Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

I investigate special situations, pairs, and index rebalancing trades in Korea.

Korea / Special Sits, Pairs, Index Rebalancing

Celltrion Merger Situation & Long/Short on the Celltrion Duo

Last Friday's Price Divergence in Celltrion Vs. Celltrion Healthcare

Celltrion Pair: Entry Point on Latest Diversion

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<p>The 3-way merger between Celltrion Holdings has been completed. Now, the market's attention is shifting to the merger of Celltrion, Celltrion Healthcare, and Celltrion Pharm.</p><div class="content-highlight"><p><strong>Perhaps the most crucial investment point in this second 3-way merger is short covering.</strong></p></div><hr><h2>What short covering?</h2><p>The prominent institutional investors that lend stocks for short selling in Korea are local ETF/index fund operators and pension funds. And among them, pension funds often recall shares to exercise shareholder rights in the event of a merger.</p><p>It then leads to an increase in demand for short coverings. We have often witnessed stock price overshooting immediately after the merger announcement. The most salient example was the Samsung Engineering &amp; Samsung Heavy Industries merger back in 2016. Samsung Engineering soared 12% right after the merger announcement, presumably due to the recall of pension funds.</p><p>However, it is essential to note that the recall is not compulsory even for stocks of an extinct entity in a merger between listed companies. <span>Stocks borrowed for short-selling are automatically transferred to newly issued stocks with only the title of an underlying share changed.</span></p><div class="content-highlight"><ul>
<li><strong>Nevertheless, the possibility of a short-term stock overshooting due to a recall cannot be ruled out in the event of a merger between companies with high stakes held by pension funds and high short interest.</strong></li>
<li><strong>Although the short interest of the three Celltrion companies has decreased a lot compared to the past, they are still maintaining a considerable level. In the case of Celltrion, short interest is 2.89% of the SO, nearly 4M shares which are 6~7x days to cover. </strong></li>
<li><strong>In addition, the proportion of investment in Celltrion and Celltrion Healthcare by local pension funds is relatively large.</strong></li>
</ul></div><p>Of course, we also have to note that the National Pension Service, the largest pension fund, has not yet resumed lending of domestic stocks, so the short-covering impact of the recall is bound to be less than in the past.</p>

The 3-way merger between Celltrion Holdings has been completed. Now, the market's attention is shifting to the merger of Celltrion, Celltrion Healthcare, and Celltrion Pharm.Perhaps the most crucial investment point in this second 3-way merger is short covering.What short covering?The prominent institutional investors that lend stocks for short selling in Korea are local ETF/index fund operators and pension funds. And among them, pension funds often recall shares to exercise shareholder rights in the event of a merger.It then leads to an increase in demand for short coverings. We have often witnessed stock price overshooting immediately after the merger announcement. The most salient example was the Samsung Engineering &amp; Samsung Heavy Industries merger back in 2016. Samsung Engineering soared 12% right after the merger announcement, presumably due to the recall of pension funds.However, it is essential to note that the recall is not compulsory even for stocks of an extinct entity in a merger between listed companies. Stocks borrowed for short-selling are automatically transferred to newly issued stocks with only the title of an underlying share changed.
Nevertheless, the possibility of a short-term stock overshooting due to a recall cannot be ruled out in the event of a merger between companies with high stakes held by pension funds and high short interest.
Although the short interest of the three Celltrion companies has decreased a lot compared to the past, they are still maintaining a considerable level. In the case of Celltrion, short interest is 2.89% of the SO, nearly 4M shares which are 6~7x days to cover. 
In addition, the proportion of investment in Celltrion and Celltrion Healthcare by local pension funds is relatively large.
Of course, we also have to note that the National Pension Service, the largest pension fund, has not yet resumed lending of domestic stocks, so the short-covering impact of the recall is bound to be less than in the past.

Celltrion 3-Way Merger Timing & Trading Approach Aiming for Immediate Short Covering

Celltrion Inc

Celltrion 3-Way Merger Timing & Trading Approach Aiming for Immediate Short Covering