Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Event-Driven

<p>In this insight, we explain the recent minority shareholders upheaval of <a href="https://www.smartkarma.com/entities/celltrion-inc" target="_blank" data-smartkarma-citation="entities:991:1" rel="noopener">Celltrion Inc (068270 KS). </a>We also discuss the following important issues:</p><ul>
<li>Increasing concerns about the excessive inheritance taxes and the transition of the major shareholding from the former Chairman of Celltrion Group Seo Jung-Jin to his sons</li>
<li>The timing of the merger of the three major Celltrion companies (Celltrion Inc, <a href="https://www.smartkarma.com/entities/celltrion-healthcare" target="_blank" data-smartkarma-citation="entities:23641:1" rel="noopener">Celltrion Healthcare (091990 KS)</a>, and <a href="https://www.smartkarma.com/entities/celltrion-pharm-inc" target="_blank" data-smartkarma-citation="entities:992:1" rel="noopener">Celltrion Pharm (068760 KS))</a>
</li>
<li>Rising inventory at Celltrion Healthcare &amp; tax Issue for Founder Seo Jung-Jin</li>
</ul><p>It was reported in the<a href="http://www.sisaweek.com/news/articleView.html?idxno=147919" target="_blank" rel="noopener"> local media</a> that some of the local minority shareholders of Celltrion have formed an <em>"emergency response committee"</em> in order to prepare for an official activist stance to urge the company to improve its corporate governance. In recent months, share price of <a href="https://www.smartkarma.com/entities/celltrion-inc" target="_blank" data-smartkarma-citation="entities:991:1" rel="noopener">Celltrion Inc (068270 KS)</a> has declined significantly and this has made many minority shareholders very upset. Celltrion's share price has declined 44% since its highs in December 2020. </p><p><strong>Conclusion - </strong>There are numerous uncertainties facing Celltrion Inc right now. The two biggest uncertainties include the transfer of the controlling ownership stake from the founder Seo Jung-Jin to his two sons along with the merger of the three public Celltrion companies. A few retail minority shareholders formed an <em>emergency response committee</em> in order to raise more voice to improve corporate governance. </p><p>In the midst of these uncertainties, we believe that there could be further weakness in Celltrion Inc. Although a merger of the three public Celltrion companies could boost the share price in the short term, there remain concerns about the excessive inventory at Celltrion Healthcare/Celltrion Inc and until the financials of the three companies on a merged basis become available, there could be continued negative sentiment on the company.</p>

In this insight, we explain the recent minority shareholders upheaval of Celltrion Inc (068270 KS). We also discuss the following important issues:
Increasing concerns about the excessive inheritance taxes and the transition of the major shareholding from the former Chairman of Celltrion Group Seo Jung-Jin to his sons
The timing of the merger of the three major Celltrion companies (Celltrion Inc, Celltrion Healthcare (091990 KS), and Celltrion Pharm (068760 KS))

Rising inventory at Celltrion Healthcare &amp; tax Issue for Founder Seo Jung-Jin
It was reported in the local media that some of the local minority shareholders of Celltrion have formed an "emergency response committee" in order to prepare for an official activist stance to urge the company to improve its corporate governance. In recent months, share price of Celltrion Inc (068270 KS) has declined significantly and this has made many minority shareholders very upset. Celltrion's share price has declined 44% since its highs in December 2020. Conclusion - There are numerous uncertainties facing Celltrion Inc right now. The two biggest uncertainties include the transfer of the controlling ownership stake from the founder Seo Jung-Jin to his two sons along with the merger of the three public Celltrion companies. A few retail minority shareholders formed an emergency response committee in order to raise more voice to improve corporate governance. In the midst of these uncertainties, we believe that there could be further weakness in Celltrion Inc. Although a merger of the three public Celltrion companies could boost the share price in the short term, there remain concerns about the excessive inventory at Celltrion Healthcare/Celltrion Inc and until the financials of the three companies on a merged basis become available, there could be continued negative sentiment on the company.

