In this briefing:
- 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
- Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
- China Mobile and SK Telecom Defensive Plays and Top Trade Set Ups
1. 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.
2. 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.
3. 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.
4. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
Contrary to the perception that the rising adoption of socially responsible investment practices has caused Big Tobacco to be shunned by portfolio managers, our shareholding analysis shows that institutional holding in most of these ‘sin’ stocks has increased in the last 4 and 8 quarters.
Nevertheless, Big Tobacco suffered a pounding in 2018. Investors had bought into tobacco premising reduced risk products (Eg: e-cigarettes, Heat Not Burn products) would reduce regulatory risk and reverse decades of sales decline. As it turned out, regulators frowned at the popularity of vaping amongst teens in the US, calling out companies for baiting youngsters into long-term smoking habits. Regulators also told off companies for marketing e-cigarettes and HNBs as healthier options, as tobacco still kills.
Ethical portfolios with negative screens (for example, ones that will not invest in tobacco stocks) have underperformed in the long-term past. There is a growing tribe of funds committed to responsible investing with positive ESG screens. For such funds, we present in this insight a framework for analyzing the sector from an ESG perspective. A deep dive into ITC Ltd (ITC IN), the only cigarette major to turn in a positive performance this year, vindicates, in our view, its efforts to materially de-risk its asset and revenue profile, coupled with very high levels of commitment towards community development.
5. China Mobile and SK Telecom Defensive Plays and Top Trade Set Ups
We are playing any surprise bounce via Shanghai A 50 futures and the HSCE.
RIO tactical bounce trade presented.
Duration defensive long set ups outlined with stops and rally targets in China Mobile and SK Telecom.
KLSE bear triangle second trade in the making for a press toward 1,620/15.
In Europe, Italy is lagging the break down and a prime short candidate for a break below triple lows/out of flat congestion.
S&P tactical break points outlined with a bounce set up in the DJI. Base case view is to short a bounce.
Higher conviction pivot levels for a USD/JPY short are laid out with action turn levels and risk points.
