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

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Event-Driven

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

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Equity Bottom-Up

We began to turn cautious on container shipping last Summer and became more negative as Summer turned to Fall. Our view was that average freight rates and carrier profitability had improved sharply in the months following <a href="https://www.smartkarma.com/entities/18689" target="_blank" data-smartkarma-citation="entities:18689:1">Hanjin Shipping Co Ltd (117930 KS)</a>'s August 2016 bankruptcy, and that further fundamental improvements would be much harder to come by. About six months after turning cautious on container shipping, we remain negative on the sector, and we believe 2018 will turn out to be worse…

We began to turn cautious on container shipping last Summer and became more negative as Summer turned to Fall. Our view was that average freight rates and carrier profitability had improved sharply in the months following Hanjin Shipping Co Ltd (117930 KS)'s August 2016 bankruptcy, and that further fundamental improvements would be much harder to come by. About six months after turning cautious on container shipping, we remain negative on the sector, and we believe 2018 will turn out to be worse…

Container Shipping Sector: Six Months of Declining Share Prices Explained in Three Charts

Equity analyst - Containers, Drewry Maritime Financial Research

Nilesh Tiwary

Equity analyst - Containers

Maritime Sector, Equity & Credit Research

Drewry Maritime Financial Research

With no ties to other players in the shipping, finance or banking world, we provide a uniquely impartial view of the markets and companies we cover. Our parent organization, Drewry is a leading independent provider of research services to the maritime and shipping industry, employing over 100 professionals across an international network of offices in London, Delhi, Singapore and Shanghai. Combining our market-leading resources with seasoned sector expertise DFRS offers a highly differentiated and comprehensive range of investment and financial research services to lenders and prospective investors in publicly listed maritime and shipping companies. The full service of reports, supporting resources and sector orientated webinars provides our clients with the most complete picture of the organisations under coverage as is possible. We have been charting and analysing the world’s maritime markets for more than 40 years. This unrivalled intelligence and understanding provides the foundation of our research service. Our analysts have access to one of the most up-to-date, comprehensive and reliable sources of market insight and research data available today. We look at globally listed companies within the following sectors: Port Operators, Container Shipping, Container Manufacturing & Leasing, LNG Shipping, Dry Bulk Shipping and Tanker Shipping. Combine in-depth sector expertise with financial analysis focusing on over 50 stocks globally.

Problems galore: HMM’s woes seem to be compounding, despite the industry facing one of its best periods in 2017. Not only did the company fail to register a single profit last year, but has even failed to contain its ballooning debt. As of 3Q17, HMM’s overall debt of KRW 2tr (USD 1.8bn) and net gearing of 250% is among the highest in the industry. Additionally, even if the scenario unfolds positively starting 2019, the charter payments will come back to haunt the company, raising its operating…

Problems galore: HMM’s woes seem to be compounding, despite the industry facing one of its best periods in 2017. Not only did the company fail to register a single profit last year, but has even failed to contain its ballooning debt. As of 3Q17, HMM’s overall debt of KRW 2tr (USD 1.8bn) and net gearing of 250% is among the highest in the industry. Additionally, even if the scenario unfolds positively starting 2019, the charter payments will come back to haunt the company, raising its operating…

Hyundai Merchant Marine - Recovery Not in Sight

Thematic (Sector/Industry)

SummaryThe major indicators of container shipping in 2017 remained more firm than in 2016. The y/y comparisons for many data sets depict robust improvement. However, the outlook for 2018 is mixed. The supply-demand balance will improve slightly, demand growth will continue to be strong, and freight rates and the profits of carriers will strengthen at lower-than-expected rates as several temporary factors create a bump on the road to recovery. The creation of bigger alliances, and the escalation of…

SummaryThe major indicators of container shipping in 2017 remained more firm than in 2016. The y/y comparisons for many data sets depict robust improvement. However, the outlook for 2018 is mixed.  The supply-demand balance will improve slightly, demand growth will continue to be strong, and freight rates and the profits of carriers will strengthen at lower-than-expected rates as several temporary factors create a bump on the road to recovery.  The creation of bigger alliances, and the escalation of…

