Korea / Special Situations, Clepsydra Capital

Sanghyun Park

I investigate special situations in Korea.

Korea / Special Situations

Daeduck Merger Event - Spread Is Currently at 4+%, Why Not Enjoying It

Daeduck Merger Still at 4% Spread, Local Funds Keep Doing Arb (Vote/Stock Purchase Cost Forecast)

Daeduck Merger Event Back in Action: Spread Is at a 5~6% Level

Daeduck Electronics Announces A Merger with Daeduck GDS

Event-Driven

Merger ratio between Daeduck Electronics Co (008060 KS) and Daeduck GDS (004130 KS) was set at 1:1.6072719, which means we will get 45 Electronics shares for our 28 GDS shares.



Daeduck merger ratio summary
Merger ratio
Actual number of shares to be swapped
Round off to the nearest zero


Daeduck Electronics
1.6072719
45
45


Daeduck GDS
1
27.99775197
28

Source: KIND


How an arb trade should be done?


Electronics: over-valued
GDS: under-valued


Short Electronics / Long GDS
→ Repay Electronics with GDS shares


Short 45 Electronics shares
Long 28 GDS shares




Electronics: under-valued
GDS: over-valued


Long Electronics / Short GDS
→ Repay GDS with Electronics shares


Long 45 Electronics shares
Short 28 GDS shares


Source: Sanghyun Park
Have we had any spread opening over the last two trading days? At the Aug 9 closing prices, Electronics was a bit under-valued (1.34%) relative to GDS. At the Aug 10 closing prices, Electronics was a bit over-valued (1.55%) relative to GDS. None of both appears to be enough for an arb trade.
Swap prices

Electronics
₩8,581


GDS
₩13,792

Source: KIND




Date
Electronics closing price (₩)
Electronics swap price (₩)
Electronics price spread (%)
GDS closing price (₩)
GDS swap price (₩)
GDS price spread (%)
Swap price spread (%)


2018/08/10
8,750
8,581
1.97%
13,850
13,792
0.42%
1.55%


2018/08/09
9,000
8,581
4.88%
14,650
13,792
6.22%
-1.34%



2018/08/08
8,730
8,581
1.74%
14,100
13,792
2.23%
-0.50%


2018/08/07
8,730
8,581
1.74%
14,000
13,792
1.51%
0.23%


2018/08/06
8,730
8,581
1.74%
13,600
13,792
-1.39%
3.13%


2018/08/03
8,590
8,581
0.10%
13,700
13,792
-0.67%
0.77%


2018/08/02
8,400
8,581
-2.11%
13,950
13,792
1.15%
-3.25%


2018/08/01
8,540
8,581
-0.48%
14,000
13,792
1.51%
-1.99%

Source: KRX

But check the below VWAP based swap price spreads. On Aug 9, we had this beautiful 4.51% spread opening which means Electronics was over-valued by 4.51% relative to GDS.



Date
Electronics VWAP (₩)
Electronics swap price (₩)
Electronics price spread (%)
GDS VWAP (₩)
GDS swap price (₩)
GDS price spread (%)
Swap price spread (%)


2018/08/10
8,740
8,581
1.85%
13,960
13,792
1.22%
0.63%


2018/08/09
9,597
8,581
11.84%
14,802
13,792
7.32%
4.51%

Source: KRX

Well,,, if you were lucky enough to get an opportunity to short Electronics at the daily high on Aug 9, your daily arb yield on this day would easily be at least around 8-9%, and could be as high as 18%. Easy money huh...



Date
Electronics closing price (₩)
Electronics opening price (₩)
Electronics daily high (₩)
Electronics daily low (₩)
GDS closing price (₩)
GDS opening price (₩)
GDS daily high (₩)
GDS daily low (₩)


2018/08/10
8,750
8,930
8,940
8,640
13,850
14,650
14,650
13,600


2018/08/09
9,000
8,950
10,350
8,950
14,650
14,100
15,450
14,100

Source: KRX






Swap spread opening calculations
* Electronics (vertical) / GDS (horizontal)

Closing price
WWAP
Opening price
Daily high
Daily low


Closing price
-1.34%
-2.44%
2.65%
-7.14%
2.65%


VWAP
5.61%
4.51%
9.60%
-0.19%
9.60%


Opening price
-1.92%
-3.02%
2.07%
-7.72%
2.07%


Daily High
14.39%
13.29%
18.38%
8.59%
18.38%


Daiy low
-1.92%
-3.02%
2.07%
-7.72%
2.07%

Source: KRX, Sanghyun Park

It was almost impossible that this much spread opening could have gone unnoticed by local short-term money managers. In fact, local institutions had net sold a total 240,530 Electronics shares on this day while they had net purchased a total 217,763 GDS shares. In contrast, foreign investors hadn't really made any arb move here. Probably, this Daeduck event may be too small for them to care. 



