Daily BriefsEvent-Driven

Event-Driven: Chongqing Zhifei Biological Products, HYBE, Sichuan Languang Justbon Service Group, Samsung Card Co, SK IE Technology, Samsung SDI, Investor AB, SK Telecom, Amorepacific Group and more

In today’s briefing:

  • FTSE China A50 Index Rebalance Preview: One High Probability Change; One on the Cusp
  • MSCI Korea Index: Trade Approach on Highly Probable Names
  • Languang Justbon (2606 HK): Offer Now Open – For Up To Four Months
  • Korea Short Selling First Day: All Index Exclusion Stocks Are in Action
  • SK IE Technology IPO: KOSPI200 Inclusion Certain; Rally Needed for MSCI & FTSE
  • SDI’s Future Tied to JY Lee?
  • Selected European Holdcos and DLCs: April Report
  • SK Telecom: A Massive Treasury Shares Cancellation – Watching Paint Dry No More!
  • Languang Justbon’s Composite Document, IFA Opinion and Extended Closing Date
  • Korea Single-Subsidiary Holdcos NAV Discount & Short Interest: Quick Thoughts on Trade

FTSE China A50 Index Rebalance Preview: One High Probability Change; One on the Cusp

By Brian Freitas

The FTSE China A50 Index (XIN9I INDEX) is designed to represent the performance of the 50 largest companies by full market cap of the mainland Chinese market that is available to domestic and international investors via the QFII, RQFII and Stock Connect programs.

The next rebalance will be effective after the close of trading on 18 June and the changes will be announced on 2 June. The review uses data from the close on 24 May to determine the stocks to be included and excluded.

Using data from 30 April, we see 2 potential inclusions Chongqing Zhifei Biological Products (300122 CH) and Haier Smart Home (600690 CH). The stocks that would be deleted from the index are Offcn Education Technology (002607 CH) and CSC Financial Co Ltd (601066 CH).

Chongqing Zhifei Biological Products (300122 CH) was included in the index at the September 2020 review and deleted at the December 2020 review. The stock could now be included in the index again following the run up in the stock price.


MSCI Korea Index: Trade Approach on Highly Probable Names

By Sanghyun Park

The MSCI Korea Index semi-annual review period is completed. The reference date is a randomly selected trading day in the last ten trading days of May.

Here are the results:

For the additions, we have two highly probable candidates: HYBE and HMM. SKC is likely. Green Cross and Kakao Games appear to have no chance this time.

AdditionsHYBE Co LtdSKC Co LtdGreen Cross CorpHMM Co LtdKakao Games Corp
Ticker352820011790006280011200293490
Float rate (FnGuide)40.01%53.46%46.04%83.51%42.55%
Foreign room91.51%88.74%80.73%87.78%91.03%
ProbabilityHighLikelyHigh
Cutoff market cap = Median index market cap on March 31
Market cap screeningPassPassPass
Float-adjusted market cap screeningPassPassPass
Cutoff market cap = 20% premium to the median index market cap on March 31
Market cap screeningPassPassPass
Float-adjusted market cap screeningPassPass
Source: KRX, MSCI, & FnGuide

On the other hand, we have 5 candidates for exclusion, and the results are most of them have a high probability of leaving the MSCI Korea Index this time, except for Korea Gas. None of these 5 stocks has passed the float-adjusted market cap requirement on any of the last four trading sessions, even when using the median index market cap as our cutoff market cap. Just Korea Gas was on the cusp.