Container Shipping 2018 - Demand Buoyancy Drives Positive Outlook

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/041/624/original/BANNER-CARGO-FINAL.png?1515438955" class="editor-image img-responsive" data-smartkarma-image-id="41624"></figure>Tracking Traffic/Containers &amp; Air Cargo is a new research product designed to be the showcase for all of our research on container shipping and air cargo. Tracking Traffic/Containers &amp; Air Cargo will feature analysis of monthly container shipping and air cargo data from around the region (and beyond), notes from our conversations with industry participants, and links to recent company and thematic pieces. The objective of creating this product is to give readers a reliable 'one-stop shop' where they can quickly glean what we consider to be the most important data, insights and news related to Asian container shipping and air cargo. In particular, Tracking Traffic/Containers &amp; Air Cargo will highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. Special attention will be given to pricing momentum derived from monthly sales figures; we believe pricing momentum is an important determinant of share price performance for container shipping and air cargo firms.While our primary goal is to help investors with exposure to these sectors, we also believe the metrics we track can generate insights that are useful to generalist investors as well. We intend to publish this product monthly.Our first issue of Tracking Traffic/Containers &amp; Air Cargo kicks off with a review of December container traffic and freight rates, plus our reasons for believing January's rate increases will soon fail. Our review of the container sector is followed by a look at air cargo activity in the region, which is still enjoying strong fundamentals. We then summarize recent conversations with <a href="https://www.smartkarma.com/entities/8502" target="_blank" data-smartkarma-citation="entities:8502:1">Yang Ming Marine Transport (2609 TT)</a>, <a href="https://www.smartkarma.com/entities/14262" target="_blank" data-smartkarma-citation="entities:14262:1">Wan Hai Lines Ltd (2615 TT)</a>, <a href="https://www.smartkarma.com/entities/4591" target="_blank" data-smartkarma-citation="entities:4591:1">China Airlines Ltd (2610 TT)</a>, and <a href="https://www.smartkarma.com/entities/74" target="_blank" data-smartkarma-citation="entities:74:1">Singapore Airlines Ltd (SIA SP)</a>'s cargo division. Finally we conclude with an update on key investment ideas within the container and air cargo sectors.With moderating volume growth, declining freight rates, and rising fuel costs, we believe it will be difficult for shares of container carriers to extend their strong outperformance of the past 12-18 months. We are far more positive on Asian air cargo in the near term: yields continue to rise strongly on limited capacity growth, and shares of most carriers with significant air cargo exposure have risen only modestly from 2017 lows. Our favored exposure in Asian air cargo remains Taiwan-based China Airlines.<table class="table table-striped"><tbody><tr><td></td><td>Pricing Momentum</td><td>Favored Exposure</td></tr><tr><td>Container shipping</td><td>Negative</td><td>Short Evergreen Marine</td></tr><tr><td>Air cargo</td><td>Positive</td><td>Long China Airlines</td></tr></tbody></table>

Tracking Traffic/Containers &amp; Air Cargo is a new research product designed to be the showcase for all of our research on container shipping and air cargo. Tracking Traffic/Containers &amp; Air Cargo will feature analysis of monthly container shipping and air cargo data from around the region (and beyond), notes from our conversations with industry participants, and links to recent company and thematic pieces. The objective of creating this product is to give readers a reliable 'one-stop shop' where they can quickly glean what we consider to be the most important data, insights and news related to Asian container shipping and air cargo. In particular, Tracking Traffic/Containers &amp; Air Cargo will highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. Special attention will be given to pricing momentum derived from monthly sales figures; we believe pricing momentum is an important determinant of share price performance for container shipping and air cargo firms.While our primary goal is to help investors with exposure to these sectors, we also believe the metrics we track can generate insights that are useful to generalist investors as well. We intend to publish this product monthly.Our first issue of Tracking Traffic/Containers &amp; Air Cargo kicks off with a review of December container traffic and freight rates, plus our reasons for believing January's rate increases will soon fail. Our review of the container sector is followed by a look at air cargo activity in the region, which is still enjoying strong fundamentals. We then summarize recent conversations with Yang Ming Marine Transport (2609 TT), Wan Hai Lines Ltd (2615 TT), China Airlines Ltd (2610 TT), and Singapore Airlines Ltd (SIA SP)'s cargo division. Finally we conclude with an update on key investment ideas within the container and air cargo sectors.With moderating volume growth, declining freight rates, and rising fuel costs, we believe it will be difficult for shares of container carriers to extend their strong outperformance of the past 12-18 months. We are far more positive on Asian air cargo in the near term: yields continue to rise strongly on limited capacity growth, and shares of most carriers with significant air cargo exposure have risen only modestly from 2017 lows. Our favored exposure in Asian air cargo remains Taiwan-based China Airlines.Pricing MomentumFavored ExposureContainer shippingNegativeShort Evergreen MarineAir cargoPositiveLong China Airlines

TRACKING TRAFFIC/Containers & Air Cargo: January Container Rate Hikes Unlikely to Last Past LNY

South Korea

HMM Co., Ltd. provides marine transportation services.  The Company commands different types of vessels including full container vessels, oil tankers, car carriers, LNG carriers, bulk carriers, and tramps.

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HMM Co., Ltd. (011200 KS)

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

Hyundai Merchant Marine - Recovery Not in Sight

Problems galore: HMM’s woes seem to be compounding, despite the industry facing one of its best periods in 2017. Not only did the company fail to...

Drewry Maritime Financial Research

Container Shipping 2018 - Demand Buoyancy Drives Positive Outlook

SummaryThe major indicators of container shipping in 2017 remained more firm than in 2016. The y/y comparisons for many data sets depict robust...

Drewry Maritime Financial Research

TRACKING TRAFFIC/Containers & Air Cargo: January Container Rate Hikes Unlikely to Last Past LNY

Tracking Traffic/Containers & Air Cargo is a new research product designed to be the showcase for all of our research on container shipping and...

Daniel Hellberg

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52-week Range

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P/E

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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

Container Shipping Sector: Six Months of Declining Share Prices Explained in Three Charts

We began to turn cautious on container shipping last Summer and became more negative as Summer turned to Fall. Our view was that average freight...

Daniel Hellberg

Hyundai Merchant Marine - Recovery Not in Sight

Problems galore: HMM’s woes seem to be compounding, despite the industry facing one of its best periods in 2017. Not only did the company fail to...

Drewry Maritime Financial Research

Container Shipping 2018 - Demand Buoyancy Drives Positive Outlook

SummaryThe major indicators of container shipping in 2017 remained more firm than in 2016. The y/y comparisons for many data sets depict robust...

Drewry Maritime Financial Research

TRACKING TRAFFIC/Containers & Air Cargo: January Container Rate Hikes Unlikely to Last Past LNY

Tracking Traffic/Containers & Air Cargo is a new research product designed to be the showcase for all of our research on container shipping and...

Daniel Hellberg