Korea

In this briefing:

1. How Do We Play Samsung Dividend Arb Trade?
2. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst
3. Korea – AmoreCorp, LotteChem, KMW, Helixmith Shorts Increase; Covering on Shinhan, Semco, Samsung
4. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?
5. Metanet Mplatform IPO Valuation & Interest Levels of Lemon, JNTC, Metanet Mplatform, & NPD IPOs

1. How Do We Play Samsung Dividend Arb Trade?

Samsung needs to meet the 50% target of the 3-yr rolling FCF. This year’s projected FCF? It may be too early to tell, but the local street estimates it at around ₩30~33tril. Now, at an assumed ₩32.6tril (projected by Kiwoom), it will be 36.7%. So, Samsung will need to come up with something to bring it up to 50%, which requires about ₩10.7tril.

How? It will be either share buyback or more dividends (special dividends). Then, which is more likely? At the current price level, a buyback wouldn’t be as cost-effective as previously. At an 80%:20% ratio, buyback price for each common share will be ₩57,740, a 33.5% increase from the last buyback. So, we should also consider special dividends as a real possibility as well. To hit the 50% target, Samsung needs to give out a ₩1,575 additional bonus for each common share.

2. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

3. Korea – AmoreCorp, LotteChem, KMW, Helixmith Shorts Increase; Covering on Shinhan, Semco, Samsung

4. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?

• One of the big winning sectors in the Korean stock market this year has been the rechargeable batteries related stocks including Samsung Sdi (006400 KS) and LG Chem Ltd (051910 KS). In the past few days, there has been some increasing news flow in the local media regarding a potential transfer of the rechargeable batteries modules and packs business from LG Electronics (066570 KS) to LG Chem.
• On a relative basis, this transfer would likely to have a GREATER POSITIVE impact on LG Electronics since the battery modules and packs business has been losing money in the past several years and this transfer would allow LG Electronics to reduce the operating losses from this business unit (Vehicle Component Solutions).
• For now, nothing has been decided regarding the potential transfer of the rechargeable battery modules and packs business from LG Electronics to LG Chem. This is just in the discussion stage right now. However, this business transfer seems to make a lot of sense and one could wonder why they did not complete this move earlier (especially from the point of view of LG Electronics shareholders). 

5. Metanet Mplatform IPO Valuation & Interest Levels of Lemon, JNTC, Metanet Mplatform, & NPD IPOs

Our base case valuation of Metanet Mplatform is EV of 296 billion won, a market cap of 360 billion won, and an implied price of 17,215 won, which is 25% higher than the mid-point of the bankers’ IPO price range of 12,500 won to 15,000 won. As such, we have a positive view of the Metanet Mplatform IPO. 

The company’s core business is in the customer/contact centers. Driven by technology innovation, customer/contact centers are becoming increasingly automated, which will likely provide an attractive opportunity for the company to capitalize on its know-how of this business to further improve upon its economies of scale and reduce costs.

Lemon has received the highest interest level (measured in terms of platform views per report) among the four Korean IPOs that we have written about. So if the level of interest in Lemon is 100, JNTC is 90 and Metanet Mplatform is much lower at 50. Overall, among these four companies, Lemon is likely to receive the highest institutional investors’ interest, followed by JNTC, Metanet Mplatform, and NPD.  Now, the more difficult part (this is where the art of investing really comes into play) is to perceive and understand how much of this investors’ interest will have factored in the IPO demand and their share prices. 

In this briefing:

1. SK Holdings SoTP Valuation Sensitivity Analysis
2. Naver Spike Overdone – Sell

1. SK Holdings SoTP Valuation Sensitivity Analysis

2. Naver Spike Overdone – Sell

Naver Corp (035420 KS) has risen in a linear manner and testing highs from 2017 and 2018 amid growing bear divergence (non confirmation of new price highs that creates a negative undertone and precedes intermediate corrective cycles) along with deteriorating buy volume into recent strength. These weaker inputs sets up a good short trade in Naver.

RSI break below pattern support will act as a lead signal for price to break noted trendline support near 180k. Initially one would expect a reaction bounce from this trend support.

38.2% retracement lies at 160k and 50% near 150k, representing key pullback objectives.

