Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Event-Driven

Daelim Industrial's BOD and shareholders agreed to spin-off the company into <a href="https://www.smartkarma.com/entities/dl-e-c-co-ltd" target="_blank" data-smartkarma-citation="entities:31375:1" rel="noopener">DL E&amp;C Co Ltd (375500 KS)</a> and <a href="https://www.smartkarma.com/entities/daelim-industrial-co-ltd" target="_blank" data-smartkarma-citation="entities:18095:1" rel="noopener">DL Co Ltd (000210 KS)</a> in December 2020. DL E&amp;C and DL Corp shares started trading again on 25 January 2021. DL E&amp;C and DL Corp's market caps are 2.45 trillion won and 1.08 trillion won, respectively as of 26 January 2021. The combined market caps of the two companies are 3.53 trillion won, up more than 20% from the pre-spin off levels. DL E&amp;C makes some of the best apartments in Korea and this is their bread and butter business. <div>Hyundai E&amp;C, GS E&amp;C, HDC Hyundai Development, and Daewoo E&amp;C are the most appropriate comps to DL E&amp;C. These four comps are currently trading at P/E (2021E) ratios 11.8x, 6.1x, 5.6x, and 6.9x, respectively, using the consensus earnings estimates. The average P/E ratio of these four companies is 7.6x. If we apply 7.6x P/E on the estimated net profit of 660 billion won, this would suggest an implied market cap of 5.0 trillion won, which would be nearly 100% upside from the current market cap of 2.4 trillion won. If we use the lowest P/E multiple of the comps (5.6x) and apply to the estimated net profit of 660 billion won, this would suggest a market cap of 3.7 trillion won, which would be 51% higher than its current market cap. </div>

Daelim Industrial's BOD and shareholders agreed to spin-off the company into DL E&amp;C Co Ltd (375500 KS) and DL Co Ltd (000210 KS) in December 2020. DL E&amp;C and DL Corp shares started trading again on 25 January 2021. DL E&amp;C and DL Corp's market caps are 2.45 trillion won and 1.08 trillion won, respectively as of 26 January 2021. The combined market caps of the two companies are 3.53 trillion won, up more than 20% from the pre-spin off levels. DL E&amp;C makes some of the best apartments in Korea and this is their bread and butter business. Hyundai E&amp;C, GS E&amp;C, HDC Hyundai Development, and Daewoo E&amp;C are the most appropriate comps to DL E&amp;C. These four comps are currently trading at P/E (2021E) ratios 11.8x, 6.1x, 5.6x, and 6.9x, respectively, using the consensus earnings estimates. The average P/E ratio of these four companies is 7.6x. If we apply 7.6x P/E on the estimated net profit of 660 billion won, this would suggest an implied market cap of 5.0 trillion won, which would be nearly 100% upside from the current market cap of 2.4 trillion won. If we use the lowest P/E multiple of the comps (5.6x) and apply to the estimated net profit of 660 billion won, this would suggest a market cap of 3.7 trillion won, which would be 51% higher than its current market cap. 

