Korea / Special Situations, Clepsydra Capital

Sanghyun Park

I investigate special situations in Korea.

Korea / Special Situations

The Week That Was In North Asia@Smartkarma: Korea Holdco Tenders, Japan M&A Activity Both Heat Up

The Week That Was In North Asia@Smartkarma: Celltrion, Autos, Trump & North Korea

Japan: Policy Implications from the Document-Tampering Scandal

Thematic (Sector/Industry)

South korea Consumer discretionary / Thematic (Sector/Industry)

Below is the full list of Japan/Korea related reports published last week on Smartkarma.DateInsight providerInsight titleJapan17-MarTravis LundyNippon Steel Aiming at 51% of Sanyo Special Steel18-MarTravis LundyHinokiya (1413 JP) SmallCap Homebuilder TOPIX Inclusion18-MarTravis LundyIshihara Chemical (4462 JP) TOPIX Inclusion18-MarTravis LundyCK San Etsu (5757 JP) TOPIX Inclusion18-MarPaul HollingworthJapan's Banks: A Value-Quality Heat Map18-MarPaul HollingworthSMFG: 花より団子 "Dumplings Rather than Flowers"19-MarTravis LundyChikaranomoto (3561 JP) TOPIX Inclusion19-MarTravis LundyTorex Semiconductor (6616 JP) TOPIX Inclusion19-MarTravis LundyS Line (9078 JP) TOPIX Inclusion19-MarPelham SmithersCapcom Pro Tour 2018 Launched This Weekend in Atlanta19-MarMorningstar DistributionLaunching Coverage of Japan Tobacco With Wide Moat and Negative Moat Trend Ratings; FVE of JPY 3,75020-MarMio Kato, CFAJDI: Giving Our Thesis a Full Active Refresh + Apple MicroLED Development20-MarNicholasTannerVT Holdings (7593) 3/18 Earnings to Miss, near Term Downside Risk to Share Price.20-MarScott FosterHosokawa Micron (6277 JP): Benefitting from a Prolonged Tech &amp; Machinery Cycle21-MarSimon PeladeauKey ESG Engagement Questions - Financial Sector22-MarSC CapitalSharp May Not Be the Best Short for Awhile22-MarSumeet SinghZIGExN Placement - Seems to Have a Legit Reason for Selling, Operations Doing Well22-MarMio Kato, CFATechnoPro: Industry Consolidation Potential Justifies Premium23-MarMio Kato, CFAKHI: Not the Most Vulnerable to Chinese Retaliation Against Boeing, Russian MC-21 Is a WildcardKorea16-MarDouglas KimHyosung's Transformation into Holdco + Four Subsidiaries (Part 2): A Lot of Controversy17-MarDouglas KimJTC IPO Preview (Part 2) - Valuation Analysis18-MarPrasenjit K. BasuMoon Jae-In's Gamble Pays off Handsomely: A Major Breakthrough in RoK-DPRK-US Ties Is Nigh19-MarSanghyun ParkHyundai Motor Group Restructuring Update - Attention Is Now on Glovis19-MarThomas SchroederShort Netmarble Triangulation19-MarPaul HollingworthTop PH Scores™ in South Korea20-MarHenry KwonHyundai Motor Air Bag Deployment Failure...Or Should It Be ZF-TRW Air Bag Deployment Failure?21-MarSanghyun ParkDSME, HMM &amp; KDB - Understanding Relationship Dynamics21-MarDouglas KimSK Telecom's AGM &amp; Two Important Events22-MarSanghyun ParkCuckoo Holdings &amp; Cuckoo Homesys Tender Offer Event Summary23-MarSanghyun ParkSK Discovery &amp; SK Chemicals Tender Offer - Final Swap Price &amp; Status UpdateRefreshed thesis on JDIMio Kato, CFA visited JDI and refreshed his thesis on JDI. Here are some of the key points that Mio raised.Apple orders are likely to drive a surge in utilization rates throughout 2018. The company is going from facing 60% utilization rates despite a 20% capacity reduction, to being forced to fully ramp-up production at the relatively new Hakusan facility in 1QFY03/19 in order to pre-build for the peak 3QFY03/19 season due to a lack of capacity.Restructuring costs are being impacted by this reversal of fortunes as the Nikkei noted that the company's impairment charges may be JPY10-20bn lower than expected, reducing the expected JPY170bn restructuring charge for the year. It is not impossible that the final charges are even lower than the Nikkei suggests.Supply-Demand could be affected by the disappointment surrounding the iPhone X which appears to be impacting supply growth for OLED, while LTPS LCD capacity is expected to grow at a much slower rate in future, suggesting that pricing pressure for mobile panels could ease. Better unit pricing for JDI's new Full Active panels should also help profitability.Non-Mobile display volumes should grow as the company successfully commercialises the wide array of technologies it has developed in the last 12-18 months. The big driver will be an acceleration in adoption of displays by mass market automobiles and a shift to LTPS panels raising unit prices.Upside/Downside risks are numerous as the company is likely to announce equity financing shortly and near-term earnings results are likely to continue to disappoint. However, strengthening the company's balance sheet could improve sentiment despite dilution, and investment activity by auto-related companies such as Denso could also pose an upside risk.Mio also gave his view on Apple's in-house development of MicroLED screens. He does not view this as being news which should particularly affect JDI. First, its over-dependence on Apple has harmed the company in the past. JDI should be accelerating its moves to diversify its revenue streams. Second, if MicroLED development proceeds smoothly, Apple may just decide to forego transitioning to OLED completely and stick to LCD displays until it transfers to MicroLED at some point.Japanese banks' Value-Quality Heat Map based on the PH Score™Paul Hollingworth assessed the Japanese banks based on the PH Score™ which is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Value-Quality Heat Map below details opportunity from quintile 1 (highest PH Score™ ) in the first two rows  from Mie bank to Bank of Saga through to quintile 5 (lowest PH Score™) in the last two rows from