Celltrion Inc - The Minority Shareholders Upheaval & Concerns About Potential Inheritance Tax Issue

Equity Bottom-Up

<div class="content-highlight">
<p>In this insight, we provide an updated NAV valuation analysis of <a href="https://www.smartkarma.com/entities/sk-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:393:1" rel="noopener">SK Inc (034730 KS)</a>. Our updated base case valuation of SK Inc is 381,838 won per share, representing 45.5% higher than current share price.</p>
<p>In the next 12 months, we believe there is likely to be a greater emphasis on three of the unlisted companies of SK Inc including<strong> SK E&amp;S, SK Pharmteco, and SK Siltron</strong> which will increasingly be considered as potential IPO candidates.</p>
</div><ul>
<li>
<strong>SK E&amp;S</strong> is a private company that is 90% owned by <a href="https://www.smartkarma.com/entities/sk-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:393:1" rel="noopener">SK Inc (034730 KS)</a>. In early September, SK E&amp;S provided a detailed plan to aggressively expand its hydrogen, LNG, and renewable operations by 2025.</li>
<li>
<a href="https://www.ezyeconomy.com/news/articleView.html?idxno=111825" target="_blank" rel="noopener">SK Pharmteco's</a> sales increased form 110 billion won in 2017 to 710 billion won in 2020. As of July 2021, the local media mentioned that the value of SK Pharmteco could be nearly 2 trillion won but this valuation could rise to nearly 10 trillion in two to three years if the company continues to make strong progress in the CMO sector.</li>
<li>
<a href="https://www.businesspost.co.kr/BP?command=article_view&amp;num=251332" target="_blank" rel="noopener"><strong>SK Siltron</strong></a> is another private company owned SK Inc that is seriously being considered for an IPO. In September 2021, the local media mentioned that SK Siltron could be valued at about 4 to 5 trillion won. </li>
</ul>


In this insight, we provide an updated NAV valuation analysis of SK Inc (034730 KS). Our updated base case valuation of SK Inc is 381,838 won per share, representing 45.5% higher than current share price.
In the next 12 months, we believe there is likely to be a greater emphasis on three of the unlisted companies of SK Inc including SK E&amp;S, SK Pharmteco, and SK Siltron which will increasingly be considered as potential IPO candidates.


SK E&amp;S is a private company that is 90% owned by SK Inc (034730 KS). In early September, SK E&amp;S provided a detailed plan to aggressively expand its hydrogen, LNG, and renewable operations by 2025.

SK Pharmteco's sales increased form 110 billion won in 2017 to 710 billion won in 2020. As of July 2021, the local media mentioned that the value of SK Pharmteco could be nearly 2 trillion won but this valuation could rise to nearly 10 trillion in two to three years if the company continues to make strong progress in the CMO sector.

SK Siltron is another private company owned SK Inc that is seriously being considered for an IPO. In September 2021, the local media mentioned that SK Siltron could be valued at about 4 to 5 trillion won. 


SK Inc - SoTP Valuation Analysis and 3 Key Catalysts (SK E&S, SK Pharmteco, & SK Siltron)

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.

<p>The 3-way merger between Celltrion Holdings has been completed. Now, the market's attention is shifting to the merger of Celltrion, Celltrion Healthcare, and Celltrion Pharm.</p><div class="content-highlight"><p><strong>Perhaps the most crucial investment point in this second 3-way merger is short covering.</strong></p></div><hr><h2>What short covering?</h2><p>The prominent institutional investors that lend stocks for short selling in Korea are local ETF/index fund operators and pension funds. And among them, pension funds often recall shares to exercise shareholder rights in the event of a merger.</p><p>It then leads to an increase in demand for short coverings. We have often witnessed stock price overshooting immediately after the merger announcement. The most salient example was the Samsung Engineering &amp; Samsung Heavy Industries merger back in 2016. Samsung Engineering soared 12% right after the merger announcement, presumably due to the recall of pension funds.</p><p>However, it is essential to note that the recall is not compulsory even for stocks of an extinct entity in a merger between listed companies. <span>Stocks borrowed for short-selling are automatically transferred to newly issued stocks with only the title of an underlying share changed.</span></p><div class="content-highlight"><ul>
<li><strong>Nevertheless, the possibility of a short-term stock overshooting due to a recall cannot be ruled out in the event of a merger between companies with high stakes held by pension funds and high short interest.</strong></li>
<li><strong>Although the short interest of the three Celltrion companies has decreased a lot compared to the past, they are still maintaining a considerable level. In the case of Celltrion, short interest is 2.89% of the SO, nearly 4M shares which are 6~7x days to cover. </strong></li>
<li><strong>In addition, the proportion of investment in Celltrion and Celltrion Healthcare by local pension funds is relatively large.</strong></li>
</ul></div><p>Of course, we also have to note that the National Pension Service, the largest pension fund, has not yet resumed lending of domestic stocks, so the short-covering impact of the recall is bound to be less than in the past.</p>

