in the past year. Of the 26 pair trade strategies mentioned in this insight, this section I involves 19 of them (73% of total). The section II (which involve holdcos outperforming the opcos in the past year) involves 7 pair trade strategies (27% of total).</p>
<p>In other words, the opcos in general have vastly outperformed the holdcos in the past year, especially due to the ban on the short selling of stocks in Korea. Because the opcos tend to be the bigger company than the holdcos in terms of market cap, many fund managers (both active and passive) have tended to just invest in the opcos and pay less attention to the holdcos.  </p>
</div><p>Also, we described the holdcos as either regular or quasi. SK Telecom and Samsung C&amp;T would be examples of "quasi" holdcos whereas Orion Holdings and Hanjin Kal would be examples of regular holdcos. </p>

In this insight, we highlight the closing of the pricing gaps between the major Korean holdcos and opcos, especially with the upcoming end of the ban on the short selling of shares in Korea in May. In this insight, we highlight 26 pair trades that involve Korean holdcos and opcos.Just a reminder that the ban on short selling of KOSPI 200 and KOSDAQ 150 included stocks will remain in place until May 2nd and investors will be able to resume their shorting on these 350 stocks starting on May 3rd. Once this ban on short selling of stocks ends, there could be more investors that may look to add to the holdco shares and short the opco shares (especially among the pairs where the holdco shares have underperformed the opco shares in the past year). However, some of these moves have already started to take place in the past few weeks, which could reduce the overall profits on the pair trades. Traditionally, the pair trades involving Korean holdcos and opcos have been a trading strategy that many hedge funds have employed for many years. However, the ban on short selling of stocks in Korea have prevented many of these funds from employing these pair trade strategies. Once the ban ends, you will likely see these funds becoming more active in these trading methods once again. 
In the section below, we separated the pair trades into two different sections. The first table involves major opcos outperforming holdcos (regular and quasi) in the past year. Of the 26 pair trade strategies mentioned in this insight, this section I involves 19 of them (73% of total). The section II (which involve holdcos outperforming the opcos in the past year) involves 7 pair trade strategies (27% of total).
In other words, the opcos in general have vastly outperformed the holdcos in the past year, especially due to the ban on the short selling of stocks in Korea. Because the opcos tend to be the bigger company than the holdcos in terms of market cap, many fund managers (both active and passive) have tended to just invest in the opcos and pay less attention to the holdcos.  
Also, we described the holdcos as either regular or quasi. SK Telecom and Samsung C&amp;T would be examples of "quasi" holdcos whereas Orion Holdings and Hanjin Kal would be examples of regular holdcos. 

Closing the Gap: Korean Holdcos Vs. Opcos

Founder/CEO of ROK Advisory, ROK Advisory LLC

Ken S. Kim

Founder/CEO of ROK Advisory

ROK Advisory LLC

ROK is an independent research advisory firm. We guide you to minimize the information gap between foreign and local investors in Northeast Asia with a focus in Korea, Taiwan and Japan.

Independent Research Advisory Firm

Equity Bottom-Up

<p>In Korea the safest way to invest is to align your interest as a minority shareholder with those of the family?  Usually the key asset of the chaebol is apparent but what about SK Group? It seems we have an opportunity to hone in what the key asset is.</p>

In Korea the safest way to invest is to align your interest as a minority shareholder with those of the family?  Usually the key asset of the chaebol is apparent but what about SK Group? It seems we have an opportunity to hone in what the key asset is.

The Chaebol Dilemma - What's the Family Jewel(S)?