Newly Spun-Off DL E&C and DL Corp Create Higher Value

<a href="https://www.smartkarma.com/entities/daelim-industrial-co-ltd" target="_blank" data-smartkarma-citation="entities:18095:1" rel="noopener">Daelim Industrial (000210 KS)</a> first announced its decision to form a holding company structure on 10 September 2020. Since then, Daelim Industrial's share price is down 9.2% in this period, underperforming KOSPI which is up 9.2% in the same period. On 4 December, Daelim Industrial's shareholders vote on this deal. We think the shareholders will confirm this formation of Holdco/spin-off. Over the years of following the Korean stock market, we have found that the shareholders sometimes do not like the initial spin-off story which knocks the price downwards but later on the share price makes a positive turnaround. In our view, Daelim Industrial could be one of these spin-off related turnaround plays that could outperform the market over the next 6 to 12 months.  Daelim Industrial is one of the largest construction companies in Korea. It makes some of the finest apartments in Korea. The housing business (mostly apartments construction) accounted for 54% of total sales and 78% of the total operating profit of the company in 1Q-3Q 2020. The company has one of the most profitable and best E&amp;C business (especially housing/apartments construction) in Korea.What are the appropriate comps for DL E&amp;C? Hyundai E&amp;C, GS E&amp;C, and Daewoo E&amp;C are the most appropriate comps to DL E&amp;C. These three comps are currently trading at P/E ratios of 11.5x, 6.7x, and 7.6x, respectively. The average of these three multiples would be 8.6x. If we take a more conservative view and take just the lowest P/E of the comps (6.7x) and use this multiple to apply to the estimated annual net profit of 660 billion for the E&amp;C business, it would result in an implied market cap of 4.4 trillion won, which would exceed Daelim Industrial's current market cap of 2.9 trillion won. So essentially, you would be getting the other businesses for free.

Daelim Industrial (000210 KS) first announced its decision to form a holding company structure on 10 September 2020. Since then, Daelim Industrial's share price is down 9.2% in this period, underperforming KOSPI which is up 9.2% in the same period. On 4 December, Daelim Industrial's shareholders vote on this deal. We think the shareholders will confirm this formation of Holdco/spin-off. Over the years of following the Korean stock market, we have found that the shareholders sometimes do not like the initial spin-off story which knocks the price downwards but later on the share price makes a positive turnaround. In our view, Daelim Industrial could be one of these spin-off related turnaround plays that could outperform the market over the next 6 to 12 months.  Daelim Industrial is one of the largest construction companies in Korea. It makes some of the finest apartments in Korea. The housing business (mostly apartments construction) accounted for 54% of total sales and 78% of the total operating profit of the company in 1Q-3Q 2020. The company has one of the most profitable and best E&amp;C business (especially housing/apartments construction) in Korea.What are the appropriate comps for DL E&amp;C? Hyundai E&amp;C, GS E&amp;C, and Daewoo E&amp;C are the most appropriate comps to DL E&amp;C. These three comps are currently trading at P/E ratios of 11.5x, 6.7x, and 7.6x, respectively. The average of these three multiples would be 8.6x. If we take a more conservative view and take just the lowest P/E of the comps (6.7x) and use this multiple to apply to the estimated annual net profit of 660 billion for the E&amp;C business, it would result in an implied market cap of 4.4 trillion won, which would exceed Daelim Industrial's current market cap of 2.9 trillion won. So essentially, you would be getting the other businesses for free.

Daelim Industrial: Unlocking Higher Value Through A Holdco & Spin-Off (Voting on 4 December)

Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Last December, Hyundai Motor and the two other affiliate companies, Kia Motor and Hyundai Mobis, closed their stock book. In doing so, they discovered that there was no Elliott's name in any of the three stockholder registers. It was when they found out that Elliott had sold all of its holdings in the three companies. Elliott had reportedly held 2.9% in Hyundai Motor, 2.1% in Kia, and 2.6% in Mobis.
What should we make of it? Well, the local street believed that Hyundai had waited for Elliott to leave. That is, Hyundai wouldn't re-begin the restructuring if Elliott stayed. Korea FTC? Well, it once did a hard pushing on Hyundai concerning circular shareholding. But since Elliott came in, Korea FTC has sided with Hyundai. There has been no real pressure on Hyundai by Korea FTC lately. Korea FTC hasn't been a fan of Elliott. So, Elliott knew that there wouldn't be restructuring as long as it remained as a shareholder. Now, Elliott is no longer with Hyundai, which is making the local street believe that Hyundai has no reason to push back the restructuring, so does Korea FTC.
Then, is the restructuring imminent? Of course, there is no official word by the company yet. But no Elliott means that Korea FTC will likely push Hyundai again. Also, there is no clear benefit of delaying it further for Hyundai. From a tax angle, it'd be easier to get it done when the share prices aren't dangerously high, as the current level.
So, here is my step-by-step guide for the restructuring process to find out which stock or stocks to buy (or short) at each stage of the process.