The 3-way merger between Celltrion Holdings has been completed. Now, the market's attention is shifting to the merger of Celltrion, Celltrion Healthcare, and Celltrion Pharm.Perhaps the most crucial investment point in this second 3-way merger is short covering.What short covering?The prominent institutional investors that lend stocks for short selling in Korea are local ETF/index fund operators and pension funds. And among them, pension funds often recall shares to exercise shareholder rights in the event of a merger.It then leads to an increase in demand for short coverings. We have often witnessed stock price overshooting immediately after the merger announcement. The most salient example was the Samsung Engineering &amp; Samsung Heavy Industries merger back in 2016. Samsung Engineering soared 12% right after the merger announcement, presumably due to the recall of pension funds.However, it is essential to note that the recall is not compulsory even for stocks of an extinct entity in a merger between listed companies. Stocks borrowed for short-selling are automatically transferred to newly issued stocks with only the title of an underlying share changed.
Nevertheless, the possibility of a short-term stock overshooting due to a recall cannot be ruled out in the event of a merger between companies with high stakes held by pension funds and high short interest.
Although the short interest of the three Celltrion companies has decreased a lot compared to the past, they are still maintaining a considerable level. In the case of Celltrion, short interest is 2.89% of the SO, nearly 4M shares which are 6~7x days to cover. 
In addition, the proportion of investment in Celltrion and Celltrion Healthcare by local pension funds is relatively large.
Of course, we also have to note that the National Pension Service, the largest pension fund, has not yet resumed lending of domestic stocks, so the short-covering impact of the recall is bound to be less than in the past.

Celltrion 3-Way Merger Timing & Trading Approach Aiming for Immediate Short Covering

<p>Celltrion and Celltrion Healthcare, which have been moving quite tightly recently, experienced a significant level of divergence last Friday.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/646/original/1.png?1632020309" class="editor-image img-responsive" data-smartkarma-image-id="230646"></figure></section><p>Celltrion vs. Celltrion Healthcare is at -1.72σ on a 20-day moving average as of last Friday's close. This level of price divergence is the largest since early June.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/647/original/image_95913332721632020426124.png?1632020428" class="editor-image img-responsive" data-smartkarma-image-id="230647"></figure><p>For the past month, Celltrion Healthcare's earnings estimates have been adjusted more significantly than those of Celltrion. On a local street consensus basis, Celltrion's 2022 net profit was revised down by 3.16%, while Celltrion Healthcare's was downgraded by 6.75%. Nevertheless, Celltrion Healthcare's 12M forward PER rose 3.69%p higher than that of Celltrion.</p><table class="table table-striped">
<colgroup>
<col width="70">
<col width="70">
<col width="70">
<col width="70">
<col width="70">
<col width="70">
<col width="70">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"FY2022E"}'>FY2022E</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Celltrion, T"}'>Celltrion, T</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Celltrion, T-1M"}' data-sheets-numberformat='[null,4,"[$₩]#,##0"]'>Celltrion, T-1M</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"MoM Δ"}' data-sheets-numberformat='[null,4,"[$₩]#,##0"]'>MoM Δ</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Celltrion H, T"}'>Celltrion H, T</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Celltrion H, T-1M"}' data-sheets-numberformat='[null,4,"[$₩]#,##0"]'>Celltrion H, T-1M</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"MoM Δ"}' data-sheets-numberformat='[null,4,"[$₩]#,##0"]'>MoM Δ</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NP to controlling stake"}' data-sheets-numberformat='[null,3,"0.00%",1]'>Consensus net profit to controlling stake</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":830}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[0]C[6]/10">₩830.0B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":857.1}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[0]C[6]/10">₩857.1B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-0.03161824757904565}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[0]C[-2]-R[0]C[-1])/R[0]C[-1]"><strong>-3.16%</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":370}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'>₩370.0B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":396.8}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]'>₩396.8B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-0.06754032258064518}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[0]C[-2]-R[0]C[-1])/R[0]C[-1]"><strong>-6.75%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"12M PER "}'>12M forward PER</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":47.67}' data-sheets-numberformat='[null,2,"0.00x"]' data-sheets-formula="=R[0]C[6]">47.67x</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":46.68}' data-sheets-numberformat='[null,2,"0.00x"]' data-sheets-formula="=R[0]C[6]">46.68x</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.021208226221079735}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[0]C[-2]-R[0]C[-1])/R[0]C[-1]"><strong>+2.12%</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":52.29}' data-sheets-numberformat='[null,2,"0.00x"]'>52.29x</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":49.42}' data-sheets-numberformat='[null,2,"0.00x"]'>49.42x</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.058073654390934794}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[0]C[-2]-R[0]C[-1])/R[0]C[-1]"><strong>+5.81%</strong></td>
</tr>
<tr><td colspan="7" rowspan="1" data-sheets-value='{"1":2,"2":"Source: FnGuide"}' data-sheets-numberformat='[null,4,"[$₩]#,##0"]'>Source: FnGuide</td></tr>
</tbody>
</table>

