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

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

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

Event-Driven

HD Hyundai Heavy Industries  / Event-Driven

<p>Hyundai Heavy Industries' 15-trading day review period ended last Thursday, and the KRX officially announced that it would add Hyundai Heavy to the following KRX indexes. </p><div class="content-highlight"><ul>
<li>KRX 100 (equal-weighted):  Studio Dragon (25345) will be deleted.</li>
<li>KRX Sector (Machinery &amp; Equipment). No delete</li>
<li>The effective date for both indexes is December 10.</li>
</ul></div><p>As for KOSPI 200 Fast Entry, KRX said that Hyundai Heavy Industries' KOSPI 200 Fast Entry is currently under review. Its decision will be included in the notice of the December regular rebalancing results.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/235/523/original/2.png?1634401666" class="editor-image img-responsive" data-smartkarma-image-id="235523"></figure></section><p>Below is the average daily market cap of the KOSPI large-cap ordinary stocks during the 15-trading day review period from September 17 to October 14. Hyundai Heavy Industries ranks in 42nd place, making it eligible to join KOSPI 200 through Fast Entry.</p><div class="content-highlight"><p><strong>The rule is straightforward. If Hyundai Heavy stays within the top 50 by the average daily market cap among the KOSPI ordinary stocks for 15 trading days from listing, it will join KOSPI 200 through Fast Entry. So, its Fast Entry should be seen as a done deal.</strong></p></div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/235/524/original/1.png?1634402056" class="editor-image img-responsive" data-smartkarma-image-id="235524"></figure></section>

Hyundai Heavy Industries' 15-trading day review period ended last Thursday, and the KRX officially announced that it would add Hyundai Heavy to the following KRX indexes. 
KRX 100 (equal-weighted):  Studio Dragon (25345) will be deleted.
KRX Sector (Machinery &amp; Equipment). No delete
The effective date for both indexes is December 10.
As for KOSPI 200 Fast Entry, KRX said that Hyundai Heavy Industries' KOSPI 200 Fast Entry is currently under review. Its decision will be included in the notice of the December regular rebalancing results.Below is the average daily market cap of the KOSPI large-cap ordinary stocks during the 15-trading day review period from September 17 to October 14. Hyundai Heavy Industries ranks in 42nd place, making it eligible to join KOSPI 200 through Fast Entry.The rule is straightforward. If Hyundai Heavy stays within the top 50 by the average daily market cap among the KOSPI ordinary stocks for 15 trading days from listing, it will join KOSPI 200 through Fast Entry. So, its Fast Entry should be seen as a done deal.

KRX Made It Clear that Hyundai Heavy KOSPI 200 Fast Entry Inclusion Would Be December 10

<p>Hyundai Heavy Industries is up 14% on the previous trading day and today. Over the past five days, the share price has risen close to 19%.</p>
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/778/original/2.png?1632968483" class="editor-image img-responsive" data-smartkarma-image-id="232778"></figure>
</section>
<div class="content-caption">(Source: Google Finance)</div>
<p>It seems that the leading cause is a mixture of passive trading for KOSPI 200 inclusion and also the trading aimed at this expectation.</p>
<p>In fact, among the top net buying stocks by local pension funds (National Pension Service accounts for about 80%) over the past month, Hyundai Heavy Industries ranks second only after Krafton. Local pension funds have recorded more than 150 billion won in net purchases in the past six trading days since Hyundai Heavy Industries went public.</p>
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/779/original/1.png?1632968640" class="editor-image img-responsive" data-smartkarma-image-id="232779"></figure>
</section>
<div class="content-caption">(Source: KRX)</div>
<p>The market seems to be interpreting the purchase of Hyundai Heavy Industries by local pension funds as a preemptive response to the KOSPI 200 inclusion. Hyundai Heavy Industries' current market cap is ₩10.25T, ranking 41st among KOSPI common stocks. The KOSPI 200 Fast Entry is almost certain given the difference in market cap of about ₩2T from the 50th place.</p>

Hyundai Heavy Industries is up 14% on the previous trading day and today. Over the past five days, the share price has risen close to 19%.



