In this briefing:
- SKT CEO Park’s Words Are Confusing. I’d Now Stay Away from the Event
- CJ E&M: (Parasite = Oscar?) A Turnaround Play After Six Years of Pain
- 2020 Strategy: Less Than 20/20
- Korea – Semco and Hynix Rising, FILA Korea Falling
- Semiconductor Surge: GEM Managers Hit Max Exposure
SK Telecom CEO Park Jung-ho has recently made several remarks on the SKT split. On January 8 at the CES 2020, he said in front of a handful of local reporters that he would try to IPO some of SKT’s subsidiaries this year. Well, until this part it seems fine to me. Then, he appeared again at a local event on January 13 and made further comments on the restructuring. This time, he said that the SKT intermediate holding company option is still alive and under consideration. What’s surprising is that he reportedly said that he was considering physical division instead of equity spinoff as a way to split SKT. It means that there won’t be SK Holdings+SKT InvestmentCo (which holds the Hynix controlling stake) merger. It isn’t over yet. He then added that he is still mulling over whether to place Hynix above SK Telecom or leave it below SK Telecom. Honestly, I’m confused here. If he chooses physical division, he won’t have any viable way to place Hynix above SK Telecom. The only way is doing another step to spin off an entity holding the Hynix controlling stake, which doesn’t make much sense.
The source is the local news outlet called Digital Today. Although it isn’t a top-tier news outlet in Korea, it is a well-known and well-connected newspaper among local tech professionals. So, the possibility that it fabricated or misunderstood Park’s remarks should be slim.
Korea produces some of the most globally competitive products including semiconductors, smartphones, TVs, and yes Korean contents. CJ E&M is the largest entertainment company in Korea which produces and distributes some of the finest Korean contents (dramas, movies, and music). CJ E&M’s stock has been clobbered in the past six years (down more than 60% since reaching its highs in early 2014).
This has been due to a combination of factors including increasing competition at home from Disney, Netflix (both a partner & competitor), and Youtube. Plus, many investors see little synergies in merger between CJ E&M and CJ O Shopping which was completed in 2018. There have also been political squabbles among China, Japan, and South Korea in the past few years, limiting the opportunity for the company to expand its entertainment overseas.
Now we believe the tides are beginning to turn and over the next 6-12 months, we see a distinct turnaround story for CJ E&M. First, we like the company’s strong pipeline of new movies and dramas. Second, there is an increasing likelihood of the Chinese government allowing greater access to Korean contents, unlike in the past 2-3 years where it has been very difficult to export these Korean contents to China. Third, with the final FTC approval for the sale of the CJ Hellomobile to LG UPlus, CJ E&M should be able to improve its returns on capital and better focus on its core entertainment business.
We see 2020 as full of surprises, marked by rising geopolitical risk. Major headlines this year will include the US election in November, BREXIT, the greater China situation (which includes a cross-strait tension between China and Taiwan and the on-going protest in Hong Kong), the US-China trade war, a lack of progress in the Nuclear talk with North Korea, and, last but not least, the middle east tension which has already escalated to the next level. The attack that killed Iran’s top general on 2-Jan started the year on the right track for gold and oil prices as well as those relying on prices of these two commodities, such as the Mideastern countries and Russia.
In the year ahead, we favor equities over bonds in general. As we believe valuations are stretched, securities selection is key and a buying opportunity on the sell-off event, especially stemming from the geopolitical risk, will reward value investors. We prefer emerging markets (EM) equities and bonds as we expect more upside potentials in light of improving credit fundamentals and a continued fund flow into an EM world for diversification away from developed markets (DM). At the end of the day, unpredictable policy shifts in the US and in Europe do not help. We also do not expect China’s trade war with the US and debt debacle to go away anytime soon.
In a year of rising geopolitical risk, we expect infrastructure, utilities, and other non-cyclical businesses to do better. However, rising oil prices and continued recovery (albeit at a slow pace) should help the oil and gas sector.
This year should be another record year for green financing, spurred by more awareness that our planet is changing for the worst (i.e. the bushfire in Australia). Green financing (including green bonds) has a more committed group of investors which means less volatile spread movement in general.
In 2020, we will add additional angles to our fixed income research to include equity and F/X strategies as well as green bond research. Capital markets continue to evolve and, even at a slower pace than expected, we believe local currency EM bonds and tokenized securities (i.e. security tokens) are two topics we will follow closely. Stay tuned!
The Korea Exchange (KRX) publishes outstanding short position data daily with a two day lag. The data below is of the close of 10 January 2020.
Current short notional on the KOSPI market is KRW 10,969bn (US$9.48bn) with the largest short notionals in Celltrion Inc (068270 KS), Samsung Biologics Co., (207940 KS), Samsung Electro Mechanics Co, Ltd. (009150 KS), Amorepacific Corp (090430 KS) and LG Display (034220 KS).
Stocks with the largest increase in short interest over the week were LG Chem Ltd (051910 KS), SK Hynix (000660 KS), Fila Korea Ltd (081660 KS) and Naver Corp (035420 KS) while shorts were covered in Samsung Electro Mechanics Co, Ltd. (009150 KS), SK Holdings (034730 KS), Posco Chemtech (003670 KS) and Samsung Fire & Marine Ins (000810 KS).
We also take a look at some prominent names that have seen a big move in price or short interest during the week. Some are set up for a squeeze while others could see the price fall from here.
- Global EM managers have increased Semiconductor exposures to their highest levels on record.
- Taiwanese and South Korean Semiconductor overweights hit all-time highs.
- Most favoured stocks are Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) , SK Hynix (000660 KS) and Mediatek Inc (2454 TT) with buying seen in Win Semiconductors (3105 TT)
- Fund close positions in Chipbond Technology (6147 TT) and Novatek Microelectronics Corp (3034 TT)
- Semiconductor stocks are the largest Industry group overweight bet by EM active managers heading into 2020.
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