DeletionsSamsung Card Co LtdLotte CorpKorea Gas CorpGS Retail Co LtdOttogi Corp
Ticker029780004990036460007070007310
Float rate (FnGuide)20.17%24.87%43.14%34.10%35.95%
Foreign room88.26%88.58%67.41%85.50%83.91%
ProbabilityHighHighHighHigh
Cutoff market cap = Median index market cap on March 31
Market cap screeningFail
Float-adjusted market cap screeningFailFailFailFailFail
Cutoff market cap = 20% premium to the median index market cap on March 31
Market cap screeningFail
Float-adjusted market cap screeningFailFailFailFailFail
Source: KRX, MSCI, & FnGuide

Languang Justbon (2606 HK): Offer Now Open – For Up To Four Months

By David Blennerhassett

On the 22 March, Sichuan Languang Justbon Service Group (2606 HK) (“Justbon”) announced its major shareholder (plus two other vendors) had entered into MOUs with Country Garden Services Holdings (6098 HK) (CGS), such that 126,011,860 H shares AND 750,000 domestic shares or 71.17% of shares out would be acquired. Upon completion, CGS was obligated to make an unconditional mandatory general Offer (MGO) for the H shares (at HK$51.0571/share) and domestic shares (at RMB42.8547/share).

In addition, if a delisting resolution was approved by independent H-shareholders and a 90% acceptance condition (of independent H-shares)) was satisfied, H-shareholders will receive HK$54.30/share and domestic shareholders RMB45.5768/share.

On the 19 April, Justbon said all three agreements had completed, giving CGS 71.17%.
The Composite Document has now been despatched, and the Offer is open to acceptances. The H Share Class Meeting will be held on the 17 June, which is also the first closing date. 
Assuming the delisting resolution is approved, the latest time for the acceptance condition to be satisfied is the 3 September, four months from now. 
But as this is an unconditional MGO, this extended acceptance period tilts the deal in favour of CGS securing the 90% tendering condition.
More below the fold.

Korea Short Selling First Day: All Index Exclusion Stocks Are in Action

By Sanghyun Park

Monday was the first short-selling resumption day. The total short-selling reached 4.9% and 3.1% of the total trading volumes for KOSPI and KOSDAQ, respectively. KOSPI was down 2.5%p from the previous short-selling trading session (March 13, 2020). KOSDAQ went up by 0.7%p from the previous session.

KOSPI usually has about 50:50 equal weight between foreign investors and local institutions. But yesterday had foreign investors go active at a usual pace while local institutions stayed quiet. However, KOSDAQ had another usual day in terms of short-selling weights between foreign and local institutions.

KOSPI2019 daily average2020.01~03.13 daily average2020.03.132021.05.03
Total short selling (₩B)318.0499.1991.0814.0
% of total trading volume6.40%6.70%7.40%4.90%
 – Foreign investors, weight %59.10%49.20%53.90%90.70%
 – Local institutions, weight %40.10%50.00%45.40%7.70%
 – Local retail, weight %0.80%0.80%0.70%1.60%
Source: KRX
KOSDAQ2019 daily average2020.01~03.13 daily average2020.03.132021.05.03
Total short selling (₩B)102.7155.0192.6279.0
% of total trading volume2.40%2.50%2.40%3.10%
 – Foreign investors, weight %74.20%73.90%70.20%78.00%
 – Local institutions, weight %23.80%23.60%27.00%20.30%
 – Local retail, weight %2.10%2.50%2.70%1.80%
Source: KRX

In KOSPI, three of the top 5 most actively shorted stocks are the MSCI Korea exclusion names: Samsung Card, Ottogi, and Lotte Corp. Well, this should come as no surprise. Of course, Hanjin Kal is another well-anticipated one as its proxy fight was practically over. In KOSDAQ, DAWONSYS, NKMax, Dongkook Pharm, and Seegene top the list. Apparently, short-sellers mainly target overvaluation stocks in KOSDAQ.

