Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Event-Driven

It was reported yesterday after market close that <a href="https://www.smartkarma.com/entities/10155" target="_blank" data-smartkarma-citation="entities:10155:1">Hyundai Heavy Industries (009540 KS)</a> (HHI) may be interesting in buying <a href="https://www.smartkarma.com/entities/12531" target="_blank" data-smartkarma-citation="entities:12531:1">Daewoo Shipbuilding &amp; Marine Engineering (042660 KS)</a> (DSME). Hyundai Heavy Industries has mentioned that it is reviewing this potential merger but that nothing has been determined so far. Korea Development Bank (KDB) currently owns a 55.7% stake in DSME, which is currently worth 2.3 trillion won as of January 31st. The local media have mentioned there there could be some formal announcement of the deal on March 31st at the HHI's board meeting. We have provided the five major scenarios of the potential deal structure between DSME &amp; HHIH. While we do not rule out a potential rights offering of the common shares, we think that a greater probability is that HHIH may use a combination its treasury shares, cash, and new issue of dividend preferred stock (Scenario V) to complete this purchase of the 55.7% stake of DSME. What trade has the best risk/reward? At this point, it would appear that the best trade would be to go long on <a href="https://www.smartkarma.com/entities/4" target="_blank" data-smartkarma-citation="entities:4:1">Samsung Heavy Industries (010140 KS)</a>.

It was reported yesterday after market close that Hyundai Heavy Industries (009540 KS) (HHI) may be interesting in buying Daewoo Shipbuilding &amp; Marine Engineering (042660 KS) (DSME). Hyundai Heavy Industries has mentioned that it is reviewing this potential merger but that nothing has been determined so far. Korea Development Bank (KDB) currently owns a 55.7% stake in DSME, which is currently worth 2.3 trillion won as of January 31st. The local media have mentioned there there could be some formal announcement of the deal on March 31st at the HHI's board meeting. We have provided the five major scenarios of the potential deal structure between DSME &amp; HHIH. While we do not rule out a potential rights offering of the common shares, we think that a greater probability is that HHIH may use a combination its treasury shares, cash, and new issue of dividend preferred stock (Scenario V) to complete this purchase of the 55.7% stake of DSME. What trade has the best risk/reward? At this point, it would appear that the best trade would be to go long on Samsung Heavy Industries (010140 KS). 

Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings

The Korean financial regulators announced a temporary suspension of shares trading for <a href="https://www.smartkarma.com/entities/22932" target="_blank" data-smartkarma-citation="entities:22932:1">Samsung Biologics Co., (207940 KS)</a> as of today, mainly due to its severe accounting violations in 2015 prior to its public listing. It is expected that Samsung Biologics shares will be suspended for about one to two months as of November 14th. We have mentioned previously that the scenario of Samsung Biologics getting delisted permanently is highly unlikely mainly because of the potential uproar and the huge negative sentiment this will create for the Korean economy and on the minority shareholders. Plus, there are also cases such as <a href="https://www.smartkarma.com/entities/12531" target="_blank" data-smartkarma-citation="entities:12531:1">Daewoo Shipbuilding &amp; Marine Engineering (042660 KS)</a> which made severe accounting violations and whose shares were temporarily suspended for more than a year. One important, final note on today's announcement is that "never say never" on the incumbent administration's dire efforts to go after Samsung Biologics. Although we do believe that Samsung Biologics to trade again in one or two months, there is always another option of the regulators delaying this entire process once again to prolong the temporary suspension of Samsung Biologics shares even further, which will create another layer of uncertainty on the company.

The Korean financial regulators announced a temporary suspension of shares trading for Samsung Biologics Co., (207940 KS) as of today, mainly due to its severe accounting violations in 2015 prior to its public listing. It is expected that Samsung Biologics shares will be suspended for about one to two months as of November 14th. We have mentioned previously that the scenario of Samsung Biologics getting delisted permanently is highly unlikely mainly because of the potential uproar and the huge negative sentiment this will create for the Korean economy and on the minority shareholders. Plus, there are also cases such as Daewoo Shipbuilding &amp; Marine Engineering (042660 KS) which made severe accounting violations and whose shares were temporarily suspended for more than a year. One important, final note on today's announcement is that "never say never" on the incumbent administration's dire efforts to go after Samsung Biologics. Although we do believe that Samsung Biologics to trade again in one or two months, there is always another option of the regulators delaying this entire process once again to prolong the temporary suspension of Samsung Biologics shares even further, which will create another layer of uncertainty on the company.