In this briefing:

1. Naver Spike Overdone – Sell
2. SK Hynix Short Zone with Option for SEC Long Pair
3. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

1. Naver Spike Overdone – Sell

Naver Corp (035420 KS) has risen in a linear manner and testing highs from 2017 and 2018 amid growing bear divergence (non confirmation of new price highs that creates a negative undertone and precedes intermediate corrective cycles) along with deteriorating buy volume into recent strength. These weaker inputs sets up a good short trade in Naver.

RSI break below pattern support will act as a lead signal for price to break noted trendline support near 180k. Initially one would expect a reaction bounce from this trend support.

38.2% retracement lies at 160k and 50% near 150k, representing key pullback objectives.

2. SK Hynix Short Zone with Option for SEC Long Pair

SK Hynix (000660 KS) has done very well from our buy in level at 78k but the current upleg is looking overdone with ideal topside projection just under 105k and the RSI exhibiting minor bear divergence (non confirmation of the recent high) amid lofty readings. 

A choppy dip and rally would fit with some distribution taking place as the KOSPI shows similar froth near the 306-09 range.

SK Hynix needs a rest on the form of a pullback from a minor new high with supports near 94k and 90.50k. The macro drive higher should then resume.

The ratio chart between SK Hynix and SEC shows a clear bias for SK Hynix to continue to U/P SEC and another positioning option to test the 1.50 support zone. 1.66 represents uptick resistance on this ration.

3. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

In this briefing:

1. Naver Spike Overdone – Sell
2. SK Hynix Short Zone with Option for SEC Long Pair
3. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
4. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short

1. Naver Spike Overdone – Sell

Naver Corp (035420 KS) has risen in a linear manner and testing highs from 2017 and 2018 amid growing bear divergence (non confirmation of new price highs that creates a negative undertone and precedes intermediate corrective cycles) along with deteriorating buy volume into recent strength. These weaker inputs sets up a good short trade in Naver.

RSI break below pattern support will act as a lead signal for price to break noted trendline support near 180k. Initially one would expect a reaction bounce from this trend support.

38.2% retracement lies at 160k and 50% near 150k, representing key pullback objectives.

2. SK Hynix Short Zone with Option for SEC Long Pair

SK Hynix (000660 KS) has done very well from our buy in level at 78k but the current upleg is looking overdone with ideal topside projection just under 105k and the RSI exhibiting minor bear divergence (non confirmation of the recent high) amid lofty readings. 

A choppy dip and rally would fit with some distribution taking place as the KOSPI shows similar froth near the 306-09 range.

SK Hynix needs a rest on the form of a pullback from a minor new high with supports near 94k and 90.50k. The macro drive higher should then resume.

The ratio chart between SK Hynix and SEC shows a clear bias for SK Hynix to continue to U/P SEC and another positioning option to test the 1.50 support zone. 1.66 represents uptick resistance on this ration.

3. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

4. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short

Shin Kyuk-ho, the founder of Lotte Group, passed away yesterday. The total value of his wealth is a little more than ₩1tril. The local news outlets report that he hasn’t left any will. So, the inheritance goes to the direct family members at a 1.5:1:1:1:1 ratio, 1.5 for his wife and 1 for each of the four children, including Shin Dong-bin.

In this briefing:

1. The Guerrilla War Against The PBOC
2. Samsung C/1P Is At -1.4σ & 1P Discount Close to an All-Time Low: Structural Reversion Is Ahead
3. JNTC IPO Valuation Analysis
4. Removal of 30% Limit on a Single Stock in ETFs: Impact on Samsung 30% Cap in KOSPI 200
5. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism

1. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

2. Samsung C/1P Is At -1.4σ & 1P Discount Close to an All-Time Low: Structural Reversion Is Ahead

Samsung C/1P is currently at -1.4σ on a 20D MA. The preferred share discount is 14.72%, which is pretty close to the 2-yr low (14.57%). Even compared with the 120D mean, it is more than a 3% point lower.

3. JNTC IPO Valuation Analysis

JNTC is one of the global leaders in making 3D cover (tempered) glass and connector parts for smartphones. The IPO base deal size is from US$80 million to US$98 million. The book-building for the institutional investors starts on 19 February. 