Last December, Hyundai Motor and the two other affiliate companies, Kia Motor and Hyundai Mobis, closed their stock book. In doing so, they discovered that there was no Elliott's name in any of the three stockholder registers. It was when they found out that Elliott had sold all of its holdings in the three companies. Elliott had reportedly held 2.9% in Hyundai Motor, 2.1% in Kia, and 2.6% in Mobis.
What should we make of it? Well, the local street believed that Hyundai had waited for Elliott to leave. That is, Hyundai wouldn't re-begin the restructuring if Elliott stayed. Korea FTC? Well, it once did a hard pushing on Hyundai concerning circular shareholding. But since Elliott came in, Korea FTC has sided with Hyundai. There has been no real pressure on Hyundai by Korea FTC lately. Korea FTC hasn't been a fan of Elliott. So, Elliott knew that there wouldn't be restructuring as long as it remained as a shareholder. Now, Elliott is no longer with Hyundai, which is making the local street believe that Hyundai has no reason to push back the restructuring, so does Korea FTC.
Then, is the restructuring imminent? Of course, there is no official word by the company yet. But no Elliott means that Korea FTC will likely push Hyundai again. Also, there is no clear benefit of delaying it further for Hyundai. From a tax angle, it'd be easier to get it done when the share prices aren't dangerously high, as the current level.
So, here is my step-by-step guide for the restructuring process to find out which stock or stocks to buy (or short) at each stage of the process.

Step-By-Step Guide of Hyundai Motor Group Restructuring

It was announced on September 10th that Tongil Nanum, a non-profit foundation and the second-largest shareholder of Daelim Corp, is selling its 33% stake of Daelim Corp. The value of this 33% stake in Daelim Corp is estimated to be about 287 billion won ($240 million). <a href="https://www.smartkarma.com/entities/daelim-industrial-co-ltd" target="_blank" data-smartkarma-citation="entities:18095:1" rel="noopener">Daelim Industrial (000210 KS)</a> (market cap of 3.4 trillion won)'s largest shareholder is Daelim Corp with a 21.7% stake of the company. Daelim Corp acts as a quasi-holding company of the Daelim Group. Daelim Industrial's foreign ownership stake was as low as 30.7% on March 6th, 2018 when its stock price was 72,400 won. Since then, Daelim Industrial's share price is up 36% and foreign shareholders' stake in Daelim Industrial has risen to 51.1%. Many investors have some concerns about Daelim Industrial's new Chairman Lee Hae-Wook who is the eldest son of the Hononary Chairman of Daelim Group. Nearly three years have passed since the bad publicity of where Lee Hae-Wook replaced his personal drivers more than 40 times in six months. Although changing one's personal driver more than 40 times in a span of six months does not necessarily mean that he is a bad professional manager, this issue raised many eyebrows among the institutional investors who watch this company closely.

It was announced on September 10th that Tongil Nanum, a non-profit foundation and the second-largest shareholder of Daelim Corp, is selling its 33% stake of Daelim Corp. The value of this 33% stake in Daelim Corp is estimated to be about 287 billion won ($240 million). Daelim Industrial (000210 KS) (market cap of 3.4 trillion won)'s largest shareholder is Daelim Corp with a 21.7% stake of the company. Daelim Corp acts as a quasi-holding company of the Daelim Group. Daelim Industrial's foreign ownership stake was as low as 30.7% on March 6th, 2018 when its stock price was 72,400 won. Since then, Daelim Industrial's share price is up 36% and foreign shareholders' stake in Daelim Industrial has risen to 51.1%. Many investors have some concerns about Daelim Industrial's new Chairman Lee Hae-Wook who is the eldest son of the Hononary Chairman of Daelim Group. Nearly three years have passed since the bad publicity of where Lee Hae-Wook replaced his personal drivers more than 40 times in six months. Although changing one's personal driver more than 40 times in a span of six months does not necessarily mean that he is a bad professional manager, this issue raised many eyebrows among the institutional investors who watch this company closely. 