Samsung Biologics: A Temporary Suspension of Shares Trading

It was reported in numerous local Korean media today that the final decision by the regulators on the fate of <a href="https://www.smartkarma.com/entities/22932" target="_blank" data-smartkarma-citation="entities:22932:1">Samsung Biologics Co., (207940 KS)</a> will be announced on November 14th. At this point, it is likely that the regulators will finally announce that Samsung Biologics made major accounting violations, which resulted in the company reporting a net profit of 1.9 trillion won in 2015, up from a net loss in 2014. In the past few days, the Democratic Party lawmaker Park Yong-Jin has revealed numerous documents (actual emails) that were exchanged between Samsung Biologics and Samsung Group's Future Strategy Office (the control tower of the Samsung Group) regarding Samsung Biologics' controversial accounting treatments related to Samsung Biologics' call option held by its US partner Biogen in their JV Samsung Bioepis, the Samsung C&amp;T and Cheil Industries merger in 2015, and ways to avoid their capital erosion. The Samsung Group got rid of the Future Strategy Office in 2017. The timing of Kim Dong-Yeon and Jang Ha-Sung being pushed out last week combined with the Democratic Party lawmaker Park Yong-Jin coming out and saying he has concrete evidence of the accounting violations of Samsung Biologics do not bode well for Samsung Biologics. What are the most likely scenarios post November 14th for Samsung Biologics? At this point, it appears that the regulators will likely rule on November 14th that in fact there were severe accounting violations of Samsung Biologics in the past. A more likely scenario at this stage is a temporary suspension of shares trading of Samsung Biologics, rather than a full de-listing of the company.

It was reported in numerous local Korean media today that the final decision by the regulators on the fate of Samsung Biologics Co., (207940 KS) will be announced on November 14th. At this point, it is likely that the regulators will finally announce that Samsung Biologics made major accounting violations, which resulted in the company reporting a net profit of 1.9 trillion won in 2015, up from a net loss in 2014. In the past few days, the Democratic Party lawmaker Park Yong-Jin has revealed numerous documents (actual emails) that were exchanged between Samsung Biologics and Samsung Group's Future Strategy Office (the control tower of the Samsung Group) regarding Samsung Biologics' controversial accounting treatments related to Samsung Biologics' call option held by its US partner Biogen in their JV Samsung Bioepis, the Samsung C&amp;T and Cheil Industries merger in 2015, and ways to avoid their capital erosion. The Samsung Group got rid of the Future Strategy Office in 2017. The timing of Kim Dong-Yeon and Jang Ha-Sung being pushed out last week combined with the Democratic Party lawmaker Park Yong-Jin coming out and saying he has concrete evidence of the accounting violations of Samsung Biologics do not bode well for Samsung Biologics. What are the most likely scenarios post November 14th for Samsung Biologics? At this point, it appears that the regulators will likely rule on November 14th that in fact there were severe accounting violations of Samsung Biologics in the past. A more likely scenario at this stage is a temporary suspension of shares trading of Samsung Biologics, rather than a full de-listing of the company. 

The Odd Timing of the Final Rule on Samsung Biologics and Firing of Kim Dong-Yeon & Jang Ha-Sung

