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

<p>One noteworthy news came out on Hanssem. One of Korea's local first-tier economic newspapers, Seoul Economic Daily, put out an exclusive report after the market closed on Monday, precisely at 4:50 pm local time. The report says that IMM Private Equity, which will acquire a 27.7% stake held by Hanssem's major shareholder, has decided to cancel Hanssem's treasury stock (26.7%) after the acquisition.</p><p><a href="https://signalm.sedaily.com/NewsView/22RMLWH489/GX1101" target="_blank" rel="noopener">Here is the link to the news report by Seoul Economic Daily.</a></p><div class="content-highlight"><p>Hanssem currently has <strong>6,274,504 treasury shares</strong>, representing <strong>26.66%</strong> of the shares outstanding.</p></div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/124/original/1.png?1632755230" class="editor-image img-responsive" data-smartkarma-image-id="232124"></figure></section><div class="content-caption">(Source: FnGuide)</div><p>This news flowed into the market around 5 pm and made some impact in the after-hours single-price trading window. The share closed with a 0.84% gain during the regular trading hours and enjoyed an additional 3%p increase in the last 30 minutes of the after-hours single-price trading window. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/125/original/2.png?1632756022" class="editor-image img-responsive" data-smartkarma-image-id="232125"></figure></section><div class="content-caption">(Source: Shinhan HTS)</div><p>However, as the number of shares traded during this after-hours trading window was less than 3,000, it is still too early to accurately estimate the impact this news will have on the share price in the short term.</p>

One noteworthy news came out on Hanssem. One of Korea's local first-tier economic newspapers, Seoul Economic Daily, put out an exclusive report after the market closed on Monday, precisely at 4:50 pm local time. The report says that IMM Private Equity, which will acquire a 27.7% stake held by Hanssem's major shareholder, has decided to cancel Hanssem's treasury stock (26.7%) after the acquisition.Here is the link to the news report by Seoul Economic Daily.Hanssem currently has 6,274,504 treasury shares, representing 26.66% of the shares outstanding.(Source: FnGuide)This news flowed into the market around 5 pm and made some impact in the after-hours single-price trading window. The share closed with a 0.84% gain during the regular trading hours and enjoyed an additional 3%p increase in the last 30 minutes of the after-hours single-price trading window. (Source: Shinhan HTS)However, as the number of shares traded during this after-hours trading window was less than 3,000, it is still too early to accurately estimate the impact this news will have on the share price in the short term.

IMM PE Has Reportedly Decided to Cancel Hanssem's 26.7% Treasury Shares

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<div class="content-highlight">
<p><a href="https://www.kedglobal.com/newsView/ked202105310007" target="_blank" rel="noopener">Lotte Rental</a> is getting ready to complete its IPO in Korea in 2H 2021 (around September). It has been reported in the media that the company may be seeking a valuation of about 2 trillion won ($1.8 billion). </p>
</div>
<p>The company generated total revenue of 2.3 trillion won (up 9.8% YoY) and an operating profit of 164.3 billion won (up 25.9% YoY) in 2020. From 2018 to 2020, it had an average operating margin of 6.6%. Despite the company's improving income statement, it has a leveraged balance sheet and it will try to improve its balance sheet through an IPO. </p>


Lotte Rental is getting ready to complete its IPO in Korea in 2H 2021 (around September). It has been reported in the media that the company may be seeking a valuation of about 2 trillion won ($1.8 billion). 

The company generated total revenue of 2.3 trillion won (up 9.8% YoY) and an operating profit of 164.3 billion won (up 25.9% YoY) in 2020. From 2018 to 2020, it had an average operating margin of 6.6%. Despite the company's improving income statement, it has a leveraged balance sheet and it will try to improve its balance sheet through an IPO. 

The Korea Fair Trade Commission (KFTC) annually designates local conglomerates having an aggregate asset value of more than ₩5T as a Business Group Subject to Disclosure. These are the largest industrial conglomerates designated as a Business Group Subject to Disclosure as of the last yearend.









Rank
Conglomerate
Aggregate asset value
Number of subsidiaries
Holdco type


1
Samsung
₩424.9T
59
De-facto operating holdco


2
Hyundai Motor
₩234.7T
54
-


3
SK
₩225.5T
125
Legitimate operating holdco


4
LG
₩137.0T
70
Legitimate pure holdco


5
Lotte
₩121.5T
86
Legitimate pure holdco


6
POSCO
₩80.3T
35
-


7
Hanwha
₩71.7T
86
De-facto pure holdco


8
GS
₩66.8T
69
Legitimate pure holdco


9
Hyundai Heavy Industries
₩62.9T
30
Legitimate pure holdco


10
Shinsegae
₩44.1T
41
-


11
KT
₩36.3T
44
-


12
CJ
₩34.5T
77
Legitimate pure holdco


13
Hanjin
₩33.6T
31
Legitimate pure holdco


14
Doosan
₩29.3T
25
De facto pure holdco


15
LS
₩23.7T
54
Legitimate operating holdco


16
Booyoung
₩23.3T
23
-


17
DL
₩18.7T
32
Legitimate operating holdco

Source: Kore Fair Trade Commission

Of these 17 largest industrial conglomerates having an aggregate asset value of more than ₩20T, 6 business groups are suitable for pair trading with a synthetic subsidiary.
Samsung Group
SK Group
LG Group
Lotte Group
Hanwha Group
CJ Group
Hyundai Motor Group is a circular shareholding structure, not suitable for pair trading. POSCO, Shinsegae, KT, LS, and DL have substantial operating operations outweighing their respective listed subsidiaries. GS and Hyundai Heavy Industries have a significant presence from the unlisted companies: GS Caltex and Hyundai Oilbank. Hanjin and Doosan are more of single-subsidiary holding companies. Lastly, Booyoung is a privately-held company.Discount to NAV Samsung C&amp;T has the highest discount to the NAV at 62.77%, followed by SK Inc with 52.14%. On the other hand, CJ Corp has the lowest discount at 34.19%. Hanwha Corp also has a lower discount than the others at 38.87%.