(Source: Google Finance)
It seems that the leading cause is a mixture of passive trading for KOSPI 200 inclusion and also the trading aimed at this expectation.
In fact, among the top net buying stocks by local pension funds (National Pension Service accounts for about 80%) over the past month, Hyundai Heavy Industries ranks second only after Krafton. Local pension funds have recorded more than 150 billion won in net purchases in the past six trading days since Hyundai Heavy Industries went public.



(Source: KRX)
The market seems to be interpreting the purchase of Hyundai Heavy Industries by local pension funds as a preemptive response to the KOSPI 200 inclusion. Hyundai Heavy Industries' current market cap is ₩10.25T, ranking 41st among KOSPI common stocks. The KOSPI 200 Fast Entry is almost certain given the difference in market cap of about ₩2T from the 50th place.

Hyundai Heavy Industries: Passive Impact Timing Confusion

HD Korea Shipbuilding & Offshore Engineering / Event-Driven

HD Korea Shipbuilding & Offshore Engineering

<p>The listing of Hyundai Heavy Industries is due tomorrow, and the time has come to consider the timing of short-selling Korea Shipbuilding &amp; Offshore Engineering (KSOE) due to the holding company discount risk.</p><div class="content-highlight">
<p><strong>In general, we have often witnessed a trading pattern in which a holding company's stock price plummets when one of its major operating subsidiaries goes public.</strong></p>
<p><strong>The KSOE is also highly likely to be a target of this trading pattern.</strong></p>
</div><hr><p>KSOE is an intermediate holding company of Hyundai Heavy Industries Group, and its major subsidiaries include:</p><ul>
<li><strong>Hyundai Heavy Industries</strong></li>
<li><strong>Hyundai Mipo Dockyard</strong></li>
<li><strong>Hyundai Samho Heavy Industries</strong></li>
</ul><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/011/original/1.png?1631749332" class="editor-image img-responsive" data-smartkarma-image-id="230011"></figure></section><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value="{&quot;1&quot;:2,&quot;2&quot;:&quot;KSOE's major subsidiaries&quot;}">KSOE's major subsidiaries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Ticker"}'>Ticker</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Stake %"}'>Stake %</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Stake value"}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}'>Stake value</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Note"}'>Note</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Mipo Dockyard Co., Ltd."}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Hyundai Mipo Dockyard</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"010620"}' data-sheets-formula='="010620"'>010620</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.424}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>42.40%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1298.9506391992}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}' data-sheets-formula='=googlefinance(R[0]C[-2], "price")*googlefinance(R[0]C[-2], "shares")/1000000000*R[0]C[-1]'><strong>₩1,298.95B</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Market value"}'>Market value</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Heavy Industries"}'>Hyundai Heavy Industries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Unlisted"}'>Unlisted</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.7972}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>79.72%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":4246.20608}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}' data-sheets-formula="=R[0]C[2]*R[0]C[-1]"><strong>₩4,246.21B</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"At the IPO price"}'>At the IPO price</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Samho Heavy Industries"}'>Hyundai Samho Heavy Industries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Unlisted"}'>Unlisted</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.8054}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>80.54%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1200.213}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}'><strong>₩1,200.21B</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Book value"}'>Book value</td>
</tr>
<tr><td colspan="5" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table><p>In fact, KSOE's biggest investment point so far is that it is the only channel through which to invest in Hyundai Heavy Industries and Hyundai Samho Heavy Industries, the world's largest shipyards.</p><div class="content-highlight"><p><strong>However, after Hyundai Heavy Industries is listed, the investment points of KSOE will inevitably fade. As KSOE is an intermediate holding company of Hyundai Heavy Industries Group, dividends and brand royalties from its subsidiaries such as Hyundai Heavy Industries will likely flow into the ultimate holding company, <a href="https://www.smartkarma.com/entities/hyundai-heavy-industries-holdings" target="_blank" data-smartkarma-citation="entities:24075:1" rel="noopener">Hyundai Heavy Industries Holdings (267250 KS)</a>, making it less attractive for investment.</strong></p></div><p>Nevertheless, its discount to NAV is 7.52% based on the current share price. This is significantly lower than the 50% level of the average discount rate of local holding companies.</p><table class="table table-striped">
<colgroup>
<col width="70">
<col width="70">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"NAV"}' data-sheets-note="Sang Hyun Park: Cases when a company's net cash position and the value of its publically traded interests are worth more than its market cap create the opportunity of a stub trade, in which investors can take a view that the company's core business will rise by shorting the minority stakes whilst going long the underlying. Such an opportunity has arisen in the wake of the Alibaba listing which has seen early investing company Yahoo trade at a discount to the value of its stake in Alibaba.">NAV</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of listed holdings"}'><strong>Value of listed holdings (including Hyundai Heavy Industries)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":5831.62191898336}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[8]C[5])"><strong>₩5,831.6B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - % of Holdco market cap"}'>- % of Holdco market