KOSPIShort selling % of total trading volumeShort selling trading value (₩B)KOSDAQShort selling % of total trading volume
Short selling trading value (₩B)
Samsung Card Co Ltd56.24%5.36DAWONSYS CO., LTD41.55%3.51
Hyundai Marine & Fire Insurance Co., Ltd45.50%8.46NKMax Co Ltd38.29%3.16
Ottogi Corp37.74%1.55Dongkook Pharmaceutical Co Ltd34.10%1.33
Lotte Corp37.52%10.48Seegene Inc33.90%29.01
Hanjin Kal32.45%5.49SM Entertainment Co Ltd32.12%2.53
Source: KRX

SK IE Technology IPO: KOSPI200 Inclusion Certain; Rally Needed for MSCI & FTSE

By Brian Freitas

Even with HUGE oversubscription numbers, SK IE Technology (361610 KS) has allocated a large part of the institutional tranche to market participants that will not be locked-up on their shares. Fortuitously, the ESOP portion was undersubscribed and the shares were reallocated to retail investors and institutions. Put together, this will increase the free float of the stock and a modest 85-90% rally on listing day could see SK IE Technology (361610 KS) included in the MSCI Standard and FTSE All-World indices.

Fast Entry into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) is virtually guaranteed. The issue is one of timing. The stock lists on 11 May and will complete 15 trading days by 1 June. The results of the regular June review would have been announced before then and the rebalance will be effective after the close of trading on 10 June. There is still enough time for the index committee to make the announcement and include the stock in the index in June – whether they do so remains to be seen.

If the stock is included in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) in June and the stock gets Fast Entry into the MSCI and FTSE indices, passive trackers across the indices will need to buy close to 1.87m shares of SK IE Technology (361610 KS) within a month of the stock starting to trade. That is close to 14% of the shares that are available to trade by that point and could even be as high as 17% of the shares available for trading.

The stock will most likely be locked limit up on listing day and the passive flow could keep the stock supported for the next few weeks.


SDI’s Future Tied to JY Lee?

By Ken S. Kim

The talk of M&A interest by Samsung Electronics has been making the rounds again and the question is how does Samsung Electronics (005930 KS) grow with the current leader locked up in jail? Samsung SDI (006400 KS) seems to be central to where the Group goes.


Selected European Holdcos and DLCs: April Report

By Jesus Rodriguez Aguilar

Discounts to NAV for our selected European holdcos and DLCs have generally tightened in April. The report incorporates Q1 releases for the main Swedish listed holding companies, and several SOTP valuations.

Ecology, technology and cyclical pull are the three factors that play in favour of the Swedish stock market, which is among the top performers this year. In the last twelve months its revaluation exceeds 60%, helped by the quality of its companies. The high concentration of the OMX index in cyclical companies, which benefit from the optimism generated by vaccination, accelerates its rise. The 15 largest companies represent almost 60% of the total market, which generates leverage in sectors such as industrial (with a 34% weight of the index), financial (23%) and Technology (10%). This performance should be maintained compared to other markets throughout the year. The shift towards cyclicals has been reflected in the good performance of H&M, Nordea Bank, Volvo and Ericsson. Sweden is a very stable economy and there are funds that seek that tranquility, which benefits their good progress. The commitment to sustainability puts the Swedish market in the focus of large investors, in addition to having a stable currency in which to diversify.

  • The current premium of BHP Group (BHP AU) vs.  Bhp Billiton (BLT LN) at close of March was 21.8% (vs. 24.6% as of 31 December and 19.5% as of the end of March), against a 10-year average of 14.6%. I would rather be long the UK plc and short the Aussie Ltd. through US listings.

  • Corp Financiera Alba Sa (ALB SM) is trading at a 44.5% discount to NAV, partly because of its low liquidity. The discount does not seem to be arbitraged lately. Naturgy Energy Group SA (NTGY SM), one of its portfolio main assets, is the object of a partial takeover bid; Euskaltel is the object of a full takeover bid, as it has been previously flagged here. Alba has some quality assets and is fundamentally cheap, in my view.

  • The discount of Groupe Bruxelles Lambert Sa (GBLB BB) has tightened to 31.5%. I recommend Long GBL / Short main listed assets (LafargeHolcim, SGS, Pernod Ricard, Adidas and Umicore, which represent c. 70% of NAV).