4. Removal of 30% Limit on a Single Stock in ETFs: Impact on Samsung 30% Cap in KOSPI 200

The Korea Financial Supervisory Service (KFSS) announced the amendment to the Enforcement Regulations of Financial Investment Business Regulations on February 11. This amendment contains the removal of the 30% limit weight of a single stock in local ETFs. For instance, those ETFs mirroring KOSPI 200 can now have Samsung Electronics common shares for more than 30% weight. The schedule of the enactment is as follows. March 22 is the deadline for the review. Then, the amendment will become in effect as of the second quarter of this year, which is the first of April.

5. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism

The amended Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea (the “Capital Markets Act”) went into effect starting on February 1, 2020. One major change made by this amendment (Article 154) is the clarification and improvement of the beneficial ownership disclosure rule which is a so-called “5% rule” in Korea. We think that this latest amendment provides a legal basis for institutional investor activism in South Korea.

The substantial shareholders whose minimum shareholding is 5 percent are required to disclose information including their investment intentions whether or not to influence company management and policies. Before the amendment, it was not clear whether institutional investors should be regarded as having an intention to influence management when exercising stewardship responsibilities such as publicly sending letters to management and filing shareholder proposals to (i) raise dividends, (ii) limit CEO pay, and/or (iii) dismiss directors who were found guilty of illegally damaging the firm. However, this latest amendment finally clarified it by creating a new criterion that is no longer categorized as either “influencing management” or “just a simple portfolio investment”. And then, it moved the aforementioned stewardship activities to this new category, which we named “investment with limited stewardship”. 

In our previous insight Two Notable Changes in National Pension Service of Korea: Activism Guideline and Delegation of Votes, we noted that NPS would pay particular attention to three major issues – (i) dividend policy, (ii) executive compensation scheme, and (iii) qualifications of directors – which are all closely linked to a company’s approach to capital allocation. The amended Capital Markets Act empowers institutional investors to exert more pressure on boards to resolve the exact same issues from (i) to (iii) as we described above.

Just a few clarifications. Regarding (i) dividend and (ii) executive compensation issues, it is true that the amended Capital Markets Act newly allowed institutional investors to exercise minority shareholder rights conferred by the law without changing their investment intentions to “influencing management”. However, state-run pension funds have already been allowed to do so even before the amendment. Also, this amendment added one clarifying sentence to Article 154-1, which stipulates that investors are now allowed to exercise minority shareholder rights to dismiss directors who were convicted of illegal actions and/or bringing irrecoverable damages to the company. Some local media reported that this is a major change, but this is not true. Article 385-2 and Article 402 of the Commercial Act of Korea have already provided such exception. That is, this latest revision of the Capital Markets Act aims at making those two Acts consistent with each other so that investors can be more vocal about (iii) qualifications of directors with no worries over conflicts of law. 

As of February 7, 2020, NPS and a few value-oriented institutional investors changed their investment intentions from “simple portfolio investment” to “investment with limited stewardship” for some of their invested stocks. We listed those stocks in the Detail section. We selected Daelim Industrial (000210 KS) as a primary entity of our insight because it is highly likely that NPS files shareholder proposals to raise its dividends and/or to remove Lee Hae-wook on the board. Though Lee Hae-wook is not yet convicted illegally damaging the firm, he is facing trial for alleged embezzlement and breach of duty on April 21, 2020. NPS holds 12.82% in Daelim Industrial (000210 KS).

Here is a summary of the key changes.

• Institutional investors are required to report their investment intentions based on three criteria – (i) simple portfolio investment, (ii) investment with limited stewardship, and (iii) influencing management. The first two purposes are NOT considered to influence decision making of management, and thus, less strict rules on disclosure are applied. 

• ALL stewardship activities that are not specified as “influencing management” in the Article 154-1 are now considered as “not influencing management”. 

• Institutional investors (including state-run pension funds) are allowed to exercise minority shareholder rights to make changes to Articles of Incorporation of companies only when they target ALL companies in their portfolios based on the principles that are publicly disclosed.
• Institutional investors are not required to change their investment intentions to “influencing management” when they send shareholder letters or publicly deliver their opinions to companies. However,  they have to do so when soliciting other minority shareholder to exercise voting rights by proxy to vote for or against the resolutions.
• The amendment requires institutional investors whose investment purpose is “simple portfolio investment” to submit an official document that promises to only exercise the basic rights of shareholders. Otherwise, they should change their investment purpose to “investment with limited stewardship”. Recently, NPS and other institutional investors made such changes. Those updated disclosures indicate that they will exert more pressure on boards. 