cap</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.7012666341045598}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[-1]C[0]/((R[3]C[-3]*R[0]C[-3])/1000000000)">70.13%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of unlisted holdings"}'><strong>Value of unlisted holdings (which includes Hyundai Samho Heavy Industries)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1825.212}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[7]C[5])"><strong>₩1,825.2B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stub value"}'>Stub value</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":659.0072110166407}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=(R[1]C[-3]*R[-2]C[-3]/1000000000)-R[-3]C[0]-R[-1]C[0]">₩659.0B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stub value per share"}'>Stub value per share</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":9311.547212597516}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]*1000000000/R[-3]C[-3]">₩9,312</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of operating assets"}'>Value of operating assets</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[8]C[5])">₩0.0B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"GAV"}'>GAV</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7656.8339189833605}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[-6]C[0]+R[-4]C[0]+R[-1]C[0]">₩7,656.8B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"GAV per share"}'>GAV per share</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":108277.93228902365}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]/R[4]C[-3]*1000000000">₩108,278</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Discount to GAV (excl. treasury shares)"}'>Discount to GAV (excl. treasury shares)</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-0.08517033449031985}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-4]C[-3])/R[-1]C[0]">-8.52%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Holdco net cash/debt (de-consolidated)"}'><strong>Holdco net cash/debt (de-consolidated)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1327.7}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[5]C[5]"><strong>₩1,327.7B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of pref shares"}'>Value of pref shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=(R[-5]C[-3]*R[-2]C[-3]+R[-5]C[-2]*R[-2]C[-2])/1000000000">₩0.0B</td>
</tr>
<tr><td colspan="2"></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NAV"}'><strong>NAV</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":8984.533918983361}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[-5]C[0]+R[-2]C[0]-R[-1]C[0]"><strong>₩8,984.5B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NAV per share (excl. treasury shares)"}'><strong>NAV per share (excl. treasury shares)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":127053.3964327235}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]/R[-1]C[-3]*1000000000"><strong>₩127,053</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Discount to NAV"}'><strong>Discount to NAV</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.07519197991517018}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-9]C[-3])/R[-1]C[0]"><strong>7.52%</strong></td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: KRX &amp; DART","6":1}'>Source: KRX &amp; DART</td></tr>
</tbody>
</table><p>As an intermediate holding company, KSOE plans to play a role as a control tower by conducting R&amp;D, M&amp;A, and new and renewable businesses, but at this point, its own operating operation is virtually non-existent. In other words, since the value of the operating operation is zero, the current valuation is based on the cash assets held and the value of the stake in the subsidiaries.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/013/original/2.png?1631750466" class="editor-image img-responsive" data-smartkarma-image-id="230013"></figure><p>Of course, it is true that KSOE's PBR is lower than the local peers in the same sector. However, there is a question as to whether it is appropriate to apply the PBR valuation as KSOE is a pure holding company rather than a shipbuilding company.</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":"PBR comparisons on FY2022E net assets"}'>PBR comparisons on FY2022E net assets</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Ticker"}'>Ticker</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"PBR"}'>PBR</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Mipo Dockyard Co., Ltd."}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Hyundai Mipo Dockyard</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"010620"}' data-sheets-formula='="010620"'>010620</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"1.31x"}'><strong>1.31x</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Daewoo Shipbuilding &amp; Marine Engineering"}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Daewoo Shipbuilding &amp; Marine Engineering</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"042660"}' data-sheets-formula='="042660"'>042660</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"1.25x"}'><strong>1.25x</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Samsung Heavy Industries Co.,Ltd"}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Samsung Heavy Industries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"010140"}' data-sheets-formula='="010140"'>010140</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"1.05x"}'><strong>1.05x</strong></td>
</tr>
<tr><td colspan="3"><strong> </strong></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Korea Shipbuilding &amp;Offshore Engn Co Ltd"}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Korea Shipbuilding &amp;Offshore Engn</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"009540"}' data-sheets-formula='="009540"'>009540</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"0.79x"}'><strong>0.79x</strong></td>
</tr>
<tr><td colspan="3" data-sheets-value='{"1":2,"2":"Source: FnGuide"}'>Source: FnGuide</td></tr>
</tbody>
</table><p>Lastly, KSOE has an event to acquire Daewoo Shipbuilding &amp; Marine Engineering (DSME). Currently, the acquisition is awaiting approval from foreign countries.</p><p>If approved, KSOE will swap shares with Korea Development Bank through issuance of new shares. In other words, Korea Development Bank will hand over its stake in DSME (55.68%) to KSOE, and will receive a stake in KSOE instead. In this process, KSOE needs to issue more than 2 trillion won worthy of new shares. In other words, it is unlikely that this DSME acquisition event will lead to KSOE's valuation re-rating.</p>