Celltrion and Celltrion Healthcare, which have been moving quite tightly recently, experienced a significant level of divergence last Friday.Celltrion vs. Celltrion Healthcare is at -1.72σ on a 20-day moving average as of last Friday's close. This level of price divergence is the largest since early June.For the past month, Celltrion Healthcare's earnings estimates have been adjusted more significantly than those of Celltrion. On a local street consensus basis, Celltrion's 2022 net profit was revised down by 3.16%, while Celltrion Healthcare's was downgraded by 6.75%. Nevertheless, Celltrion Healthcare's 12M forward PER rose 3.69%p higher than that of Celltrion.











FY2022E
Celltrion, T
Celltrion, T-1M
MoM Δ
Celltrion H, T
Celltrion H, T-1M
MoM Δ


Consensus net profit to controlling stake
₩830.0B
₩857.1B
-3.16%
₩370.0B
₩396.8B
-6.75%


12M forward PER
47.67x
46.68x
+2.12%
52.29x
49.42x
+5.81%

Source: FnGuide



Last Friday's Price Divergence in Celltrion Vs. Celltrion Healthcare

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

<div>
<p>In this analysis, we provide a detailed overview of investor positioning among 96 active Asia Ex-Japan funds with combined AUM of $80bn.  Highlights:</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>The big four of China &amp; HK, Taiwan, South Korea and India dominate holdings in Asia Ex-Japan.  The 4 countries combined account for 85.4% of total allocations, though all but India are held underweight versus the MSCI Asia Ex-Japan index.</li>
<li>China &amp; HK's weight in Asia Ex-Japan funds stands at a 4-year low of 42.96% having fallen heavily from the high of 52% back in August 2020.</li>
<li>Allocations in Indian stocks hit a new all-time high last month of 13.54%.  India has been the go-to overweight holding since the election of Narendra Modi in 2014, though managers are much more closely aligned to benchmark today.</li>
<li>
<p>Indonesian allocations are close to their lowest levels on record.  Only 82.8% of the Asia Ex-Japan managers in our analysis have exposure to Indonesia,  with Comgest, Barings and Vontobel closing exposure over the last 6-months.</p>
</li>
<li>Information Technology dominates the holdings picture, being both the largest sector holding and the largest sector overweight by some distance.  Opposing this are net underweights in Health Care (-1.61%), Materials (-1.25%) and Financials (-1.17%). </li>
<li>The key antagonist in China's tech crackdown, Consumer Discretionary weights have fallen from a high of 21.35% in October 2020 to 16.84% today.  In tandem, active managers have moved from an overweight of 2.18% to an underweight of -0.12%.  Confidence has certainly taken a knock.</li>
</ul>
<p>Also analyzed in more detail:  Thailand, Health Care, Indian Financials, South Korean Consumer Staples, China Financials, <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> , <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> , <a href="https://www.smartkarma.com/entities/midea-group-co-ltd-a" target="_blank" data-smartkarma-citation="entities:16185:1" rel="noopener">Midea Group Co Ltd A (000333 CH)</a> and <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US).</a></p>
<p><em>Analysis taken from our Asia Ex-Japan research, covering 96 active Asia Ex-Japan funds with combined AUM of $80bn. </em></p>
</div>