In this briefing:

1. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst
2. Korea – AmoreCorp, LotteChem, KMW, Helixmith Shorts Increase; Covering on Shinhan, Semco, Samsung
3. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?
4. Metanet Mplatform IPO Valuation & Interest Levels of Lemon, JNTC, Metanet Mplatform, & NPD IPOs
5. BNK Financial: Signals of Progress Are Underappreciated

1. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

2. Korea – AmoreCorp, LotteChem, KMW, Helixmith Shorts Increase; Covering on Shinhan, Semco, Samsung

3. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?

• One of the big winning sectors in the Korean stock market this year has been the rechargeable batteries related stocks including Samsung Sdi (006400 KS) and LG Chem Ltd (051910 KS). In the past few days, there has been some increasing news flow in the local media regarding a potential transfer of the rechargeable batteries modules and packs business from LG Electronics (066570 KS) to LG Chem.
• On a relative basis, this transfer would likely to have a GREATER POSITIVE impact on LG Electronics since the battery modules and packs business has been losing money in the past several years and this transfer would allow LG Electronics to reduce the operating losses from this business unit (Vehicle Component Solutions).
• For now, nothing has been decided regarding the potential transfer of the rechargeable battery modules and packs business from LG Electronics to LG Chem. This is just in the discussion stage right now. However, this business transfer seems to make a lot of sense and one could wonder why they did not complete this move earlier (especially from the point of view of LG Electronics shareholders). 

4. Metanet Mplatform IPO Valuation & Interest Levels of Lemon, JNTC, Metanet Mplatform, & NPD IPOs

Our base case valuation of Metanet Mplatform is EV of 296 billion won, a market cap of 360 billion won, and an implied price of 17,215 won, which is 25% higher than the mid-point of the bankers’ IPO price range of 12,500 won to 15,000 won. As such, we have a positive view of the Metanet Mplatform IPO. 

The company’s core business is in the customer/contact centers. Driven by technology innovation, customer/contact centers are becoming increasingly automated, which will likely provide an attractive opportunity for the company to capitalize on its know-how of this business to further improve upon its economies of scale and reduce costs.

Lemon has received the highest interest level (measured in terms of platform views per report) among the four Korean IPOs that we have written about. So if the level of interest in Lemon is 100, JNTC is 90 and Metanet Mplatform is much lower at 50. Overall, among these four companies, Lemon is likely to receive the highest institutional investors’ interest, followed by JNTC, Metanet Mplatform, and NPD.  Now, the more difficult part (this is where the art of investing really comes into play) is to perceive and understand how much of this investors’ interest will have factored in the IPO demand and their share prices. 

5. BNK Financial: Signals of Progress Are Underappreciated

Bnk Financial Group (138930 KS) scores well again with our PH Score™.  A PH Score™ of 9.5 reveals positive changes in Profitability, in Efficiency, in Capitalisation, in Asset Quality, and in Provisioning while the valuation variable was highly positive. 

In this briefing:

1. SK Hynix Short Zone with Option for SEC Long Pair
2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
3. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short

1. SK Hynix Short Zone with Option for SEC Long Pair

SK Hynix (000660 KS) has done very well from our buy in level at 78k but the current upleg is looking overdone with ideal topside projection just under 105k and the RSI exhibiting minor bear divergence (non confirmation of the recent high) amid lofty readings. 

A choppy dip and rally would fit with some distribution taking place as the KOSPI shows similar froth near the 306-09 range.

SK Hynix needs a rest on the form of a pullback from a minor new high with supports near 94k and 90.50k. The macro drive higher should then resume.

The ratio chart between SK Hynix and SEC shows a clear bias for SK Hynix to continue to U/P SEC and another positioning option to test the 1.50 support zone. 1.66 represents uptick resistance on this ration.

2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

3. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short

Shin Kyuk-ho, the founder of Lotte Group, passed away yesterday. The total value of his wealth is a little more than ₩1tril. The local news outlets report that he hasn’t left any will. So, the inheritance goes to the direct family members at a 1.5:1:1:1:1 ratio, 1.5 for his wife and 1 for each of the four children, including Shin Dong-bin.