  • The discount in Heineken Holdings relative to Heineken has widened to 14.4% (vs. 12.6% at the end of March) vs. an average of 10.5% for the last 15 years, and 7.9% for the last five years. Recommendation is long Heineken Holdings, short Heineken.

  • Industrivarden AB (INDUA SS) C shares are trading at a 0.6% discount to NAV (vs. 7.8% at the end of February), the lowest over the last twelve months. I would wait for the discount to widen before entering the trade again.

  • The discount to NAV of Investor AB (INVEB SS) B shares has tightened to 14% (vs. 17.1% at the end of February and 14.4% at the end of March).

  • From my SOTP valuation, Investment Ab Kinnevik (KINVB SS) B shares are trading at a c. 8% premium to NAV. Post the Zalando distribution (together with the Millicom distribution), Kinnevik will transform itself in a listed VC, investing mainly in tech.

  • Royal Dutch Shell PLC (RDS/B US) “B” shares closed April in New York at a discount of 5.8% (vs. 4.4% as of 31 December and 6.1% as of end of March) with respect to the Royal Dutch Shell Plc (Adr) (RDS/A US) “A” shares. Trade: LONG RDSB ADR/SHORT RDSA ADR. Target: 2% premium.


SK Telecom: A Massive Treasury Shares Cancellation – Watching Paint Dry No More!

By Douglas Kim

SK Telecom (017670 KS)announced this morning that it will cancel 2.6 trillion won worth of treasury shares (8,685,568 shares, representing 10.8% of total shares outstanding). We believe this is a tremendous willingness of the company to improve shareholder value of the company. We believe this move will have a major positive impact on the SK Telecom’s share price. This is the second largest ever cancellation of treasury shares by a Korean company (after Samsung Electronics). 

This massive treasury share cancellation will result in increasing the respective ownership stakes by the existing shareholders as well as improve the overall long-term ROE of the company and returns on capital. The cancellation of the treasury shares is expected to take place on 6 May 2021. Currently, SK Telecom has 9,418,558 treasury shares. 

SK Telecom is currently trading at 12.3x P/E (2021E). In the past two years, SK Telecom’s shares have traded at an average P/E of 17.1x. The combination of the tremendous treasury shares cancellation as well as the expectation of the holdco structure are likely to lead to many investors willing to attach higher valuation multiples.

If we attach a 17.1x P/E multiple to 2021 earnings, it would suggest a market cap of 34.4 trillion won or 426,000 won, which would be 40% upside from current levels. Given these positives, SK Telecom remains a Strong Buy.


Languang Justbon’s Composite Document, IFA Opinion and Extended Closing Date

By Arun George

Sichuan Languang Justbon Service Group (2606 HK) has despatched the composite document in relation to Country Garden Services Holdings (6098 HK) base and enhanced offer. Currently, Country Garden owns 71.17% of the outstanding shares comprising 66.99% of the domestic shares and 71.20% of the H Shares. 

The base offer is an unconditional mandatory cash offer for all the issued shares is HK$51.0571 per H-share (RMB42.8547 per domestic share. The enhanced share offer, which is payable only if the delisting is approved, is HK$54.3000 per H-share (RMB45.5768 per domestic share). 

Unsurprisingly, the IFA considers the base and enhanced offer to be fair and reasonable. We broadly agree with the IFA analysis with the exception that the peer multiple comparisons could be improved. 

The two key conditions for the delisting will be approval by at least 75% independent H-shareholders (<10% of all independent H-shareholders rejection) and the satisfaction of the minimum acceptance condition (90% of H-shares held by independent H-shareholders). Satisfaction of the minimum acceptance condition is the key hurdle. We note the privatisation proposals for Beijing Jingneng Clean Energy (579 HK) and Harbin Electric Co Ltd H (1133 HK) have previously failed due to the inability to meet the 90% minimum acceptance condition.  

Country Garden Services has bought itself some leeway by having the right to extend the closing date from 17 June to not later than 3 September. In theory, the extended time period should provide a greater chance of meeting the 90% threshold. At the last close, the gross spread to the enhanced offer price of HK$54.3000 stands at 4.9%.