In this analysis, we provide a detailed overview of investor positioning among 96 active Asia Ex-Japan funds with combined AUM of $80bn.  Highlights:



The big four of China &amp; HK, Taiwan, South Korea and India dominate holdings in Asia Ex-Japan.  The 4 countries combined account for 85.4% of total allocations, though all but India are held underweight versus the MSCI Asia Ex-Japan index.
China &amp; HK's weight in Asia Ex-Japan funds stands at a 4-year low of 42.96% having fallen heavily from the high of 52% back in August 2020.
Allocations in Indian stocks hit a new all-time high last month of 13.54%.  India has been the go-to overweight holding since the election of Narendra Modi in 2014, though managers are much more closely aligned to benchmark today.

Indonesian allocations are close to their lowest levels on record.  Only 82.8% of the Asia Ex-Japan managers in our analysis have exposure to Indonesia,  with Comgest, Barings and Vontobel closing exposure over the last 6-months.

Information Technology dominates the holdings picture, being both the largest sector holding and the largest sector overweight by some distance.  Opposing this are net underweights in Health Care (-1.61%), Materials (-1.25%) and Financials (-1.17%). 
The key antagonist in China's tech crackdown, Consumer Discretionary weights have fallen from a high of 21.35% in October 2020 to 16.84% today.  In tandem, active managers have moved from an overweight of 2.18% to an underweight of -0.12%.  Confidence has certainly taken a knock.

Also analyzed in more detail:  Thailand, Health Care, Indian Financials, South Korean Consumer Staples, China Financials, Baidu (BIDU US) , Sea Ltd (SE US) , Midea Group Co Ltd A (000333 CH) and JD.com Inc (ADR) (JD US).
Analysis taken from our Asia Ex-Japan research, covering 96 active Asia Ex-Japan funds with combined AUM of $80bn. 


Asia Ex-Japan Positioning:  India & Tech at Record Highs

South Korea

Celltrion Inc. produces and sells biosimilar products and also provides consignm ent processing service for other companies.  The Company's main product is Abata cept which is for arthritis treatment

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Celltrion Inc (068270 KS)

Celltrion Inc - The Minority Shareholders Upheaval & Concerns About Potential Inheritance Tax Issue

In this insight, we explain the recent minority shareholders upheaval of Celltrion Inc (068270 KS) and the potential timing of the merger of the...

Douglas Kim

SK Inc - SoTP Valuation Analysis and 3 Key Catalysts (SK E&S, SK Pharmteco, & SK Siltron)

In this insight, we provide an updated NAV valuation analysis of SK Inc. Our updated base case valuation of SK Inc is 381,838 won per share,...

Douglas Kim

Celltrion 3-Way Merger Timing & Trading Approach Aiming for Immediate Short Covering

This post examines the timing of the upcoming 3-way merger between Celltrion's three listed companies, along with trading approaches aiming for...

Sanghyun Park

Last Friday's Price Divergence in Celltrion Vs. Celltrion Healthcare

This post investigates what may have caused last Friday's price divergence in Celltrion vs. Celltrion Healthcare and discusses why it may get...

Sanghyun Park

Asia Ex-Japan Positioning: India & Tech at Record Highs

In this analysis, we provide a detailed overview of investor positioning among 96 active Asia Ex-Japan funds with combined AUM of $80bn.

Steven Holden

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