In this briefing:
- Hyundai Motor Share Class: Time for 1P to Catch Up
- Wonik Merger Swap: Div-Adjusted Yield Is Now at 4.17% – Cancellation Risk Is Slim
- Share Classifications: Mid-December 2018 Snapshot
- A Comprehensive Overview of Major Tender Offers in Korea in 2018
- Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
1. Hyundai Motor Share Class: Time for 1P to Catch Up
- 1P (005385 KS) was supposed to make a catchup move yesterday relative to 2P (005387 KS). But it didn’t. Price ratio is currently well below -1 σ. Div yield difference is at 0.53%p. This is close to yearly high. At this level, 1P has no other way but to catch up with 2P.
- In my previous insight, I suggested holding onto 1P/2P long/short position. This trade hasn’t performed well. We are at a 5.07% loss at yesterday’s closing. I’d still hold onto this position for the same reasonings as before.
- Tricky one is the recently announced hydrogen cell investment. This may be seen as something boosting Common and likely 2P. Hydrogen cell investment should rather be considered as a signal that the HMG-government relation has vastly improved. This suggests that the restructuring may get accelerated. Anything positively affecting the restructuring should be positive on 1P.
2. Wonik Merger Swap: Div-Adjusted Yield Is Now at 4.17% – Cancellation Risk Is Slim
- Wonik IPS (240810 KS) / Wonik Tera Semicon (123100 KS) merger got shareholder approval yesterday. Spread now stands at 4.28%. Spread peaked at 5.12% on Dec 12. Dividend-adjusted spread is 4.17%.
- Tera Semicon is a bit of a concern. Its stock purchase price is 1.38% higher than current price. Worst case would be half of the minority shareholders claiming rights. Even if so, this would be less than ₩60bil. The company is liquid enough to absorb it.
- Local institutional arb traders have been seen doing this trade, at least partly. I’d make this trade when spread widens to 5~6%. I expect it to get to this level very soon.
3. Share Classifications: Mid-December 2018 Snapshot
This weekly share class summary is a companion insight to Travis Lundy‘s H/A Spread & Southbound Monitor – most recently discussed in H/A Spread & Southbound Monitor – Going Into Year End.
This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:
1. 82 ADRs
2. 105 Korean Prefs
3. 22 Regional Dual Classes
4. 7 Foreign/Local Thai shares
The average premium/discount for each set over a one-year period is graphed below.
For a granular breakdown of each set, PDFs are attached at the bottom of this insight.
4. A Comprehensive Overview of Major Tender Offers in Korea in 2018
In this report, we provide a comprehensive overview of the eight major tender offers in Korea in 2018 including the ones below. This report is meant to be an in-depth reference guide for those investors that are interested in capitalizing on the price inefficiencies of tender offers in Korea.
- HDC HOLDINGS/HDC E&C
- SK DISCOVERY/SK CHEMICAL
- CUCKOO HOLDINGS/CUCKOO HOMESYS
- HANIL HOLDINGS/HANIL CEMENT
- JEIL PHARMA HOLDINGS/JEIL PHARMACEUTICAL
- LOTTE HOLDINGS/LOTTE CONFECTIONERY, LOTTE CHILSUNG BEVERAGE
- SEAH STEEL HOLDINGS/SEAH STEEL
- HYOSUNG CORP/HYOSUNG TNC, HYOSUNG HEAVY, HYOSUNG ADVANCED MATERIALS, HYOSUNG CHEMICAL
Returns During Various Periods of Major Tender Offers in Korea in 2018 (Holdcos & Opcos)
In our analysis, we divided the time periods of the tender offers into six major categories. We then took the average and median returns of the holdcos and opcos that have announced their tender offers. Our results suggest that the BEST return (highest spread) can be achieved in the third category [from end of tender period to listing date]. The average spread was 19.5% using this strategy (going long holdco and short opco).
The second highest return was achieved in the first category [from announcement of tender offer to end of swap price determination period]. The trade in this case would be (going short holdco and long opco). Using this strategy would have yielded an average return of 7.5%.
Most of tender offers below include the holdco taking a greater stake of the opco and the Chairman/CEO increasing his stake of the holdco. From the perspective of these Chairman/CEOs, there would be financial interests to see “lower” prices of the holdcos during the tender periods so that they could buy them at cheaper prices.
5. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
- I initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. Yield peaked at 16.66% on Nov 22. It now stays at 8.75%.
- The ongoing FSS investigation is hammering both. Healthcare is hurting a bit more because it is more directly exposed. The market is overreacting to it. Given what has happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
- I’d hold onto this position longer to regain a mid-teen yield. Current ratio is slightly above 20D MA, but still below yearly median.
- Healthcare’s KOSPI move is still lurking. Temasek’s Healthcare selling was done lately. Celltrion merger is also rising to the surface. We have more factors pushing up the ratio in favor of Healthcare.