The listing of Hyundai Heavy Industries is due tomorrow, and the time has come to consider the timing of short-selling Korea Shipbuilding &amp; Offshore Engineering (KSOE) due to the holding company discount risk.
In general, we have often witnessed a trading pattern in which a holding company's stock price plummets when one of its major operating subsidiaries goes public.
The KSOE is also highly likely to be a target of this trading pattern.
KSOE is an intermediate holding company of Hyundai Heavy Industries Group, and its major subsidiaries include:
Hyundai Heavy Industries
Hyundai Mipo Dockyard
Hyundai Samho Heavy Industries










KSOE's major subsidiaries
Ticker
Stake %
Stake value
Note


Hyundai Mipo Dockyard
010620
42.40%
₩1,298.95B
Market value


Hyundai Heavy Industries
Unlisted
79.72%
₩4,246.21B
At the IPO price


Hyundai Samho Heavy Industries
Unlisted
80.54%
₩1,200.21B
Book value

Source: DART &amp; KRX

In fact, KSOE's biggest investment point so far is that it is the only channel through which to invest in Hyundai Heavy Industries and Hyundai Samho Heavy Industries, the world's largest shipyards.However, after Hyundai Heavy Industries is listed, the investment points of KSOE will inevitably fade. As KSOE is an intermediate holding company of Hyundai Heavy Industries Group, dividends and brand royalties from its subsidiaries such as Hyundai Heavy Industries will likely flow into the ultimate holding company, Hyundai Heavy Industries Holdings (267250 KS), making it less attractive for investment.Nevertheless, its discount to NAV is 7.52% based on the current share price. This is significantly lower than the 50% level of the average discount rate of local holding companies.