In this briefing:

1. SK Hynix Short Zone with Option for SEC Long Pair
2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
3. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short
4. Recent Long Short on Samsung/Hynix & KOSPI 200,,, & 30% KOSPI 200 Cap

1. SK Hynix Short Zone with Option for SEC Long Pair

SK Hynix (000660 KS) has done very well from our buy in level at 78k but the current upleg is looking overdone with ideal topside projection just under 105k and the RSI exhibiting minor bear divergence (non confirmation of the recent high) amid lofty readings. 

A choppy dip and rally would fit with some distribution taking place as the KOSPI shows similar froth near the 306-09 range.

SK Hynix needs a rest on the form of a pullback from a minor new high with supports near 94k and 90.50k. The macro drive higher should then resume.

The ratio chart between SK Hynix and SEC shows a clear bias for SK Hynix to continue to U/P SEC and another positioning option to test the 1.50 support zone. 1.66 represents uptick resistance on this ration.

2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

3. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short

Shin Kyuk-ho, the founder of Lotte Group, passed away yesterday. The total value of his wealth is a little more than ₩1tril. The local news outlets report that he hasn’t left any will. So, the inheritance goes to the direct family members at a 1.5:1:1:1:1 ratio, 1.5 for his wife and 1 for each of the four children, including Shin Dong-bin.

4. Recent Long Short on Samsung/Hynix & KOSPI 200,,, & 30% KOSPI 200 Cap

Samsung Elec has made a great run lately, and so did Hynix. Then, we have to ask ourselves this question. Was it a part of a rerating on entire Korea? Well, it doesn’t seem that it was the case. During the same period, KOSPI 200 has gone up only 2.71%, whereas Samsung has climbed nearly 10%.

So, it should have been more of a decoupling situation for Korea’s memory chip stocks. Well, it isn’t the first time that we see this kind of decoupling. Entire Korea is more correlated with China than the US; however, Samsung and Hynix are still going more in line with NASDAQ, specifically PHLX SS. The latest liquidity-fueled frenzy in the US has primarily pushed up the US tech stocks. Samsung and Hynix must have also benefited from it as well. Then, this dynamic has invited arb traders who wanted to capitalize on this specific hedge position: long Samsung/Hynix and short KOSPI 200. This approach is reasonable as there is no reason to believe entire Korea is moving up on a rerating.

Well, the strategy seems to have paid off nicely. The gain of each entry point since December 20 until January 7, if holding until January 17, is still sitting at least above 3%. It peaks as high as 5% if you entered the position on December 24. If you took higher leverage as Samsung and Hynix carry one of the few sufficiently liquid futures, your gain would have been in a much more pleasant area. 

In this briefing:

1. Korea – AmoreCorp, LotteChem, KMW, Helixmith Shorts Increase; Covering on Shinhan, Semco, Samsung
2. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?
3. Metanet Mplatform IPO Valuation & Interest Levels of Lemon, JNTC, Metanet Mplatform, & NPD IPOs
4. BNK Financial: Signals of Progress Are Underappreciated
5. The Guerrilla War Against The PBOC

1. Korea – AmoreCorp, LotteChem, KMW, Helixmith Shorts Increase; Covering on Shinhan, Semco, Samsung

2. Transfer of Rechargeable Batteries Modules & Packs Business from LG Electronics to LG Chem?

• One of the big winning sectors in the Korean stock market this year has been the rechargeable batteries related stocks including Samsung Sdi (006400 KS) and LG Chem Ltd (051910 KS). In the past few days, there has been some increasing news flow in the local media regarding a potential transfer of the rechargeable batteries modules and packs business from LG Electronics (066570 KS) to LG Chem.
• On a relative basis, this transfer would likely to have a GREATER POSITIVE impact on LG Electronics since the battery modules and packs business has been losing money in the past several years and this transfer would allow LG Electronics to reduce the operating losses from this business unit (Vehicle Component Solutions).
• For now, nothing has been decided regarding the potential transfer of the rechargeable battery modules and packs business from LG Electronics to LG Chem. This is just in the discussion stage right now. However, this business transfer seems to make a lot of sense and one could wonder why they did not complete this move earlier (especially from the point of view of LG Electronics shareholders). 

3. Metanet Mplatform IPO Valuation & Interest Levels of Lemon, JNTC, Metanet Mplatform, & NPD IPOs

Our base case valuation of Metanet Mplatform is EV of 296 billion won, a market cap of 360 billion won, and an implied price of 17,215 won, which is 25% higher than the mid-point of the bankers’ IPO price range of 12,500 won to 15,000 won. As such, we have a positive view of the Metanet Mplatform IPO. 

