Daily BriefsSouth Korea

South Korea: F&F, Kakao Pay, DSC Investment, KRW and more

In today’s briefing:

  • MSCI Korea: Potential Changes at the November SAIR and Related Trades
  • KOSPI 200 Bi-Annual Rebalancing Preview (December 9)
  • Kakao Pay IPO Schedule Update & Short Trading Idea on Kakao Bank
  • Korea Small Cap Gem #11: DSC Investment – One of the Most Prolific Investors of Korean Unicorns
  • FX Dashboard: Is Korean Won’s Underperformance Overdone?

MSCI Korea: Potential Changes at the November SAIR and Related Trades

By Brian Freitas

MSCI is scheduled to announce the results of the November 2021 Semi Annual Index Review (SAIR) on 12 November (Asia time) with the changes implemented after the close of trading on 30 November.

The review period for price cut-off will run from 18-29 October.

Based on the closing prices from 17 September, we see 4 potential inclusions and 2 exclusions for the MSCI Korea Index. The potential inclusions are L&F Co Ltd (066970 KS), F&F (383220 KS), Kakao Games Corp (293490 KS) and Krafton Inc (259960 KS), while the potential exclusions are Daewoo Shipbuilding & Marine Engineering (042660 KS) and Cheil Worldwide (030000 KS).

The estimated impact on the potential inclusions is not very large as compared to the impact on the potential deletions.

F&F (383220 KS) is a potential inclusion to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the December rebalance and that will add to the passive flow in the stock over a 10 day period.

Except for Daewoo Shipbuilding & Marine Engineering (042660 KS), short interest is not material on any of the other names.


KOSPI 200 Bi-Annual Rebalancing Preview (December 9)

By Sanghyun Park

Below is KOSPI 200’s screening methodology for the regular bi-annual rebalancing. The rebalancing trading will occur at the close on December 9, and the review period is May 1 to October 31. We will likely hear the rebalancing results in late November.

KOSPI 200 bi-annual rebalancing
RebalancingBiannually
– Effective dateNext trading day of 2nd Thursday of June & December
– ImplementationDecember 10, 2021
– Rebalancing tradingDecember 9, 2021
– Review periodMay 1 to October 31, 2021
Screening
  • Select candidates for each sector in order by the cumulative average daily market cap (the cumulative cut-off at the 15th percentile).
  • Include the first company that crosses the 15th percentile mark. Exclude those whose cumulative average daily trading value is below the 15th percentile.
  • Also, exclude those new entrants whose average daily market cap ranking is above 110%.
  • If not reach 200 members in the first and second screenings, then re-select the current constituents whose average daily market cap ranking is within 110%.
  • Select additional names among the unselected current constituents by the average daily market cap regardless of classification.
Total float MC (₩B)1,247,667.7
Source: KRX

Kakao Pay IPO Schedule Update & Short Trading Idea on Kakao Bank

By Sanghyun Park

Listing schedule

First, it was confirmed that the Financial Supervisory Service discussed the scope of correction and listing schedule with Kakao Pay during the Chuseok holiday.

The results of this discussion have not yet been leaked to the market. However, the local street’s general view is that the listing schedule will not be substantially delayed. Kakao Pay’s listing schedule has already been postponed once, and delaying it until next year could be a significant burden for the Financial Supervisory Service as well.

The majority view in the local market is that Kakao Pay will submit a revised securities declaration at the end of September (likely sometime next week). And the bookbuilding will begin around mid-October after the 15 business day grace period. In this case, the listing date is likely to be around mid-November.

What changes are to be added?

Kakao Pay has so far provided a service that recommends insurance or financial investment products that meet individual needs through the app. The FSC concluded that this was a product brokerage service, not an advertisement.

Of course, a business license is required to broker financial products in the Korean market. An insurance broker license is required to broker insurance, and a brokerage license is needed to broker financial investment products under the Capital Market Act.

Currently, Kakao Pay does not have these licenses. Instead, Kakao Pay’s subsidiaries, KP Insurance Service, and Kakao Pay Securities, hold these financial product brokerage licenses. However, the FSC raised the issue, saying that this is a license owned by a subsidiary, not a license of Kakao Pay.

Therefore, the FSC requested Kakao Pay to immediately stop these services from September 25, when the guidance period of the Financial Consumer Protection Act ends. In this regard, Kakao Pay has already temporarily suspended insurance product brokerage services such as car insurance, companion animal insurance, and overseas travel insurance.

Kakao Pay has no choice but to include the newly changed regulatory environment and the resulting temporary suspension of services in the revised securities report. Then, the question is whether a lowering of the offering price is inevitable.

The general view of the local market is that a downward revision of the offering price is inevitable. As 32% of sales in the first half of this year were from the brokerage of financial products, future growth and sales estimates will have to be revised down.

Of course, Kakao Pay can resume these financial product brokerage services under the name of its subsidiaries or by directly obtaining a license. However, the problem is that the cost structure will be significantly different if it becomes a financial product brokerage service rather than an advertisement. That is, it is inevitable to make a major revision to whether Kakao Pay can achieve the previously estimated sales/profit growth rate with this cost structure.


Korea Small Cap Gem #11: DSC Investment – One of the Most Prolific Investors of Korean Unicorns

By Douglas Kim

One of the most prolific investors in the Korean unicorns has been a local investment company called DSC Investment (241520 KS), which currently has a market cap of 160 billion won. Established in 2012, DSC Investment currently operates 19 funds with a total AUM of $586 million. DSC Investment is a venture capital firm focusing on early-stage startups. 

Among the hundreds of venture capital companies in Korea, DSC Investment is a stand-out since it has done such an excellent job in picking big winners (especially unicorns that plan to complete their IPOs in the next three years). Among the unicorns/near unicorns below which have been invested by DSC Investment, Kurly, Musinsa, Kong Studio, and Dunamu are expected to complete their IPOs in the next 1-2 years. 

We estimate DSC Investment’s major ownership stakes in four, key unicorns in Korea (Kurly, Musinsa, Kong Studio, and Dunamu) to be about 435 billion won. DSC Investment’s stakes in these four companies are nearly 172% higher than its market cap. 

DSC Investment has many other promising investments including Riiid, Furiosa AI, Brandi, and SMLAB. Most of the company’s promising investments are still private companies ready to complete their IPOs in the next 1-2 years. As these companies start to complete their IPOs, investors will increasingly focus on DSC Investment (241520 KS) as a key investment play. Consequently, we believe that DSC Investment could be a big winner over the next 1-2 years. 


FX Dashboard: Is Korean Won’s Underperformance Overdone?

By Gautam Jain, PhD, CFA

As the US dollar has strengthened this month, it has weighed on EM currencies. Several Asian currencies, in particular, have been among the worst performers, adjusted for their respective betas. Among them, Korean won has underperformed on a combination of low carry and FX interventions. The carry should rise as the central bank has started its tightening cycle, but it is likely to be gradual. Moreover, the recent missile test by North Korea and the lowering of the country’s potential growth by the central bank have weighed on the currency. Our view is that the currency is now reflecting these risks and should gradually close its gap with the rest of EM.


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