Korea Single-Subsidiary Holdcos NAV Discount & Short Interest: Quick Thoughts on Trade

By Sanghyun Park

With short-selling in full action now, the attention is growing on the local single-subsidiary holding company stocks. I track the following 12 pairs. Currently, three holding companies are at a negative sigma on a 20-day moving average.

HoldcoSubsidiarySigma (σ) on a 20-day moving average
Amorepacific GroupAmorepacific Corp1.04
BGF Co LtdBGF Retail Co Ltd0.24
Halla Holdings CorpMando Corp0.62
Hanjin KalKorean Air Lines Co Ltd-1.64
Hankook & Company Co LtdHankook Tire & Technology Co Ltd0.69
HANSAE YES24 HOLDINGS CO., LTD.Hansae Co., Ltd.-1.57
HDC Holdings Co LtdHDC Hyundai Development Co1.52
Nexen CorporationNexen Tire Corp-0.71
Nongshim Holdings Co LtdNongshim Co Ltd1.16
ORION Holdings CorpOrion Corp1.24
Poongsan Holdings CorporationPOONGSAN CORPORATION1.07
Youngone Holdings Co LtdYoungone Corporation1.16
Source: KRX

In a longer horizon (180-days), Hanjin Kal (again), Hankook & Co, and Nexen appear to be in an undervalued territory relative to their respective counterpart.

Holdco%Δ to 180-day mean%Δ to 180-day high
%Δ to 180-day low
Amorepacific Group-3.76%-16.86%9.99%
BGF Co Ltd24.29%-5.08%47.30%
Halla Holdings Corp-8.97%-32.41%22.01%
Hanjin Kal-42.64%-65.21%2.65%
Hankook & Company Co Ltd-12.17%-32.20%9.18%
HANSAE YES24 HOLDINGS CO., LTD.-1.84%-30.55%38.10%
HDC Holdings Co Ltd-1.41%-15.67%18.40%
Nexen Corporation-15.93%-25.30%3.63%
Nongshim Holdings Co Ltd11.01%-0.72%32.78%
ORION Holdings Corp38.24%-1.97%72.32%
Poongsan Holdings Corporation3.45%-24.96%14.58%
Youngone Holdings Co Ltd-1.02%-15.07%20.33%
Source: KRX

Unfortunately, their NAV discount tells a different story. High-NAV discount holdco stocks are BGF, Halla Holdings, Nongshim Holdings, and Youngone Holdings. In contrast, Hanjin Kal and Hankook & Co still have substantial room for further deflation relative to their local peers in NAV discount.

* FYI, only Halla Holdings has significant operating operations. 

HoldcoSubsidiaryNAV discountSingle subsidiary weight in NAVSingle subsidiary weight in GAV
Amorepacific GroupAmorepacific Corp11.39%94.87%92.47%
BGF Co LtdBGF Retail Co Ltd53.56%68.45%82.11%
Halla Holdings CorpMando Corp67.04%68.92%49.55%
Hanjin KalKorean Air Lines Co Ltd-1.76%81.57%82.50%
Hankook & Company Co LtdHankook Tire & Technology Co Ltd17.91%89.46%97.87%
HANSAE YES24 HOLDINGS CO., LTD.Hansae Co., Ltd.34.88%74.72%64.86%
HDC Holdings Co LtdHDC Hyundai Development Co43.85%62.61%55.20%
Nexen CorporationNexen Tire Corp48.07%73.44%73.67%
Nongshim Holdings Co LtdNongshim Co Ltd61.52%68.01%68.49%
ORION Holdings CorpOrion Corp45.33%95.84%87.02%
Poongsan Holdings CorporationPOONGSAN CORPORATION49.59%80.11%84.91%
Youngone Holdings Co LtdYoungone Corporation52.20%79.12%85.07%
Source: KRX

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