Yamagata to Fukuoka.Top PH Score™ are thus: Mie Bank Ltd/The (8374 JP), Towa Bank Ltd/The (8558 JP), Sumitomo Mitsui Financial Group (8316 JP), Resona Holdings Inc (8308 JP), Tsukuba Bank Ltd (8338 JP), Oita Bank Ltd/The (8392 JP), Shikoku Bank Ltd/The (8387 JP), 77 Bank Ltd/The (8341 JP), Mitsubishi UFJ Financial Group (8306 JP), Hachijuni Bank Ltd/The (8359 JP), Hyakugo Bank Ltd/The (8368 JP), Nagano Bank Ltd/The (8521 JP), Bank Of Kyoto Ltd/The (8369 JP), Bank Of Saga Ltd/The (8395 JP).In his other insight, Paul singles out one particular name in the Japanese bank sector. It is Sumitomo Mitsui Financial Group (8316 JP). He argues that Sumitomo Mitsui is just too cheap to ignore, with its deposits base priced in line with bargain basement NPL-heavy Greek and Italian levels. In fact, the bank exhibits very strong fundamental progression as embodied in its quintile 1 PH Score ™ which captures value-quality signals from his proprietary model.Key findings from Korea's prominent blockchain seminarDouglas Kim recently attended a full-day, paid seminar (Next Frontier, The New Business World Made By Blockchain: IT Strategy Forum 2018) on March 8th, 2018. Some of the most prominent, "who's who" leaders in the Blockchain industry in Korea gave presentations at this seminar.(Next Frontier, The New Business World Made By Blockchain Seminar in Seoul, Korea)Douglas argues based on what he heard from this seminar that the concept that I can generate sales from my own data, instead of other companies is just starting to get noticed by people that understand the Blockchain technology. There are three key aspects about Blockchain including its role as a super database, network, and computer. More than anything else, Blockchain allows super amounts of data to be stored in a distributed ledger system that can be duplicated thousands of times across a network of computers. So, Douglas believes that Facebook's recent Cambridge Analytica data scandal will raise greater awareness that there is an alternative (blockchain) to the current data monetization system dominated by big players such as Facebook and Google.eSports market in JapanPelham Smithers discusses this interesting topic: eSports market in Japan. For firms like Capcom (9697 JP) and Bandai Namco (7832 JP), which have their own arcade network, and thus have the infrastructure and the titles to host their own tournaments, the margins would be huge, as they would absorb the venue and publisher fee costs, which would imply an OPM of 55% on this business. Assuming global games like League of Legends and DoTA2 take 50% of the Japanese eSports market, Pelham argues that Capcom could capture 15% of the Japanese eSports market and Bandai Namco could capture 20%. That would imply ¥3.4bil in revenues, ¥1.9bil in OP for Capcom, and ¥4.6bil in revenues, ¥2.5bil in OP, for Bandai Namco. However, if eSports proves to be another area where Japan ends up going its own way, and domestic games dominate, then those figures would likely double, implying up to ¥3.8bil in OP for Capcom from the Japanese market, and ¥5bil for Bandai Namco.eSports in the Olymipics?More importantly, it is possible that Japanese firms in general, but these two in particular, will do even better. eSports is currently dominated by team warfare games, but as we start to see eSports in events like the Olympics (which could be as soon as Paris 2024), then the industry is likely to become more genre orientated. The Olympics can’t hand out medals for every single game, so is likely to select one game from each genre. Here, five games are chosen from five different genres, which are Hearthstone, League of Legends, Project Cars, Rocket League and Street Fighter V, and teams fighting it out have to master all five. The inclusion of two Japanese-sourced games in these five – Bandai Namco’s Project Cars and Capcom’s Street Fighter V – show how Japan does disproportionately well, when the situation becomes more genre-orientated.JTC implied valuation analysisDouglas said he would take the JTC IPO deal, mainly due to the attractive valuations and encouraging growth of the inbound tourism to Japan.His 1-yr price target of JTC is 10,200 won per share, representing a 34% upside to the high end of the IPO price range. At 10,200 won, the market cap of the company would be 359 billion won. He applied a 15.2x P/E, which is an average P/E of its comps to our estimated net profit of 33.7 billion won for the company in FY19. He also applied a 30% valuation discount to be conservative. The implied value of the company is 10.7x the company's estimated net profit in FY19. Hotel Shilla Co Ltd (008770 KS) is a leading duty free shop in Korea and it is currently trading at 24x 2019 P/E, using consensus earnings estimates. His price target of 10,200 won for JTC suggests a P/E of 10.7x which is nearly 55% discount to the Hotel Shilla valuations. JTC Comparable Companies Valuation　　　ShinsegaeMode TourAnnualized net profit (Won bn); FY19265.540.9Mkt cap (Won bn)3,263.7741.8P/E (x)12.318.1Average P/E (x)15.2　Source: Company data; Naver Finance　　JTC implied valuation　JTC estimated net profit (FY19E); Won bn33.7JTC Implied Value (Won bn); pre-discount512.6Discount (30%)153.8JTC Implied Value (Won bn); post-discount358.8Fully diluted shares outstanding (m)35.3JTC Implied Value Per Share (Won); post-discount10,165High end of IPO price range (Won)7,600% Upside (Our implied price vs. high end of IPO price range)34%Source: Company data, Our estimates

Sumitomo Mitsui Financial Group (8316 JP)

Mitsubishi UFJ Financial (MUFG) (8306 JP)

北アジアで起こった一週間@Smartkarma: JDI、日本の銀行、ブロックチェーン、そしてTOPIX