In this briefing:
- Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando
- Chunbo Co. IPO Preview
- 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
- Korean Stock Market Sectors 2018 Review & 2019 Outlook
- Are US Stocks Still Expensive?
1. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando
- Halla Holdings is falling nearly 5% today. Holdco said it’d give a ₩2,000 div per share. This is about 4.5% div yield at yesterday’s closing price. 5% drop today shouldn’t be much as an ex-dividend date price drop. Mando fell 5%. Mando was oversold relative to the other local auto stocks, particularly to Halla Holdings. They are still close to +1 σ on a 20D MA.
- Mando-Hella Elec has been another reason behind Holdco’s valuation divergence against Mando lately. I believe Mando-Hella is being overhyped. Mando-Hella-caused divergence should no longer be effective. I expect ‘downwardly’ mean reversion from now on. I’d go short Holdco and long Mando at this point.
2. Chunbo Co. IPO Preview
- Chunbo Co Ltd (278280 KS) is a provider of fine chemical materials in Korea, and it is expected to complete its IPO in January 2019. Its chemical materials are used in numerous industries including the display, semiconductors, rechargeable batteries, and pharmaceutical.
- The bankers used nine comparable companies, including Sk Materials (036490 KS), Foosung Co Ltd (093370 KS), and Iljin Materials (020150 KS), to value Chunbo Co Ltd (278280 KS). The bankers used the annualized net profit of these companies from 1Q-3Q18 in their valuation analysis. The average P/E multiple of the comps were 25.3x. The bankers then applied Chunbo’s annualized net profit of 19.8 billion won from 1Q18 to 3Q18 and applied the P/E multiple of 25.3x to derive an implied market cap of 501.3 billion won. After applying an IPO discount of 20.2% to 30.2%, the bankers derived an IPO range of 35,000 to 40,000 won.
- The company has a consistent record of generating solid growth in sales and profits in the past few years. The company’s sales increased 18.4% CAGR from 2014 to 2017. Its operating margin averaged 21% from 2014 to 3Q18.
3. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
Our review of ten Asian gaming companies forward prospects for 2019 yielded our top five picks. Two of those comprise this insight. Three more will follow in Part Two. There is, in our opinion, some disconnect between continuing macro headwinds in both the VIP and mass sectors and a more bullish tone based on a recent upside trend in Macau, strong results in the Philippines and Cambodia. Given the battering of the market in general, the already 8 month old bearish tone to the sector and the current pricing of the two stocks noted here, we see significant upside opportunity as we near the beginning of 2019.
4. Korean Stock Market Sectors 2018 Review & 2019 Outlook
In this report, we review the major sectors’ performance in the Korean stock market in 2018 and also provide our outlook for them in 2019. We divided the Korean stock market into 17 major sectors such as autos, internet, and utilities. Our top sector picks for 2019 include telecom, Internet/games, utilities, and technology (lithium-ion batteries). We also believe there will likely be select IPOs that could do well next year. Overall, we believe it will be prudent to maintain a defensive position in one’s stock portfolio.
One of the positive surprises that could occur in 2019 could be some kind of resolution between the US-China trade war. Both Xi and Trump have significant incentives to make a truce and negotiate for a settlement. However, even if China and the US make a compromise settlement, we believe the overall positive impact could be temporary. The great concern is the fact that the excessive global debt driven economy may be getting closer to the last legs of the business cycle and as more global investors perceive a global recession ahead, they may accelerate the transition to more defensive portfolios.
The top five stocks we like in the Korean stock market in 2019 are SK Telecom (017670 KS), NCsoft Corp (036570 KS), Samsung Sdi (006400 KS), LG Corp (003550 KS), and Ottogi Corporation (007310 KS) .
5. Are US Stocks Still Expensive?
There are striking parallels between 1929 and 2018.
The 1929 crash put a halt to a nine-year bull run on the market.
Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.
As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.
Are we in a similar situation right now?