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

The Yara Birkeland will be the world's first unmanned container vessel running on electric power that was developed by Kongsberg of Norway for the fertilizer company YARA. For those readers more familiar with AI in autonomous vehicle, the Yara Birkeland should be seen as a prototype that is designed to ultimately navigate on unmanned basis but with final control functions onshore rather than onboard.  Hence, what the shipping industry refers to as fully autonomous vessels will be very similar to Level 4 autonomous vehicles with autonomy limited to the operational domain of the vessel's navigational route, with a control/monitor crew on shore.  Off the bat, this goal will be technologically easier to achieve than Level 5 AVs in our view.<table class="table table-striped"><tbody><tr><td colspan="2"><h2>The Yara Birkeland: Key Specifications</h2></td></tr><tr><td>Vessel Type</td><td style="text-align: center;">Container Vessel</td></tr><tr><td>Size</td><td style="text-align: center;">120 TEU (3200 DWT)</td></tr><tr><td>Propulsion System</td><td style="text-align: center;">Electric</td></tr><tr><td>Battery Pack</td><td style="text-align: center;">7-9 MWh</td></tr><tr><td>Proximity Sensors</td><td style="text-align: center;">Radar, Lidar, AIS, Camera, IR Camera</td></tr><tr><td>Connectivity &amp; Communications</td><td style="text-align: center;">Maritaime Broadband Radio, Satellite Communications, GSM</td></tr><tr><td>Operational Area</td><td style="text-align: center;">12 Nautical Miles between 3 ports in southern Norway (Coastal Waters)</td></tr><tr><td>Operation/Control Centers</td><td style="text-align: center;">YARA at Porsgrunn, Kongsberg Maritime, Kystverket VTS centre at Brevik</td></tr></tbody></table><div class="content-caption">Source: Kongsberg</div>What we like about the Yara Birkeland: finite set of variability with a well defined goal in the vessel's operational domain, which is distinguishable from a Level 5 AV in the automotive industry whose operational domain is basically infinite.  In other words, commercialization can come very quickly under the right set of regulatory circumstances.Where we remain skeptical about the Yara Birkeland: Cost (USD25mn vs. about USD10mn for similar class new container vessels, plus data validation issues that can potentially arise once the vessel is placed into operation.  IMO regulations currently do not address unmanned vessels and it can take years before a global regulatory framework comes into existence but then again eeder class container vessels are not generally used for international navigation.Implications for Investors: Kongsberg shares have increased by 45.7% over a 1 year period.  Especially in regards to shipbuilding, we suspect it is going to be the technology IP holder who benefits in the long run, as it has happened in the global automotive industry so it will not necessarily be shipyards can undergo potential valuation expansion on the back of this theme.  In Korea, where shipyard related AI has been progressing more briskly than what many sellside analysts are aware of (especially in production process related areas), IP is held closely by the university system, especially KAIST.  For the foreseeable future, autonomous vessels will be mostly for coastal and river route navigational needs, with small to medium sized shipyards which will be ideally suited to fabricate such vessels if cost/benefit justifies ship owner needs.

The Yara Birkeland will be the world's first unmanned container vessel running on electric power that was developed by Kongsberg of Norway for the fertilizer company YARA. For those readers more familiar with AI in autonomous vehicle, the Yara Birkeland should be seen as a prototype that is designed to ultimately navigate on unmanned basis but with final control functions onshore rather than onboard.  Hence, what the shipping industry refers to as fully autonomous vessels will be very similar to Level 4 autonomous vehicles with autonomy limited to the operational domain of the vessel's navigational route, with a control/monitor crew on shore.  Off the bat, this goal will be technologically easier to achieve than Level 5 AVs in our view.The Yara Birkeland: Key SpecificationsVessel TypeContainer VesselSize120 TEU (3200 DWT)Propulsion SystemElectricBattery Pack7-9 MWhProximity SensorsRadar, Lidar, AIS, Camera, IR CameraConnectivity &amp; CommunicationsMaritaime Broadband Radio, Satellite Communications, GSMOperational Area12 Nautical Miles between 3 ports in southern Norway (Coastal Waters)Operation/Control CentersYARA at Porsgrunn, Kongsberg Maritime, Kystverket VTS centre at BrevikSource: KongsbergWhat we like about the Yara Birkeland: finite set of variability with a well defined goal in the vessel's operational domain, which is distinguishable from a Level 5 AV in the automotive industry whose operational domain is basically infinite.  In other words, commercialization can come very quickly under the right set of regulatory circumstances.Where we remain skeptical about the Yara Birkeland: Cost (USD25mn vs. about USD10mn for similar class new container vessels, plus data validation issues that can potentially arise once the vessel is placed into operation.  IMO regulations currently do not address unmanned vessels and it can take years before a global regulatory framework comes into existence but then again eeder class container vessels are not generally used for international navigation.Implications for Investors: Kongsberg shares have increased by 45.7% over a 1 year period.  Especially in regards to shipbuilding, we suspect it is going to be the technology IP holder who benefits in the long run, as it has happened in the global automotive industry so it will not necessarily be shipyards can undergo potential valuation expansion on the back of this theme.  In Korea, where shipyard related AI has been progressing more briskly than what many sellside analysts are aware of (especially in production process related areas), IP is held closely by the university system, especially KAIST.  For the foreseeable future, autonomous vessels will be mostly for coastal and river route navigational needs, with small to medium sized shipyards which will be ideally suited to fabricate such vessels if cost/benefit justifies ship owner needs.

The Yara Birkeland: The World's First Autonomous Ship - Kongsberg's Answer to Tesla?

