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

SK Telecom Spinoff Relisting Step-By-Step Walkthrough

SKT Long Gaining Traction with New High in Store

SKT FIF-Adjustment Passive Play: SK Square ADS Refund May Kill It

Conservative Adjustment for Short Position Aimed at SKT's Underweight Rebalancing

Capitalize on a Likely Increase in FIF Adjustment Coefficient After SKT Demerger

SKT Is on the Move Ahead of Quarterly Ex-Dividend: Expected Div Yield-Based Valuation

The Blockchain Delusion. A (Mostly) Bearish Investment Thesis.

Gravity Works As WeWork Doesn't; Now Plan B

Clepsydra Capital

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

Event-Driven

<p>SK Telecom's spin-off must obtain shareholder approval, and the shareholder meeting is scheduled for October 12. However, the general mood in the market is favorable for this split, so it should be concluded that shareholder approval is almost a certainty.</p><div class="content-highlight"><p><strong>Then, we should prepare for passive trading that occurs between trade suspension and re-listing.</strong></p></div><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Timetable"}' data-sheets-note="Sang Hyun Park: We have to buy shares until BOD+1 and hold onto them until the day immediately before the ex-rights date to be eligible to receive stock purchase rights. We then have to notify our dissenting opinion until the end of dissenting opinion notice period.">Schedule</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Shareholder approval at EGM"}'>Shareholder approval at EGM</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44481}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'>2021. 10. 12</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Trade suspension begins"}'><strong>Trade suspension begins</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44495}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'><strong>2021. 10. 26</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Trade suspension ends"}'><strong>Trade suspension ends</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44526}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'><strong>2021. 11. 26</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Re-listing"}'><strong>Re-listing</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44529}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'><strong>2021. 11. 29</strong></td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: DART"}'>Source: DART</td></tr>
</tbody>
</table><ul>
<li>Passive funds are supposed to sell at the close on the last trading day before the trading suspension period kicks in, which is October 26 in this event.</li>
<li>They then buy back at the close on the re-listing day, November 29.</li>
</ul><div><p>Of course, these aren't definite rules. In fact, local passive funds do not seem to be blindly following this rule anymore.</p></div><p>Nonetheless, local ETFs/index funds must still follow this trading pattern to minimize the tracking error. On the other hand, the NPS-managed and variable insurance index funds do not seem to engage in this adjustment actively.</p><div class="content-highlight"><p><strong>Therefore, it seems appropriate to conservatively assume that 20 trillion won of ETFs/index funds out of 80 trillion won of funds following the KOSPI 200 will execute this trading.</strong></p></div><table class="table table-striped"><tbody>
<tr><td colspan="2" style="width: 494.429px;">Breakdown of ₩80T of local passive funds tracking KOSPI 200</td></tr>
<tr>
<td style="width: 247.214px;"><strong>ETFs</strong></td>
<td style="text-align: right; width: 247.214px;"><strong>₩16T</strong></td>
</tr>
<tr>
<td style="width: 247.214px;"><strong>Index funds</strong></td>
<td style="text-align: right; width: 247.214px;"><strong>₩4T</strong></td>
</tr>
<tr><td colspan="2" style="text-align: center; width: 247.214px;"><strong> </strong></td></tr>
<tr>
<td style="width: 247.214px;">National Pension Service - Passive</td>
<td style="text-align: right; width: 247.214px;">₩42T</td>
</tr>
<tr>
<td style="width: 247.214px;">Variable Insurance Index funds</td>
<td style="text-align: right; width: 247.214px;">₩18T</td>
</tr>
<tr>
<td style="width: 247.214px;"> - Total</td>
<td style="text-align: right; width: 247.214px;">₩80T</td>
</tr>
<tr><td colspan="2" style="width: 494.429px;">Source: KG Zeroin, KRX, NPS, &amp; YONHAP INFOMAX</td></tr>
</tbody></table><p>Now, the key is whether the two companies to be split will be included in the KOSPI 200. In this regard, the following is the treatment rule of KOSPI 200 for the split event.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/471/original/2.png?1632869576" class="editor-image img-responsive" data-smartkarma-image-id="232471"></figure></section><div>
<p>A summary of the above rules is as follows:</p>
<ul>
<li>SK Telecom (a surviving company) is <strong>removed</strong> from KOSPI 200 if the market cap proportional to the split ratio is <strong>smaller than that of the smallest constituent company in the index by market cap</strong>.</li>
<li>SK Square (a newly spun-off company) is <strong>added</strong> to KOSPI 200 if the ranking of the market cap proportional to the split ratio is <strong>within the 80th percentile of the number of constituents</strong>.</li>
</ul>
</div><div>
<p>SK Telecom remains in the KOSPI 200 if it has a larger split ratio-based market cap than the stock with the smallest market cap among KOSPI 200 constituents. Currently, the stock's market cap with the lowest market cap is around ₩0.6T, which is significantly lower than SKT's split-based market cap of ₩13.8T.</p>
<p>In the case of SK Square, the stock's market cap currently at the 80th percentile is ₩1.4T. Since SK Square's split-based market cap is ₩8.9T, there is a 100% chance that SK Square will also be included in the KOSPI 200.</p>
<table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Market cap"}'>Market cap</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Surviving"}'>Surviving</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"New"}'>New</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Name"}'>Name</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"SK Telecom"}'>SK Telecom</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"SK Square"}'>SK Square</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Split ratio"}'>Split ratio</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.6073625}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>60.74%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.3926375}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>39.26%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Market cap proportional to the split ratio"}'><strong>Market cap proportional to the split ratio</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":13.808371324195232}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00T"}' data-sheets-formula="=R[-2]C[2]*R[-1]C[0]"><strong>₩13.81T</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":8.926603792304768}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00T"}' data-sheets-formula="=R[-2]C[1]*R[-1]C[0]"><strong>₩8.93T</strong></td>
</tr>
<tr><td colspan="3" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table>
<p></p>
</div>

