Brief Korea: Korea – AmoreCorp, LotteChem, KMW, Helixmith Shorts Increase; Covering on Shinhan, Semco, Samsung and more

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

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The Korea Exchange (KRX) publishes outstanding short position data daily with a two day lag. The data below is of the close of 14 February 2020.

Current short notional on the KOSPI market is KRW 10,532bn (US$8.85bn) with the largest short notionals in Celltrion Inc (068270 KS), Samsung Biologics Co., (207940 KS), Amorepacific Corp (090430 KS), Samsung Electro Mechanics Co, Ltd. (009150 KS) and Samsung Electronics (005930 KS)

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

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  • 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

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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

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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. 

The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score.

A low RSI and rock-bottom FV add to the attractiveness of shares. In fact, shares stands in the top quintile of opportunity globally by VFM from >2000 banks that we track.

With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.

The big plus is that fundamental trends are benign in a highly challenging market for eking out higher profitability. Efficiency improvements and growth in non-interest Income are so necessary, and tangible at BNK, given the strains on the top-line from soft Net Interest Income amidst modest Balance Sheet growth and the inexorable decline in NIM. However, BNK’s NIM erosion is mirrored -and matched- by a reduction in the NPL ratio. The sharp downward direction in the problem loan ratio cannot be underestimated. Credit costs are thus understandably on a downward trajectory, supporting squeezed Profitability in conjunction with aforementioned Efficiency gains and fee income progression.

It is common knowledge that South Korean banks are cheap. See South Korean Banks: You Back the Big Prices, Not the Favourites and South Korean Banks: Stuck in the Value Vault .  BNK is especially cheap, trading on a P/Book and FV of 0.29x and 3%, respectively, while the Earnings and Dividend Yields fetch 23% and 5.3%, respectively. A PH Score™ of 9.5 can serve as a tailwind.

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.

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