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

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Currently, Daewoo Shipbuilding &amp; Marine Engineering (042660 KS) is one of the Korea's hottest stocks that are making many investors quite happy. This year alone, DSME shares have more than doubled. (DSME 3M price chart - Courtesy Naver Finance)DateClosing price (₩)Daily ΔTrade volumeTrade value (₩)Market cap (₩ mil)2018/03/2026,6505.34%1,204,51431,556,428,4502,842,3902018/03/1925,300-2.88%408,38410,348,629,6502,698,4042018/03/1626,050-2.62%534,92313,928,307,2002,778,3962018/03/1526,7505.31%1,052,39527,262,524,3002,853,0562018/03/1425,400-6.45%1,142,87729,362,840,0502,709,0702018/03/1327,150-1.81%1,340,09435,770,234,1502,895,7182018/03/1227,6502.22%455,95812,522,455,5002,949,0462018/03/0927,0500.56%1,003,74527,637,639,6502,885,0532018/03/0826,9002.09%817,98122,014,244,9002,869,0542018/03/0726,3500.96%1,482,88139,900,758,8502,810,3932018/03/0626,10010.36%1,267,72732,251,616,7002,783,7292018/03/0523,650-3.67%497,17911,979,914,2502,522,4212018/03/0224,550-1.80%529,67112,948,693,5002,618,4122018/02/2825,0000.20%733,64818,568,280,4502,666,4072018/02/2724,9500.00%604,30014,963,480,3002,661,0742018/02/2624,9501.84%961,53724,143,424,4502,661,0742018/02/2324,5007.69%1,670,74940,599,078,9002,613,0792018/02/2222,7500.66%1,109,21525,570,608,1502,426,4312018/02/2122,6006.10%730,55616,186,340,6502,410,4322018/02/2021,300-2.52%639,38013,895,574,0502,271,7792018/02/1921,8508.98%858,00518,578,074,7502,330,4402018/02/1420,0505.80%306,9846,057,677,0002,138,4592018/02/1318,950-2.82%410,5077,903,616,3502,021,1372018/02/1219,500-5.34%1,020,22820,062,908,7002,079,7982018/02/0920,600-3.96%632,15012,995,170,9002,197,1202018/02/0821,4502.63%964,18020,247,724,0002,287,7772018/02/0720,900-5.00%686,58815,029,868,9502,229,1162018/02/0622,0000.00%1,303,24727,957,493,5002,346,4382018/02/0522,000-5.78%789,14317,761,460,7502,346,4382018/02/0223,350-0.43%928,45821,767,425,5502,490,4242018/02/0123,450-3.30%689,13516,222,407,5502,501,0902018/01/3124,2502.11%1,368,90831,629,987,2002,586,4152018/01/3023,7505.79%1,859,12943,981,051,4502,533,0872018/01/2922,4503.70%953,73721,266,539,3502,394,4342018/01/2621,6502.36%1,234,47427,171,036,7002,309,1092018/01/2521,1506.82%1,587,98833,237,115,9002,255,7802018/01/2419,8001.54%769,98715,247,511,4502,111,7952018/01/2319,5000.52%678,05013,101,614,0502,079,7982018/01/2219,4007.18%1,091,23720,707,064,0502,069,1322018/01/1918,1000.84%244,9824,436,406,7501,930,4792018/01/1817,950-1.10%247,3804,416,216,1501,914,4802018/01/1718,150-4.47%728,90513,218,451,1501,935,8122018/01/1619,000-0.52%637,65612,001,978,7502,026,4692018/01/1519,10010.40%1,839,22434,190,721,5502,037,1352018/01/1217,3008.81%905,95715,390,516,3001,845,1542018/01/1115,9000.00%325,2265,199,480,8501,695,8352018/01/1015,9003.25%426,6556,809,135,7501,695,8352018/01/0915,400-3.14%264,0534,092,737,8001,642,5072018/01/0815,900-3.93%284,6414,550,992,8001,669,9582018/01/0516,5500.30%244,2824,036,460,9501,738,2272018/01/0416,500-4.07%526,4589,002,148,7001,732,9752018/01/0317,20012.05%819,97313,694,498,4001,806,4962018/01/0215,35010.43%382,0635,619,200,4001,612,192Source: KRXWhat's really going on here?Simple. DSME is getting really a lot of support from the government through the KDB which owns a 55.72% stake in DSME.DSME shareholding structureKDB59,738,21155.72%KEB Hana Bank9,015,5638.41%Woori Bank1,983,8411.85%KB Bank1,982,6511.85%Hana Financial Investment371,7470.35%Jeong Seong-rib7,4560.01%KB Securities7,4100.01%Total73,106,87968.19%Source: FnGuideWhat's the story here? Last year, Hyundai Merchant Marine (011200 KS) needed 10 300Kt grade VLCCs (very large crude oil carrier) worth about ₩1tril. It was arranged that HMM would get 5 VLCCs in the first round and another 5 in the second round later. With the carefully executed coordination of the KDB, all of the 5 VLCCs ordered by HMM for the first round went to DSME. No wonder huh? The KDB is the major shareholder of both HMM and DSME, and the KDB needed to maximize the valuation of both companies in order to make an exit. Then where did this ₩1tril come from? This was the money from the ₩2.6tril