SK Telecom's spin-off must obtain shareholder approval, and the shareholder meeting is scheduled for October 12. However, the general mood in the market is favorable for this split, so it should be concluded that shareholder approval is almost a certainty.Then, we should prepare for passive trading that occurs between trade suspension and re-listing.





Schedule

Shareholder approval at EGM
2021. 10. 12


Trade suspension begins
2021. 10. 26


Trade suspension ends
2021. 11. 26


Re-listing
2021. 11. 29

Source: DART


Passive funds are supposed to sell at the close on the last trading day before the trading suspension period kicks in, which is October 26 in this event.
They then buy back at the close on the re-listing day, November 29.
Of course, these aren't definite rules. In fact, local passive funds do not seem to be blindly following this rule anymore.Nonetheless, local ETFs/index funds must still follow this trading pattern to minimize the tracking error. On the other hand, the NPS-managed and variable insurance index funds do not seem to engage in this adjustment actively.Therefore, it seems appropriate to conservatively assume that 20 trillion won of ETFs/index funds out of 80 trillion won of funds following the KOSPI 200 will execute this trading.
Breakdown of ₩80T of local passive funds tracking KOSPI 200

ETFs
₩16T


Index funds
₩4T

 

National Pension Service - Passive
₩42T


Variable Insurance Index funds
₩18T


 - Total
₩80T

Source: KG Zeroin, KRX, NPS, &amp; YONHAP INFOMAX
Now, the key is whether the two companies to be split will be included in the KOSPI 200. In this regard, the following is the treatment rule of KOSPI 200 for the split event.
A summary of the above rules is as follows:

SK Telecom (a surviving company) is removed from KOSPI 200 if the market cap proportional to the split ratio is smaller than that of the smallest constituent company in the index by market cap.
SK Square (a newly spun-off company) is added to KOSPI 200 if the ranking of the market cap proportional to the split ratio is within the 80th percentile of the number of constituents.


SK Telecom remains in the KOSPI 200 if it has a larger split ratio-based market cap than the stock with the smallest market cap among KOSPI 200 constituents. Currently, the stock's market cap with the lowest market cap is around ₩0.6T, which is significantly lower than SKT's split-based market cap of ₩13.8T.
In the case of SK Square, the stock's market cap currently at the 80th percentile is ₩1.4T. Since SK Square's split-based market cap is ₩8.9T, there is a 100% chance that SK Square will also be included in the KOSPI 200.








Market cap
Surviving
New


Name
SK Telecom
SK Square


Split ratio
60.74%
39.26%


Market cap proportional to the split ratio
₩13.81T
₩8.93T

Source: DART &amp; KRX





SK Telecom Trade Suspension/Relisting: KOSPI 200 Treatment Schedule