NAV

Value of listed holdings (including Hyundai Heavy Industries)
₩5,831.6B


- % of Holdco market cap
70.13%


Value of unlisted holdings (which includes Hyundai Samho Heavy Industries)
₩1,825.2B


Stub value
₩659.0B


Stub value per share
₩9,312


Value of operating assets
₩0.0B


GAV
₩7,656.8B


GAV per share
₩108,278


Discount to GAV (excl. treasury shares)
-8.52%


Holdco net cash/debt (de-consolidated)
₩1,327.7B


Value of pref shares
₩0.0B



NAV
₩8,984.5B


NAV per share (excl. treasury shares)
₩127,053


Discount to NAV
7.52%

Source: KRX &amp; DART

As an intermediate holding company, KSOE plans to play a role as a control tower by conducting R&amp;D, M&amp;A, and new and renewable businesses, but at this point, its own operating operation is virtually non-existent. In other words, since the value of the operating operation is zero, the current valuation is based on the cash assets held and the value of the stake in the subsidiaries.Of course, it is true that KSOE's PBR is lower than the local peers in the same sector. However, there is a question as to whether it is appropriate to apply the PBR valuation as KSOE is a pure holding company rather than a shipbuilding company.







PBR comparisons on FY2022E net assets
Ticker
PBR


Hyundai Mipo Dockyard
010620
1.31x


Daewoo Shipbuilding &amp; Marine Engineering
042660
1.25x


Samsung Heavy Industries
010140
1.05x

 

Korea Shipbuilding &amp;Offshore Engn
009540
0.79x

Source: FnGuide

Lastly, KSOE has an event to acquire Daewoo Shipbuilding &amp; Marine Engineering (DSME). Currently, the acquisition is awaiting approval from foreign countries.If approved, KSOE will swap shares with Korea Development Bank through issuance of new shares. In other words, Korea Development Bank will hand over its stake in DSME (55.68%) to KSOE, and will receive a stake in KSOE instead. In this process, KSOE needs to issue more than 2 trillion won worthy of new shares. In other words, it is unlikely that this DSME acquisition event will lead to KSOE's valuation re-rating.

Outright Shorting KSOE or Long/Short Setup with HHI on a Likely Widening Holdco Discount

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

HD Hyundai Heavy Industries  / Equity Capital Markets

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<p><a href="https://www.smartkarma.com/entities/hyundai-heavy-industries-co-ltd" target="_blank" data-smartkarma-citation="entities:33808:1" rel="noopener">Hyundai Heavy Industries (1748326D KS)</a> raised US$925m at KRW60,000 per share, at the top-end of its IPO price range. The company is set to debut on 17th September, 2021.</p>
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<p>Hyundai Heavy Industries (HHI) is a South Korea shipbuilder. The company is wholly owned by <a href="https://www.smartkarma.com/entities/korea-shipbuilding-offshore-engineering-co-ltd" target="_blank" data-smartkarma-citation="entities:10155:1" rel="noopener">Korea Shipbuilding &amp; Offshore Engineering (009540 KS)</a>  after the latter’s spin-off in 2019.</p>
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<p>In this note, we share our thoughts on demand and deal dymamics.</p>
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<p>Our previous coverage of the IPO:</p>
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<ul>
<li>
<a href="https://www.smartkarma.com/insights/hyundai-heavy-ipo-sharp-1h21-recovery-accompanied-with-a-surge-in-costs" target="_blank" data-smartkarma-citation="insights:56070" rel="noopener">Hyundai Heavy IPO - Sharp 1H21 Recovery Accompanied with a Surge in Costs</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/hyundai-heavy-ipo-expensive-valuation-and-korea-shipbuilders-have-been-trading-weak" target="_blank" data-smartkarma-citation="insights:56697" rel="noopener">Hyundai Heavy IPO - Expensive Valuation and Korea Shipbuilders Have Been Trading Weak</a> </li>
</ul>
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Hyundai Heavy Industries (1748326D KS) raised US$925m at KRW60,000 per share, at the top-end of its IPO price range. The company is set to debut on 17th September, 2021.