<p>SK Telecom finally announced its plans for an equity spinoff.</p><div class="content-highlight">
<p><strong>SKT will be split into two companies.</strong></p>
<ul>
<li><strong>The surviving company: tentatively named 'AI &amp; Digital Infra Company'</strong></li>
<li><strong>The newly spun-off company: tentatively named 'ICT Investment Company'</strong></li>
</ul>
</div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/200/589/original/1.jpeg?1618405943" class="editor-image img-responsive" data-smartkarma-image-id="200589"></figure></section><div class="content-caption">(Source: SK Telecom)</div><p>Here is the regulatory filing at KRX KIND.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/200/588/original/Screen+Shot+2021-04-14+at+9.08.48+AM.png?1618405789" class="editor-image img-responsive" data-smartkarma-image-id="200588"></figure></section><div class="content-caption"><a href="https://engkind.krx.co.kr/common/disclsviewer.do?method=search&amp;acptNo=20210414000385&amp;docno=&amp;formProcsCd=070&amp;language=english" target="_blank" rel="noopener">(Source: KRX KIND)</a></div><hr><div class="content-highlight"><h2>Key points in the announcement</h2></div><ul>
<li>SKT wants this equity spinoff to unlock the market valuation for the telecom (SKT itself), semiconductor (Hynix), and the remaining ICT businesses (ADT Caps, 11st, etc.).</li>
<li>SKT also wants to offer investors two separate investment options: telecom (value and steady) and non-telecom (growth and more volatile).</li>
<li>The spinoff company will actively seek investment activities. It plans to invest in both domestic and overseas semiconductor companies.</li>
<li>The spinoff company will also promote IPOs of its subsidiaries: ADT Caps, 11st, and T Map Mobility.</li>
<li>SKT stated that it has no plans to merge the spinoff company with SK Inc.</li>
<li>SKT plans to complete this equity spinoff within this year.</li>
</ul>

SK Telecom finally announced its plans for an equity spinoff.
SKT will be split into two companies.

The surviving company: tentatively named 'AI &amp; Digital Infra Company'
The newly spun-off company: tentatively named 'ICT Investment Company'

(Source: SK Telecom)Here is the regulatory filing at KRX KIND.(Source: KRX KIND)Key points in the announcement
SKT wants this equity spinoff to unlock the market valuation for the telecom (SKT itself), semiconductor (Hynix), and the remaining ICT businesses (ADT Caps, 11st, etc.).
SKT also wants to offer investors two separate investment options: telecom (value and steady) and non-telecom (growth and more volatile).
The spinoff company will actively seek investment activities. It plans to invest in both domestic and overseas semiconductor companies.
The spinoff company will also promote IPOs of its subsidiaries: ADT Caps, 11st, and T Map Mobility.
SKT stated that it has no plans to merge the spinoff company with SK Inc.
SKT plans to complete this equity spinoff within this year.


SK Telecom Equity Spinoff Announcement: Summary, Takeaways, & Price Impact

South Korea

SK Holdings Co., Ltd. is a holdings company that is engaged in various industries including energy, chemicals, information technology, semiconductors, marketing, and services businesses in South Korea and internationally.

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SK Inc (034730 KS)

Korea Top Conglomerates Synthetic Pair Trading

This post explores pair trading opportunities on Korea's top conglomerates using their major subsidiaries as a synthetic target for a hedge.

Sanghyun Park

Closing the Gap: Korean Holdcos Vs. Opcos

In this insight, we highlight the closing of the pricing gaps between the major Korean holdcos and opcos, especially with the upcoming end of the...

Douglas Kim

The Chaebol Dilemma - What's the Family Jewel(S)?

What is the key asset of the SK Group and how should we play this over the course of time ? Here's at least what we should consider

Ken S. Kim

SK Telecom Equity Spinoff Announcement: Summary, Takeaways, & Price Impact

SKT finally announces an equity spinoff. This post summarizes the announcement along with key takeaways and immediate term price impact.

Sanghyun Park

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Korea Top Conglomerates Synthetic Pair Trading

This post explores pair trading opportunities on Korea's top conglomerates using their major subsidiaries as a synthetic target for a hedge.

Sanghyun Park

SK Telecom Share Cancellation: Why Doing It Now & Potential Impacts

SK Telecom made a huge treasury share cancellation announcement this morning. This post discusses why doing it now and examines potential impacts.

Sanghyun Park

Closing the Gap: Korean Holdcos Vs. Opcos

In this insight, we highlight the closing of the pricing gaps between the major Korean holdcos and opcos, especially with the upcoming end of the...

Douglas Kim

The Chaebol Dilemma - What's the Family Jewel(S)?

What is the key asset of the SK Group and how should we play this over the course of time ? Here's at least what we should consider

Ken S. Kim

SK Telecom Equity Spinoff Announcement: Summary, Takeaways, & Price Impact

SKT finally announces an equity spinoff. This post summarizes the announcement along with key takeaways and immediate term price impact.

Sanghyun Park