In this briefing:
- Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific
- TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity
- NTT Buyback Almost Done
- The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts
- BGF Holdings Stub Trade: More Price Correction on Sub Is Still Ahead
1. Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific
- This is the complete list of Korea’s single-sub holdcos with current sigma %. Three local holdcos are currently standing out: Amorepacific Group (002790 KS): +231.84% of σ, Hanjin Kal Corp (180640 KS): -113.10% of σ and Youngone Holdings (009970 KS): +86.63% of σ.
- Amorepacific appears very tempting for stub trade. The Amore duo now has the widest price divergence on a 20D MA among Korea’s single-sub holdcos. But I would wait on this name. Locally, signals of improving fundamentals are being heard on the local cosmetics stocks. Holdco has traditionally been more susceptible to fundamentals changes. It is very possible that Amore duo leads to upwardly mean reversion in favor of Holdco in the short-term.
2. TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity
Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing.
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value.
In this insight I will detail:
- an actionable market-neutral trade idea
- an analysis of the various business units of Amorepacific
- reasons for the under-performance of Amorepacific parent and a sign of a rebound
- a recap of ALL my stub trade ideas on Smartkarma, including track record of performance
3. NTT Buyback Almost Done
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
4. The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts
In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
5. BGF Holdings Stub Trade: More Price Correction on Sub Is Still Ahead
- BGF Retail (282330 KS) was down 12% last week. BGF Co Ltd (027410 KS) was down only 4.5%. Finally, they are now above 20D MA. This happens for the first time since late Nov. But Holdco discount is still at 50%. Similarly, price ratio is still close to the yearly low.
- Usually, I’d close a position when I reach ±0.5~0 σ on 20D MA. In this case, Holdco discount is too harsh to do so. Sub price/price ratio has been negatively correlated. Valuation wise, Sub price correction isn’t over yet. PER on FY19e is around 20x. This is about 7% higher than GS Retail (007070 KS) even though GS Retail EBITDA margin is slightly higher.
- It also appears that sentiments on the entire retail sector won’t improve any time soon. The government is hinting a possible change on minimum wage. This is positive on Sub. But fundamentally, Korean CCSI is still on the decline. The newly implemented franchisee support measures will further worsen sentiments. I wouldn’t close this position yet.
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