Hyundai Heavy Industries (HHI) is a South Korea shipbuilder. The company is wholly owned by Korea Shipbuilding &amp; Offshore Engineering (009540 KS)  after the latter’s spin-off in 2019.


In this note, we share our thoughts on demand and deal dymamics.


Our previous coverage of the IPO:




Hyundai Heavy IPO - Sharp 1H21 Recovery Accompanied with a Surge in Costs 

Hyundai Heavy IPO - Expensive Valuation and Korea Shipbuilders Have Been Trading Weak 



Hyundai Heavy IPO Trading - One of the Strongest Demand but KSOE Is Not Budging

SubscriptionHyundai Heavy Industries fixed the offering price at ₩60,000, the upper end of the indicative price band. As a result, it raises ₩1.08T through this IPO, with a market cap of ₩5.33T. HHI's bookbuilding result far exceeded expectations. I expected it to be successful to some extent, but I didn't know it would elicit such a warm response. With this level of success, we may even aim for KOSPI 200 Fast Entry after listing.As the competition rate for institutional subscriptions recorded 1,471 to 1, it was again close to a historical record. HHI also raised more than ₩56T in the margin in retail subscriptions. This is the largest margin since Kakao Bank's listing.









By investor type
Institution
%
Demand
%


1. Local publicly raised funds
587
35.95%
6,851,608,000
37.70%


2. Local brokerages/investment advisories
40
2.45%
462,405,000
2.54%


3. Local pensions, funds managing proprietary assets, banks, and insurance companies
276
16.90%
3,149,173,000
17.33%


4. Local - Other (discretionary investment companies, mostly local hedge funds)
382
23.39%
4,873,338,000
26.81%


5. Foreign (foreign IPO funds &amp; hedge funds)
132
8.08%
705,850,862
3.88%


6. Foreign - Other (mostly local hot money)
216
13.23%
2,132,703,000
11.73%


Total
1,633
100.00%
18,175,077,862
100.00%


Subscription rate
1,835.87

Source: DART

On average, about half went to the pricing above the upper end (including Unspecified). More importantly, all institutions have virtually written prices above 75% of the upper end. In particular, foreign institutions have made a quite aggressive pricing.








Institution type
Above the upper end + Unspecified
% of total demands
Holding tendencies


1. Local publicly raised funds
52.30%
19.80%
Long-term


2. Local brokerages/investment advisories
30.00%
0.71%
Short-term


3. Local pensions, funds managing proprietary assets, banks, and insurance companies
43.84%
7.71%
Long-term


4. Local - Other (discretionary investment companies, mostly local hedge funds)
38.22%

10.29%
Short-term


5. Foreign (foreign IPO funds &amp; hedge funds)
96.97%
3.81%
Long or short-term, depends


6. Foreign - Other (mostly local hot money)
50.93%
6.24%
Short-term

Source: DART

AllocationSome forfeited shares occurred in the ESOP, which went entirely to retail investors. Institutional allocation stood at 55%. Most of the institutional allocation results were taken by institutions with a long-term holding tendency.









Allocation by type
Initial allocation
% of the total offering
% of post-IPO SO


Institutional
55.00%
55.00%
11.15%


1. Local publicly raised funds
-
19.36%
3.93%


2. Local Br/IA
-
0.58%
0.12%


3. Local pension, etc.
-
13.78%
2.79%


4. Local - Other
-
1.89%
0.38%


5. Foreign
-
19.40%
3.93%


6. Foreign - Other
-
0.00%
0.00%


Retail
25.00%
25.60%
5.19%


ESOP
20.00%
19.40%
3.93%


Total
100.00%
100.00%
20.28%

Source: DART


In particular, a pretty decent institutional composition was created by giving about 35% of the institutional allocation to foreigners. This 35% is not a level that we can see as a significantly higher allocation ratio for foreign investors than in past cases. Nevertheless, this foreign ownership ratio is high enough to stabilize short-term investor sentiment. At the same time, almost no allocation was made to local hot money, which is highly likely to engage in short-term trading.