Korea M&A Spotlight: Daelim Corp's 33% Stake Is Up for Sale

<ul>
<li>For Hyundai Dept Store Group breaking up, two transactions must be carried out. The older brother owns a 12.67% stake in Greenfood. In contrast, Greenfood owns a 12.05% stake in Dept Store. these share holdings will have to be removed.</li>
<li>The older brother's 12.67% stake in Greenfood will likely be sold in block deals to third parties, whereas Greenfood's 12.05% stake in Dept Store will likely be sold to the older brother. As a result, Greenfood may face a negative sentiment mainly driven by stock overhang concern, whereas Dept Store has no such issue.</li>
<li>So, my trade idea that may seem plausible at least for the short-term during which this group breaking up issue ignited by the Hanwha L&amp;C acquisition is long <a href="https://www.smartkarma.com/entities/19098" target="_blank" data-smartkarma-citation="entities:19098:1">Hyundai Dept Store Co (069960 KS)</a> and short <a href="https://www.smartkarma.com/entities/19560" target="_blank" data-smartkarma-citation="entities:19560:1">Hyundai Greenfood (005440 KS)</a> until this breaking up based sentiment lasts.</li>
</ul>


For Hyundai Dept Store Group breaking up, two transactions must be carried out. The older brother owns a 12.67% stake in Greenfood. In contrast, Greenfood owns a 12.05% stake in Dept Store. these share holdings will have to be removed.
The older brother's 12.67% stake in Greenfood will likely be sold in block deals to third parties, whereas Greenfood's 12.05% stake in Dept Store will likely be sold to the older brother. As a result, Greenfood may face a negative sentiment mainly driven by stock overhang concern, whereas Dept Store has no such issue.
So, my trade idea that may seem plausible at least for the short-term during which this group breaking up issue ignited by the Hanwha L&amp;C acquisition is long Hyundai Dept Store Co (069960 KS) and short Hyundai Greenfood (005440 KS) until this breaking up based sentiment lasts.


Hyundai HS Buying Hanwha L&C Creates Group Split Sentiment: LONG Dept Store & SHORT Greenfood

South Korea

Hyundai Engineering & Construction Co., Ltd., a general construction company, provides civil engineering, architectural, industrial, and electrical engineering services.  The Company constructs roadways, dams, bridges, ports, industrial plants, apartment complexes, and cultural facilities.

Hyundai Engineering & Construction (000720 KS)

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Hyundai Engineering & Construction (000720 KS)

Newly Spun-Off DL E&C and DL Corp Create Higher Value

The newly spun off DL E&C and DL Corp have created higher value for the shareholders in the past month.Their combined market caps are 3.5 trillion...

Douglas Kim

Daelim Industrial: Unlocking Higher Value Through A Holdco & Spin-Off (Voting on 4 December)

Daelim Industrial is one of the cheapest stocks in Korea. The company could unlock greater shareholder value through the spin-off of the...

Douglas Kim

Step-By-Step Guide of Hyundai Motor Group Restructuring

Last December, Hyundai Motor and the two other affiliate companies, Kia Motor and Hyundai Mobis, closed their stock book. In doing so, they...

Sanghyun Park

Korea M&A Spotlight: Daelim Corp's 33% Stake Is Up for Sale

It was announced on September 10th that Tongil Nanum, a non-profit foundation and the second-largest shareholder of Daelim Corp, is selling its 33%...

Douglas Kim

Hyundai HS Buying Hanwha L&C Creates Group Split Sentiment: LONG Dept Store & SHORT Greenfood

For Hyundai Dept Store Group breaking up, two transactions must be carried out. The older brother owns a 12.67% stake in Greenfood. In contrast,...

Sanghyun Park

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