In this briefing:
- Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
- Korea National Pension Fund Announces a List of 11 Companies They Oppose in Upcoming AGMs
- Snippets #20: Dark Clouds in Thai Equities
- Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
- Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
- SamE shocked the market with 4Q results. OP was down nearly 30% YoY and even 20% from the already heavily adjusted street consensus of ₩13.4tril. The main reason was Amazon’s canceled order. Amazon canceled a significant portion of memory chips, mostly DRAM to be used in its IDCs.
- The market guessed that Amazon might have delayed purchase to further capitalize on falling prices. But Amazon had canceled DRAM order because there were fundamental flaws in SamE’s custom DRAM chips at chip design level.
- The street was expecting a bounce back for memory chip ASP in 2H this year. SamE’s technical issue may push it back further. Meanwhile, SamE’s next quarterly profit level can be even worse. Some in the local street already adjusted SamE’s 1Q OP down to slightly above ₩7tril. At this level, SamE’s FY19e PER would be at 11~12x. This is a very aggressive territory for SamE.
On March 12th, the Korea National Pension Fund Service (NPS) provided a list of 23 companies where it plan to exercise its voting rights in their AGMs in the next two weeks. Of these 23 companies, the NPS is opposing 11 companies on at least one of their agenda items of their upcoming AGMs, including opposing re-appointment of specific members in the BOD/senior management of these companies.
In the past, NPS’ opposing to certain agendas of the listed companies in Korea in their AGMs were typically announced about a couple of weeks AFTER the AGMs were completed. However, starting in 2019, NPS has changed its policy of announcing which companies they will exercise their voting rights (including the ones they oppose) to prior to the AGM dates.
Interesting, the 11 companies where NPS has opposed various agendas of the AGMs have strongly outperformed the market this year. These 11 companies’ share prices are up on average 8.6% YTD versus KOSPI which is up only 4.7% during the same period.
Of the five interesting trends/events/developments we heard this month, we highlighted five and how they could impact Thai equities in the near term:
- Thai Raksa Chart Party dissolution. The dissolution of the TRC, the second largest Thaksinite party, poses some political risks but could affect sentiments for companies founded by Thaksin, such as Intuch and AIS.
- Thai Air Asia says no to Nok Air. After the briefest considerations, the larger airline came to the conclusion that they wouldn’t acquire a stake in struggling Nok Air.
- Capital Gains Taxes are currently under consideration by the government for the first time. If implemented, they are likely to have negative impact on overall equities but the brokers in particular.
- From LINE to BEC. LINE (Thailand)’s Country Manager Ariya Phanomyong has agreed to move to BEC. Though mildly positive, we believe improvements will revolve around distribution rather than the more key issue of content.
- True Move’s Request for 5G delay may sound odd at first glance, but we see it as a rational, if not very tactful, way of delaying a new round of capex.
In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp.
In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below.
- Excellent dividends
- Corporate activism related stock
- Strong financial results
- Timing of the increased insider ownerships/Completion of tender offers
Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors:
- Decline in raw material prices
- Aggressive spandex investment in India
- Stabilization of spandex prices in 2H19
- Consolidation of the global spandex industry
- Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
- Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
- Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.