By investor type
Holding tendencies
Applications
Allocated, % of the offering


Local publicly raised funds
Long-term
37.70%
35.20%


Local brokerages/investment advisories
Short-term
2.54%
1.05%


Local pensions, funds managing proprietary assets, banks, and insurance companies
Long-term (pensions) &amp; short-term (proprietary asset managers)
17.33%
25.05%


Local - Other (mostly discretionary investment companies - local hedge funds))
Mainly, short-term
26.81%
3.43%


Foreign (foreign IPO funds &amp; hedge funds)
Depends
3.88%
35.27%


Foreign - Other (mostly local hot money)
Short-term
11.73%
0.00%

Source: DART




Hyundai Heavy Industries Listing: Allocation, Lockups, & Float Schedule

South Korea

Samsung Heavy Industries Co., Ltd. manufactures crude oil tankers, container vessels, bulk carriers, cruisers, and passenger ferries.  The Company also produces steel and bridge structures, and material handling equipment.  In addition, Samsung Heavy Industries provides civil engineering, architectural, and plant construction services.

Hanwha Ocean Co., Ltd. operates as a shipbuilding and offshore company. The Company provides floating structure construction, steel wire drying, commercial vessels, specialty vessels, gas carrier, tanker, containership, ro ro, bulk carrier, submarine, warship, auxiliaries, cruise ships, and ferries manufacturing services. Hanwha Ocean also offers onshore plants services.

Hyundai Rotem Company Ltd. manufactures railroad equipment and defense vehicles. The Company produces high-speed trains, light rail vehicles, locomotives, and passenger coaches, main battle tanks, armored recovery vehicles, and related defense equipment. Hyundai Rotem operates worldwide.

Hyundai Mipo Dockyard Co., Ltd. is shipbuilders in the sectors of medium-sized conventional ships and specialized vessels. The Company constructs and delivers medium-ranged product carriers, chemical tankers, containerships, LPG carriers, pure car truck carriers and others.

Bobcat Company specializes in design, manufacture, marketing and distribution of compact equipment for construction, rental, landscaping, agriculture, grounds maintenance, government, utility, industry and mining.

Hyundai Elevator Co., Ltd. (HELCO) manufactures, installs, sells, and services elevators, escalators, moving walkways, automated parking systems, and material handling systems.  The Company also produces screen doors used on platforms in train stations.

HSD Engine Co., Ltd. is an integrated engine manufacturer specializing in producing diesel engine for large vessels. The Company provides business in diesel power plant construction and operation, engine parts sales, and engine maintenance and repair services.

People and Technology INC is a company manufacturing in Secondary Battery and Semiconductors.

STX Heavy Industries Co., Ltd. manufactures diesel engine components for ships. The Company's products include crank shafts, cylinder liners, turbo chargers, and cargo pumps.

Sejin Heavy Industries Co. Ltd., operates a shipbuilding firm.  The Company manufactures ship components such as Deck House and Liquified Petroleum Gas (LPG) Tank.

Sejin Heavy Industries Co Ltd (075580 KS)

XCMG Construction Machinery Co., Ltd. manufactures and markets a variety of construction machinery including road construction machinery, scrapers, concrete mixers and other related products.

XCMG Construction Machinery A (000425 CH)

Yangzijiang Shipbuilding (Holdings) Limited builds a wide range of ships. The Company produces a wide range of commercial vessels, mini bulk carriers, multi-purpose cargo vessels, containerships, chemical tankers, offshore supply vessels, rescue and salvage vessels, and lifting vessels.