worth of the shipbuilding support program fund set up by the government soon after the collapse of Hanjin Shipping.DMSE's expected annual sales size for this year (2018) is about ₩8.4tril (FnGuide consensus compiled by the 5 local brokerages). So, this'd be only about 6% of its total annual sales. But what's important is how significant this would be to DSME's profitability. It is generally thought and believed that HMM's 5 ship orders are the main contributor to DSME's dramatic turnaround this year.FnGuide market consensus for DSME (₩ bil)2018E2019ESales8,469.37,311.7OP275.5312.3NP attributable to controlling stake276.2315.7Assets11,982.311,220.2Liabilities8,519.47,483.7Equity attributable to controlling stake3,888.24,159.6EPS (₩)2,5792,945BPS (₩)36,26838,800PER (x)9.818.59PBR (x)0.700.65Source: FnGuideHMM's first round of order (5 VLCCs) was worth ₩475.7bil. The original plan was HMM would place another 5 VLCCs order to DSME early this year. But HMM opted not to do it. Instead, it is being said that HMM will focus on container ship building. The current plan is building a total of 20 large container ships (12 22K TEU grade container ships and 8 14K TEU grade container ships) as a part of its grand plan to become a 1M TEU shipping company (HMM's current size is 330K TEU. No worry for DSME though because it is widely expected that most of these container ship building orders will again go to DSME.Thanks to the government (the KDB)'s huge help, DSME is really shining compared with its local peers valuation wise. It is the only one to turn a serious profit this year among Korea's Big Three shipbuilders. It will generate more sales than Samsung Heavy and way more profits than even Hyundai Heavy. But its market cap is still only about half of Samsung Heavy. On a PBR, DSME may not look terribly undervalued compared with Samsung Heavy. But considering that a large part of Samsung Heavy's assets are stuck with the struggling offshore plant business, we really come down to this point that DSME is seriously undervalued compared with Samsung Heavy. Yes, this means that DSME shares still seem to have more upside potential.FnGuide market consensus for DSME (₩ bil)DSMEHyundai HeavySamsung Heavy2018E2019E2018E2019E2018E2019ESales8,469.37,311.713,609.015,024.06,843.17,719.2OP275.5312.3-116.7206.179.738.9NP to controlling stake276.2315.7-90.2127.373.638.3Assets11,982.311,220.231,425.631,527.413,700.413,862.4Liabilities8,519.47,483.717,482.417,428.27,094.47,693.6Equity to controlling stake3,888.24,159.613,943.214,099.36,606.06,168.8EPS (₩)2,5792,945-1,3541,84118998BPS (₩)36,26838,800197,099198,67020,01618,521PER (x)9.818.59N/A76.8743.3883.25PBR (x)0.700.650.720.710.410.44Market cap (as of Mar 20)2,698.49,786.95,157.6Source: FnGuide

DSME, HMM & KDB - Understanding Relationship Dynamics

South Korea

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.

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Hanwha Ocean (042660 KS)

Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings

It was reported yesterday after market close that Hyundai Heavy Industries (009540 KS) (HHI) may be interesting in buying Daewoo Shipbuilding &...

Douglas Kim

Samsung Biologics: A Temporary Suspension of Shares Trading

The Korean financial regulators announced a temporary suspension of shares trading for Samsung Biologics Co., (207940 KS) as of today, mainly due...

Douglas Kim

The Odd Timing of the Final Rule on Samsung Biologics and Firing of Kim Dong-Yeon & Jang Ha-Sung

It was reported in numerous local Korean media today that the final decision by the regulators on the fate of Samsung Biologics Co., (207940...

Douglas Kim

The Yara Birkeland: The World's First Autonomous Ship - Kongsberg's Answer to Tesla?

The Yara Birkeland will be the world's first unmanned container vessel running on electric power that was developed by Kongsberg of Norway for the...

Henry Kwon

DSME, HMM & KDB - Understanding Relationship Dynamics

Currently, Daewoo Shipbuilding & Marine Engineering (042660 KS) is one of the Korea's hottest stocks that are making many investors quite...

Sanghyun Park

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