Electronics on Aug 9
Buy trading volume
Sell trading volume
Net trade volume
Buy trading value (₩)
Sell trading value (₩)
Net trade value (₩)


Financial investment company (mainly local brokerages and investment advisory firms)
29,181
23,110
6,071
264,161,700
219,134,750
45,026,950


Insurance company
0
17,379
-17,379
0
169,522,480
-169,522,480


Asset management company (mainly local public offering funds)
5,585
137,408
-131,823
50,536,930
1,345,162,930
-1,294,626,000


PEFs (mainly local hedge funds)
6,474
29,835
-23,361
60,042,880
286,937,780
-226,894,900


Bank
0
0
0
0
0
0


Other financial institution
0
0
0
0
0
0


Pension fund (mainl Korea NPS)
0
69,066
-69,066
0
648,660,970
-648,660,970


Government &amp; municipality (mainly Korea Post)
6,454
11,426
-4,972
59,583,350
109,757,930
-50,174,580


Local institutions total
47,694
288,224
-240,530
434,324,860
2,779,176,840
-2,344,851,980


Other company (mainly the company itself to buy treasury shares)
9,688
1,077
8,611
94,061,650
10,740,680
83,320,970


Local retail
3,437,232
3,160,198
277,034
33,028,887,190
30,304,678,470
2,724,208,720


Foreigner
138,248
184,041
-45,793
1,306,088,380
1,776,701,380
-470,613,000


Other foreigner
7,054
6,376
678
67,399,350
59,464,060
7,935,290


Total
3,639,916
3,639,916
0
34,930,761,430
34,930,761,430
0

Source: KRX





GDS on Aug 9
Buy trading volume
Sell trading volume
Net trade volume
Buy trading value (₩)

Sell trading value (₩)
Net trade value (₩)


Financial investment company (mainly local brokerages and investment advisory firms)
143,927
28,683
115,244
2,111,180,500
421,469,050
1,689,711,450


Insurance company
8,885
13,408
-4,523
133,604,000
197,051,200
-63,447,200


Asset management company (mainly local public offering funds)
54,251
14,891
39,360
824,084,750
217,417,750
606,667,000


PEFs (mainly local hedge funds)
7,133
31,784
-24,651
106,981,550
461,202,550
-354,221,000


Bank
0
364
-364
0
5,330,350
-5,330,350


Other financial institution
0
570
-570
0
8,309,550
-8,309,550


Pension fund (mainl Korea NPS)
106,540
11,563
94,977
1,557,370,900
169,545,950
1,387,824,950


Government &amp; municipality (mainly Korea Post)
3,466
5,176
-1,710
51,754,000
75,549,850
-23,795,850


Local institutions total
324,202
106,439
217,763
4,784,975,700
1,555,876,250
3,229,099,450


Other company (mainly the company itself to buy treasury shares)
35
4,394
-4,359
514,500
65,857,600
-65,343,100


Local retail
617,489
701,863
-84,374
9,152,986,250
10,420,124,600
-1,267,138,350


Foreigner
56,314
185,357
-129,043
834,206,600
2,731,014,950
-1,896,808,350


Other foreigner
18
5
13
264,600
74,250
190,350


Total
998,058
998,058
0
14,772,947,650
14,772,947,650
0

Source: KRX

→ Local street talking and speculation is that GDS may go further south relative to Electronics at some point(s) during this event period, mainly due to GDS' weaker fundamentals. So, we may have another one or several arb trade points down the road. Of course, this can also mean that we should consider an one-way short on GDS. Which way should we go for? Well, it will depend on the size of a spread opening. So, If you don't mind handling a small size merger event like this one, I will update you when I sense anything interesting for this event.

대덕그룹 합병 이벤트 - 8월 9일 국내 기관투자자 거래 현황