In this briefing:
- Semiconductor WFE Outlook. Things Just Got Really Ugly
- LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
- Seasonality of the Korean Stock Market: “Sell in May and Come Back in November”
- Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor
- Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
1. Semiconductor WFE Outlook. Things Just Got Really Ugly
SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.
Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year.
These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season.
There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.
2. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
- LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
- On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.
3. Seasonality of the Korean Stock Market: “Sell in May and Come Back in November”
In this report, we analyze the seasonality of the Korean Stock Market using KOSPI index from 1998 to 2018. Our analysis suggests there is a clear seasonality in the Korean stock market. “Sell in May and Come Back in November” is the best strategy for KOSPI, according to our analysis.
From 1998 to 2018, KOSPI was up on average 12.0% from November to April (6 months). For example, $1 million invested in KOSPI, generating a 12.0% per year (excluding taxes and transaction costs) using the seasonality strategy (buying KOSPI at the beginning of November and selling it at end of April) would have generated $10.8 million at the end of 21 years. In comparison, KOSPI was down on average 0.8% from May to October (6 months) from 1998 to 2018.
How About This Year? So far, “Sell in May and Come Back in November” strategy would have worked out well in Korea. For example, KOSPI was down 19.3% from end of April to end of October 2018. KOSPI is up 1.6% from end of October to December (as of 18th). Right now, the biggest impact to the direction of the global stock markets in the next several months will likely be determined in the last meeting of the US Federal Reserve on December 18th to 19th. A few high-profile investors such as Paul Tudor Jones have recently mentioned that the US Fed will not raise interest rates in 2019. A more dovish tone by US Fed Chairman Jerome Powell on the extent and pace of the future interest rate hikes in 2019 could set the tone for a turnaround of the global equity markets, including KOSPI, in the next few months.
4. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor
- Hyundai Motor Co (005380 KS) and Hyundai Mobis (012330 KS) are way more correlated than what internal sales dependency suggests. Their 2Y correlation coefficient is 0.84. The scatter chart shows they are clearly cointegrated.
- The owner family potentially buying Mobis shares may create divergence in favor of Motor. They need to sell their Motor shares to buy Mobis shares. The higher Motor price and the lower Mobis price are, the happier and wealthier they become.
- Current price ratio is a little below 2Y stat mean. I expect it to reach a +0.5~1 σ level on 2Y SD. This is a 4.5~9% yield. I’d go long Motor and short Mobis to hunt for this.
5. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
- After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
- This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
- In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.
