In this briefing:
- Hankook Tire Worldwide Stub Trade: Another Quick Mean Reversion The Other Way Around
- Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
- JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market
- Korean Air – Six Important Catalysts
1. Hankook Tire Worldwide Stub Trade: Another Quick Mean Reversion The Other Way Around
- Hankook Tire Worldwide (000240 KS) is again in an interesting position. Its sub, Hankook Tire (161390 KS), is up 2.2% today, putting the duo at -2.2σ. Sub had lost nearly 10% on Jan 2~10 mainly on weakening outlook. Sub has then fully recovered this 10% loss this week. This is putting Holdco at a severely undervalued position on a 20D MA. Holdco discount is now at 41% to NAV.
- I initiated a reverse stub trade on this duo on Jan 8. It started at a 0.44953 price ratio. We are now at 0.38882. We would have enjoyed 15% tasteful yield if we had held onto this position up to this day. We have no apparent signal of improving fundamentals on Sub. It appears that Sub’s recent gain should be the work of bargain hunters. Holdco discount is at the local peer average. Price ratio is at yearly mean.
- Importantly, this is the first time that price ratio is hitting below -2σ since late September last year. We should expect another quick mean reversion at this level. Just, this time it will be the other way. I’d go long Holdco and go short Sub now.
2. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.
Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.
Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.
Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.
3. JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market
We initiate coverage of JKN with a BUY rating, based on a target price of Bt8.80, pegged to the the 14.8xPE’19E mean of the Asia ex-Japan Consumer Discretionary Sector.
The story:
- Plenty of opportunities in the ASEAN market
- Harvest season is imminent
- New contracts with three new channels confirm 2019 domestic growth
- Mild recovery for domestic digital TV industry in 2019E
Risks: Heavy reliance on a few major customers, probability it will have to set provisions for doubtful debts and potential inability to renew contracts with customers.
4. Korean Air – Six Important Catalysts
Shares of Korean Air Lines (003490 KS) are down nearly 60% since its highs in 2010 and we believe this decline has been excessive. The stock has started to recover and we expected continued outperformance this year. We like both Korean Air (Common) (003490 KS) and Korean Air (Pref) (003495) at current levels. However, we think Korean Air (Pref) has a higher upside. We are including Korean Air (Pref) (003495) in our model stock portfolio. The following are the major catalysts that could boost Korean Air (Common) and Korean Air (Pref) shares by 20-30%+ in the next 6-12 months.
- Increasing possibility of a breakthrough in corporate governance with potential help from KCGI & NPS
- Cheap valuation/Increasing interests from both value funds and hedge funds
- Reduced political conflict between China & South Korea
- Turnaround of the aerospace business unit
- Huge investment plan by the Incheon International Airport to expand facilities by 2023
- Current ratio of Korean Air Pref/Common is below the 1 sigma level
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