Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Event-Driven

<ul>
<li>LX International announced today that it will not participate in the main bidding to acquire HMM Co.</li>
<li>This is likely to have a positive impact on LX International's share price as many investors are relieved that company will not raise excessive amounts of capital to acquire HMM.</li>
<li>In addition, by not acquiring HMM, LX International has enough financial resources to continue to pay high dividends. </li>
</ul>


LX International announced today that it will not participate in the main bidding to acquire HMM Co.
This is likely to have a positive impact on LX International's share price as many investors are relieved that company will not raise excessive amounts of capital to acquire HMM.
In addition, by not acquiring HMM, LX International has enough financial resources to continue to pay high dividends. 


LX International: Positive Impact from Not Participating in Main Bidding for HMM

Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

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

<ul>
<li>The opinion rapidly spreading in the local market is that LX International is increasing its available shares by twice the amount to plan a paid-in increase for the HMM acquisition.</li>
<li>The size of an offering is estimated at ₩1.2T to ₩1.5T. The short-term price impact will undoubtedly be significant for LX International having a market cap of ₩1.2T.</li>
<li>The market has already witnessed a preemptive position buildup targeting this. However, since there is a time gap until the offering announcement, an entry point opportunity may still be available.</li>
</ul>


The opinion rapidly spreading in the local market is that LX International is increasing its available shares by twice the amount to plan a paid-in increase for the HMM acquisition.
The size of an offering is estimated at ₩1.2T to ₩1.5T. The short-term price impact will undoubtedly be significant for LX International having a market cap of ₩1.2T.
The market has already witnessed a preemptive position buildup targeting this. However, since there is a time gap until the offering announcement, an entry point opportunity may still be available.


Shorting Event on LX International's Potential Rights Offer for HMM Takeover

Cross Asset Strategy

<div class="content-highlight">
<p>On 28 May, Korea's National Pension Fund (NPS) announced its new <a href="https://news.mt.co.kr/mtview.php?no=2021052820172973220" target="_blank" rel="noopener">5 year plan</a> to reduce the asset allocation of Korean equities to 14.5% of total assets at the end of 2026, down from the current target of 16.8% of total assets at the end of 2021. NPS now is targeting overseas equity asset allocation targets to increase from 25.1% at the end of 2021 to 35.5% at the end of 2026.</p>
<p>NPS is targeting equity, fixed income and alternative assets to account for 50%, 35%, and 15% of total assets by the end of 2026. NPS has set an annual expected return of 5.1% for its total invested assets from 2021 to 2026.</p>
</div>


On 28 May, Korea's National Pension Fund (NPS) announced its new 5 year plan to reduce the asset allocation of Korean equities to 14.5% of total assets at the end of 2026, down from the current target of 16.8% of total assets at the end of 2021. NPS now is targeting overseas equity asset allocation targets to increase from 25.1% at the end of 2021 to 35.5% at the end of 2026.
NPS is targeting equity, fixed income and alternative assets to account for 50%, 35%, and 15% of total assets by the end of 2026. NPS has set an annual expected return of 5.1% for its total invested assets from 2021 to 2026.


NPS Announces A Reduction in Asset Allocation in Korean Equities to 14.5% of Assets by 2026

<div class="content-highlight">
<p>Our NAV valuation of LX Holdings suggests NAV of 1.0 trillion won (13,556 won per share). Our NAV valuation of the company is based on the current market values for the three listed companies including Silicon Works, LG International, and LG Hausys. For MMA, we have used a 50% of its book value at the end of 2020. We have also assumed net cash of 179 billion won which is 0.088 x net cash of LG Corp (Consolidated at End of 1Q 2021). We have also assumed a 35% holdco discount. </p>
<p>We believe there are many investors who purchased Silicon Works, LG International, and LG Hausys ahead of the actual split date and the NAV (post holdco discount) of LX Holdings could be much less than the initial market cap of LX Holdings once it starts trading. Given that our base case value of LX Holdings is 13,556 won and if the final base price is confirmed at above 20,000 won to 25,000 won, for example, we believe in reducing to positions to lower levels. </p>
</div>


Our NAV valuation of LX Holdings suggests NAV of 1.0 trillion won (13,556 won per share). Our NAV valuation of the company is based on the current market values for the three listed companies including Silicon Works, LG International, and LG Hausys. For MMA, we have used a 50% of its book value at the end of 2020. We have also assumed net cash of 179 billion won which is 0.088 x net cash of LG Corp (Consolidated at End of 1Q 2021). We have also assumed a 35% holdco discount. 
We believe there are many investors who purchased Silicon Works, LG International, and LG Hausys ahead of the actual split date and the NAV (post holdco discount) of LX Holdings could be much less than the initial market cap of LX Holdings once it starts trading. Given that our base case value of LX Holdings is 13,556 won and if the final base price is confirmed at above 20,000 won to 25,000 won, for example, we believe in reducing to positions to lower levels. 