The company’s core business is in the customer/contact centers. Driven by technology innovation, customer/contact centers are becoming increasingly automated, which will likely provide an attractive opportunity for the company to capitalize on its know-how of this business to further improve upon its economies of scale and reduce costs.

Lemon has received the highest interest level (measured in terms of platform views per report) among the four Korean IPOs that we have written about. So if the level of interest in Lemon is 100, JNTC is 90 and Metanet Mplatform is much lower at 50. Overall, among these four companies, Lemon is likely to receive the highest institutional investors’ interest, followed by JNTC, Metanet Mplatform, and NPD.  Now, the more difficult part (this is where the art of investing really comes into play) is to perceive and understand how much of this investors’ interest will have factored in the IPO demand and their share prices. 

4. BNK Financial: Signals of Progress Are Underappreciated

Bnk Financial Group (138930 KS) scores well again with our PH Score™.  A PH Score™ of 9.5 reveals positive changes in Profitability, in Efficiency, in Capitalisation, in Asset Quality, and in Provisioning while the valuation variable was highly positive. 

5. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

In this briefing:

1. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
2. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short
3. Recent Long Short on Samsung/Hynix & KOSPI 200,,, & 30% KOSPI 200 Cap
4. The Fate of Lotte Group Companies Post Shin Kyuk-Ho Era

1. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

2. The Market Is Overreacting to Lotte’s Inheritance Situation: Creating an Opening for a Short

Shin Kyuk-ho, the founder of Lotte Group, passed away yesterday. The total value of his wealth is a little more than ₩1tril. The local news outlets report that he hasn’t left any will. So, the inheritance goes to the direct family members at a 1.5:1:1:1:1 ratio, 1.5 for his wife and 1 for each of the four children, including Shin Dong-bin.

3. Recent Long Short on Samsung/Hynix & KOSPI 200,,, & 30% KOSPI 200 Cap

Samsung Elec has made a great run lately, and so did Hynix. Then, we have to ask ourselves this question. Was it a part of a rerating on entire Korea? Well, it doesn’t seem that it was the case. During the same period, KOSPI 200 has gone up only 2.71%, whereas Samsung has climbed nearly 10%.

So, it should have been more of a decoupling situation for Korea’s memory chip stocks. Well, it isn’t the first time that we see this kind of decoupling. Entire Korea is more correlated with China than the US; however, Samsung and Hynix are still going more in line with NASDAQ, specifically PHLX SS. The latest liquidity-fueled frenzy in the US has primarily pushed up the US tech stocks. Samsung and Hynix must have also benefited from it as well. Then, this dynamic has invited arb traders who wanted to capitalize on this specific hedge position: long Samsung/Hynix and short KOSPI 200. This approach is reasonable as there is no reason to believe entire Korea is moving up on a rerating.

Well, the strategy seems to have paid off nicely. The gain of each entry point since December 20 until January 7, if holding until January 17, is still sitting at least above 3%. It peaks as high as 5% if you entered the position on December 24. If you took higher leverage as Samsung and Hynix carry one of the few sufficiently liquid futures, your gain would have been in a much more pleasant area. 

4. The Fate of Lotte Group Companies Post Shin Kyuk-Ho Era

On January 19th, the founder of Lotte Group Shin Kyuk-Ho passed away. He was 99 years old. Lotte Group is the fifth largest chaebol in Korea and there will be numerous Lotte related companies that will be affected post his death. Korea imposes one of the highest inheritance tax rates among the OECD countries (as high as 50-65%) and Shin Kyuk-Ho passing away will act as a key catalyst in many Lotte related shares.

One of the arguments of why there tend to be a big interest on these chaebol related shares after the founder/Chairman passes away is that sometimes there is some perception that these chaebol related companies “purposely” try to keep their share prices low around these periods in order to pay lower inheritance taxes. Plus, in order to pay for the inheritance taxes, there may be some need to divest non-core businesses and other assets.

Among the Lotte related companies, Lotte Corporation (004990 KS), Lotte Corp (Pref), Lotte Shopping Co (023530 KS), Lotte Confectionery (280360 KS), and Lotte Chilsung (Pref) are likely to have some positive momentum post the passing away of the founder Shin Kyuk-Ho who has ownership stakes in many of these companies.