Donaldson Company, Inc. manufactures filtration systems and replacement parts. The Company's products include filters and emission control products for heavy duty mobile equipment, in-plant air cleaning systems, air intake systems for industrial gas turbines, and specialized filters for computer disk drives, aircraft cabins, and semiconductors. Donaldson operates around the world.

AGCO Corporation manufactures and distributes agricultural equipment throughout the world.  The Company sells a range of agricultural equipment and related replacement parts, including tractors, combines, hay tools, sprayers, and forage equipment.  AGCO markets its products under a variety of brand names, including Massey Ferguson, AGCO, Tye, GLEANER, and Hesston.

Thermax Ltd manufactures equipment and machinery used to both produce and to conserve energy. The Company operates through a number of divisions, including Boilers, Heat Recovery Steam Generators, Water Treatment Plants and Air Pollution Control Equipment. In addition, Thermax  produces steam and gas turbines and diesel gensets through a number of strategic alliances.

EBARA CORPORATION manufactures pneumatic and hydraulic pumps and related equipment.  The Company's products include fuel, oil, water, and firefighting pumps, as well as steam turbines and boilers.  Ebara Corporation also engineers garbage incinerators, smoke desulfurizers, and other products related to environmental technology.

Minebea Mitsumi manufactures and markets miniature and instrument ball bearings.  The Company also makes DC motors, servo motors, stepping motors, spindle motors, pivot assemblies, rod-end and spherical bearings, fasteners, and computer keyboards. Minebea Mitsumi has production facilities in Thailand and Singapore.

Watts Water Technologies, Inc. designs, manufactures, and sells a line of products to the water regulation and control markets.  The Company has manufacturing plants and distribution channels in the United States, Canada, and Europe, as well as a joint venture in The People's Republic of China.

Chart Industries, Inc. is a global manufacturer of equipment used in the production, storage, and end-use of hydrocarbon and industrial gases. The Company's products include vacuum-insulated containment vessels, heat exchangers, cold boxes, and other cryogenic components.

RBC Bearings Incorporated designs, manufactures, and markets bearing products. The Company offers precision plain, roller, cam followers, couplings, collars, locking, tool holders, shafts, pins, rods, tubes, and ball bearings. RBC Bearings serves industrial, aerospace, and defense markets worldwide.

HD Korea Shipbuilding & Offshore Engineering Co., Ltd. operates as a shipbuilding and offshore company. The Company provides industrial plant engineering, special and naval shipbuilding, marine engine and machinery, industrial machinery and energy services. HD Korea Shipbuilding & Offshore Engineering markets its products worldwide.

HD Korea Shipbuilding & Offshore Engineering (009540 KS)

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HD Korea Shipbuilding & Offshore Engineering (009540 KS)

KRX Made It Clear that Hyundai Heavy KOSPI 200 Fast Entry Inclusion Would Be December 10

The KRX made it clear in its official disclosure that the effective date of the Hyundai Heavy Industries' KOSPI 200 Fast Entry would be December 10.

Sanghyun Park

Hyundai Heavy Industries: Passive Impact Timing Confusion

This post discusses the passive impact timing confusion for Hyundai Heavy Industries, which might have been a reason behind the recent price surge.

Sanghyun Park

Outright Shorting KSOE or Long/Short Setup with HHI on a Likely Widening Holdco Discount

This post discusses shorting opportunity on KSOE after HHI listing tomorrow to capitalize on a likely widening holdco discount.

Sanghyun Park

Hyundai Heavy IPO Trading - One of the Strongest Demand but KSOE Is Not Budging

Hyundai Heavy Industries (1748326D KS) raised US$925m at KRW60,000 per share, at the top-end of its IPO price range. The company is set to debut on...

Sumeet Singh

Hyundai Heavy Industries Listing: Allocation, Lockups, & Float Schedule

This post details Hyundai Heavy Industries' bookbuilding/allocation results along with lockups and float schedule in consideration of KOSPI 200...

Sanghyun Park

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