LX Holdings - NAV Analysis Suggests A Big Downside Risk

Shares outstandingThe total shares of each company are fixed. There will be no change to it.








Share structure
Pre-split
LG Corp
LX Holdings


Outstanding shares
175,871,808
160,322,613
77,745,975


Common
172,557,131
157,300,993
76,280,690


- Name
LG Corp
LG Corp
LX Holdings


- Ticker
003550
003550
-


- Current price
₩126,500
₩126,500
₩25,300


Pref
3,314,677
3,021,620
1,465,285


- Name
LG Corp 1P
LG Corp 1P
LX Holdings 1P


- Ticker
003555
003555
-


- Current price
₩99,500
₩99,500
₩19,900


Treasury shares - common
0
0
0


Treasury shares - pref
0
0
0


Common excl. treasury shares
172,557,131
157,300,993
76,280,690

Source: DART &amp; KRX

Discount to NAVLG Corp's previous closing price gives a 59.08%discount to the NAV at the last close, translating into a 61.67% discount for LG Corp and a 35.40% premium for LX Holdings.I made some changes in my calculation of NAV. I estimated each holding company's operating operation based on their latest de-consolidated operating profit. It is mostly brand royalty and office rental income. I used operating profit to exclude dividend income. 








Discount to NAV
Pre-split
LG Corp
LX Holdings


Value of listed holdings
₩41,155.3B
₩39,988.2B
₩1,167.1B


- % of Holdco market cap
188.54%
200.96%
60.48%


Value of unlisted holdings
₩2,631.7B
₩2,516.3B
₩115.4B


Stub value
-₩21,958.5B
-₩22,606.0B
₩647.4B


Stub value per share
-₩127,254
-₩143,712
₩8,488


Value of operating assets
₩7,940.0B
₩7,940.0B
₩0.0B


GAV
₩51,727.0B
₩50,444.6B
₩1,282.5B


GAV per share
₩299,767
₩320,688
₩16,812


Discount to GAV
57.80%
60.55%
-50.48%


Holdco net cash/debt
₩1,941.8B
₩1,770.0B
₩172.0B


Value of pref shares
₩329.8B
₩300.7B
₩29.2B


NAV
₩53,339.0B
₩51,913.9B
₩1,425.3B


NAV per share
₩309,109
₩330,029
₩18,685


Discount to NAV
59.08%
61.67%
-35.40%

Source: DART &amp; KRX

NAV compositionLG Corp has four major listed subsidiaries, accounting for 76.89% of the NAV. LX Holdings features three major listed subsidiaries, responsible for 81.89% of the NAV at the last close.








NAV composition
Pre-split
LG Corp
LX Holdings


LG Chem Ltd
39.36%
40.44%
-


LG Household &amp; Healthcare Ltd
15.03%
15.44%
-


LG Electronics Inc.
15.86%
16.29%
-


LG Uplus Corp
4.59%
4.72%
-


LG HAUSYS, LTD.
0.54%
-
20.29%


LG International Corp
0.59%
-
21.96%


Silicon Works Co Ltd
1.06%
-
39.64%


G II R Inc
0.07%
0.07%
-


LS Electric Co Ltd
0.06%
0.06%
-


LG CNS
2.81%
2.89%
-


Other - unlisted
2.12%
1.96%
8.09%


Operation
14.89%
15.29%
0.00%


Holdco net cash/debt
3.64%
3.41%
12.07%


Value of pref shares
-0.62%
-0.58%
-2.05%

Source: DART &amp; KRX



LG Corp Post-Spinoff NAV Update & Relisting Day Trade Approach

South Korea

LX International is a commodity trading and mining company.  The Company develops and trades coal, oil, gas, non-ferrous metals, palm oil, and renewable energy. LG International also trades IT related component/equipment, petrochemical and steel product.

LX International (001120 KS)

LX International: Positive Impact from Not Participating in Main Bidding for HMM

LX International announced today that it will not participate in the main bidding to acquire HMM Co.This is likely to have a positive impact on LX...

Douglas Kim

Shorting Event on LX International's Potential Rights Offer for HMM Takeover

Shorting opportunity looms for LX International amidst massive rights offering plan for HMM takeover as the company will increase the number of...

Sanghyun Park

NPS Announces A Reduction in Asset Allocation in Korean Equities to 14.5% of Assets by 2026

On 28 May, NPS announced its new 5 year plan to reduce the asset allocation of Korean equities to 14.5% of total assets at the end of 2026, down...

Douglas Kim

LX Holdings - NAV Analysis Suggests A Big Downside Risk

Our NAV value of LX Holdings suggests NAV of 1.0 trillion won (13,556 won per share). If the final base price is confirmed at above 20,000 won to...

Douglas Kim

LG Corp Post-Spinoff NAV Update & Relisting Day Trade Approach

This post updates each company's discount to the NAV at the last closing prices and discusses the trade approach on the relating day and in the...

Sanghyun Park