Brief Korea: Zinus IPO Valuation Analysis and more

In this briefing:

1. Zinus IPO Valuation Analysis
2. ESG Alpha: Fluff or Stuff?
3. Amorepacific C/1P Arb Trade Idea
4. Zinus IPO Preview – The #1 Player in the Online Mattress Sales in the U.S.
5. Initial Thoughts on the Hanwha Systems IPO (The Largest Korean IPO in 2019)

1. Zinus IPO Valuation Analysis

Our base case valuation of Zinus is 109,404 won per share or 1.7 trillion won in market cap. This represents a 29% upside from the mid-point of the IPO price range of 80,000 won to 90,000 won. Because of the excellent upside potential compared to the IPO price range, we have a positive view of the Zinus IPO. 

Our base case valuation is based on a 16.5x EV/EBITDA multiple using the annualized EBITDA estimate of 103 billion won, which is derived from twice the EBITDA in 1H19. Our EV/EBITDA valuation multiple of 16.5x is based on a 20% premium to the comps’ median valuation multiple in 2019. Because Zinus has better metrics than the comps in terms of sales growth, operating margins, ROE, ROA, and balance sheet strength, we believe Zinus should trade at premium valuation multiples versus its peers.

Zinus is a truly fascinating underdog comeback story. For some reason, when I think of an “underdog comeback story,” I often think about the movie Rocky. The legend has it that prior to Sylvestor Stallone becoming all famous, he was in some hard times and by some coincidence he happened to stop by the NYC library. While he was there, he grabbed a book by Edgar Allan Poe which provided him with some inspiration and later on he went on to write the entire script of the movie Rocky by himself and the rest is history.

2. ESG Alpha: Fluff or Stuff?

When there’s an elephant in the room, it’s best to acknowledge it.

So let’s be honest, ESG (Environmental, Social, Governance) is an intensely loaded acronym. Not so much for zealots and spinmeisters, but among portfolio managers the mere mention of those three letters – a four-letter word to some – can quash civility and raise the temperature in a room.

But who doesn’t love a good debate?

I am excited to bring my unapologetically alpha-centric ESG research to Smartkarma. As a former sell-side analyst, I’m a staunch proponent of independent research. Moreover, I trust ESG’s ability to create value at the security level and, sometimes, generate alpha at the portfolio level.

• Security Level: ESG analysis aids in securities selection, and ESG-focused issuers can reduce various types of risk and contribute to top- and bottom-line gains; all steps toward alpha.
• Portfolio Level: In addition to clear beta benefits (lower volatility, reduced fat tail risk), ESG integration can potentially (an operative word I’ll clarify later) generate “ESG Alpha.”

My views are based in experience, not religiosity. They are seeded in harsh early-career lessons in ESG-related risk (a class in governance from Enron, anyone?), and rooted in a decade researching ESG’s links to risk-adjusted equity returns, credit ratings, cost of capital, and yield spreads.

Initially, I struggled with whether to lead off with an “introductory” piece. The world doesn’t need another prosaic ESG primer, but I felt a need to provide some context since ESG is a new angle on Smartkarma, and my views – more pragmatic than idealistic – don’t always toe the ESG party line.

So, here it is, my introduction. Not to ESG per se, but to ESG and us – you, me, Smartkarma.

The goal of this report is simply to lay a basic foundation for future research. It leans informal, but I do have a few specific objectives (which can also be considered a rough outline):

1. Explain what I mean by alpha-centric ESG research, and what to expect from my research
2. Briefly share the strange backstory to my ESG career, as insight into my ESG philosophy
3. Offer observations (some cautionary) about certain kinds of questionable ESG “research”
4. Discuss the holy grail, ESG Alpha, from a theoretical point including its major challenges

3. Amorepacific C/1P Arb Trade Idea

Amorepacific 1P is in an attractive territory. Its C is at +2σ relative to 1P on a 20D MA. 1P DTV is less than US$1M (US$0.7~0.8M). If you still care a pref with < US$1M DTV, this will be worth your attention.

4. Zinus IPO Preview – The #1 Player in the Online Mattress Sales in the U.S.

A company called Zinus (013890 KS)whose main business is in making mattresses is getting ready for an IPO in Korea. There have been some delays in the Zinus IPO in the past two years and it appears that the company is finally ready to complete its IPO in the next few weeks. The Zinus IPO is likely to be one of the biggest IPOs in Korea this year and there should be solid interest in this IPO among many institutional investors. The company’s mattresses are one of the best-selling items in Amazon’s furniture section. 

The IPO price range is from 80,000 won to 90,000 won. The IPO deal base size is $203 million to $228 million. According to the bankers’ valuation, the expected market cap after the IPO is from 1.26 trillion won to 1.41 trillion won. The book-building for institutional shareholders starts on October 16th, 2019. 

The bankers used four companies including Hyundai Livart, Hanssem, Tempur Sealy International, and Sleep Number Corp as comps to Zinus. The average P/E of the comps is 26.7x. This resulted in the IPO value (pre IPO discount) of 1,742 billion won in market cap or 110,821 won per share. After applying an IPO discount of 18.8% to 27.8%, this resulted in an IPO price range of 80,000 won to 90,000 won per share. 

5. Initial Thoughts on the Hanwha Systems IPO (The Largest Korean IPO in 2019)

Hanwha Systems is getting ready to complete its IPO in 4Q19. Hanwha Systems is expected to be the largest IPO in Korea this year. Established in 2000, Hanwha Systems currently has two main business units including the defense/aerospace unit and ICT (information, communication, & technology) unit.

Hanwha Aerospace (012450 KS) is the largest shareholder of Hanwha Systems with a 52.9% stake in the company. Hanwha Aerospace currently has a market cap of 2.2 trillion won. Bolstered by the expectation of a strong IPO for Hanwha Systems, Hanwha Aerospace’s stock price has increased 29% this year.

The comps on average are up 11.5% YTD, outperforming KOSPI which is up only 2.2% YTD. Among the comps, Korea Aerospace Industries (047810 KS) and Hanwha Aerospace (012450 KS) have had the best share price performance YTD.