NAV
LG Corp
Samsung C&amp;T Corp
SK Inc
Lotte Corp
Hanwha Corp
CJ Corp


Value of listed holdings
₩41,080.4B
₩52,346.7B
₩24,237.4B
₩5,377.5B
₩4,501.4B
₩5,038.1B


- % of Holdco market cap
188.20%
201.51%
128.30%
139.29%
195.29%
158.42%


Value of unlisted holdings
₩2,631.7B
₩2,528.3B
₩9,890.5B
₩1,147.7B
₩1,657.0B
₩311.7B


Stub value
-₩21,883.7B
-₩28,897.7B
-₩15,236.2B
-₩2,664.6B
-₩3,853.5B
-₩2,169.5B


Stub value per share
-₩126,820
-₩154,626
-₩216,545
-₩25,399
-₩51,408
-₩74,357


Value of operating assets
₩0.0B
₩6,100.3B
₩2,235.2B
₩0.0B
₩0.0B
₩0.0B


GAV
₩43,712.1B
₩60,975.2B
₩36,363.1B
₩6,525.2B
₩6,158.4B
₩5,349.8B


GAV per share
₩253,320
₩373,019
₩695,187
₩92,157
₩89,623
₩197,713


Discount to GAV (excl. treasury shares)
50.06%
62.74%
61.38%
60.07%
65.69%
44.87%


Holdco net cash/debt (de-consolidated)
₩1,941.8B
₩268.6B
-₩6,879.4B
-₩1,764.4B
-₩2,330.8B
-₩357.6B


Value of pref shares
₩329.8B
₩219.7B
₩140.4B
₩63.2B
₩371.0B
₩510.3B


NAV
₩45,324.1B
₩61,024.1B
₩29,343.3B
₩4,697.6B
₩3,456.7B
₩4,481.9B


NAV per share (excl. treasury shares)
₩262,662
₩373,318
₩560,983
₩66,346
₩50,304
₩165,638


Discount to NAV
51.84%
62.77%
52.14%
44.53%
38.87%
34.19%

Source: KRX &amp; DART

Synthetic subsidiary weightThe number of subsidiaries in a synthetic varies from 2 to 4, representing 67.91% to 130.22% of the NAV. LG Corp has 4, the most, having a synthetic weight of 87.87% of the NAV. SK Inc has 3 subsidiaries in its synthetic, representing 67.91% of the NAV. 









Holdco pair
Number of subsidiaries in a synthetic
Synthetic subsidiary weight in NAV
Synthetic subsidiary weight in GAV


LG Corp
4
87.87%
91.11%


Samsung C&amp;T Corp
2
76.04%
76.10%


SK Inc
3
67.91%
54.80%


Lotte Corp
2
80.47%
57.93%


Hanwha Corp
3
130.22%
73.09%


CJ Corp
2
99.77%
83.58%

Source: KRX

Sigma on a 20-day moving averageWhen I'm writing this post (2 PM in Korea local time today), SK Inc and Hanwha Corp are in a diversion below -1.0σ on a 20-day moving average relative to their respective synthetic subsidiary. In contrast, CJ Corp is in a 2.0σ diversion, just the opposite way.











Sigma (σ) on a 20-day moving average
Today
T-1
T-2
T-3
T-4


LG Corp
0.87
1.02
1.26
1.39
1.56


Samsung C&amp;T Corp
-0.47
-0.55
0.30
-2.25
-2.53


SK Inc
-1.41
-1.64
-1.67
-1.74
-1.81


Lotte Corp
0.86
1.44
1.91
1.97
2.64


Hanwha Corp
-1.16
-0.77
-0.96
0.44
1.35


CJ Corp
1.92
1.03
0.54
0.82
1.83

Source: KRX



Korea Top Conglomerates Synthetic Pair Trading

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<p>Short selling has finally resumed in Korea and it has been a busy couple of days on that front with foreign investors piling into stocks that have run up more than their peers over the last year and are potentially overvalued.</p><p>Long/short pairs could be implemented in Korea during the short sell ban if you had long inventory or if there were listed single stock futures on the short leg.</p><p>With short selling permitted on constituents of the <a href="https://www.smartkarma.com/entities/korea-stock-exchange-kospi-200-index" target="_blank" data-smartkarma-citation="entities:26021:1" rel="noopener">Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX)</a>, we take a look at long/short pairs where both stocks are members of the index. These pairs belong to the same GICS sub-industry, are correlated and exhibit mean-reversion. We also use short sale data from the last couple of trading sessions to see which stocks are being targeted by short sellers.</p>

Short selling has finally resumed in Korea and it has been a busy couple of days on that front with foreign investors piling into stocks that have run up more than their peers over the last year and are potentially overvalued.Long/short pairs could be implemented in Korea during the short sell ban if you had long inventory or if there were listed single stock futures on the short leg.With short selling permitted on constituents of the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX), we take a look at long/short pairs where both stocks are members of the index. These pairs belong to the same GICS sub-industry, are correlated and exhibit mean-reversion. We also use short sale data from the last couple of trading sessions to see which stocks are being targeted by short sellers.

Korea Pair Trades: High Risk/Reward Names with Short Sell Screen

<div class="content-highlight"><p>In this insight, we highlight the closing of the pricing gaps between the major Korean holdcos and opcos, especially with the upcoming end of the ban on the short selling of shares in Korea in May. In this insight, we highlight 26 pair trades that involve Korean holdcos and opcos.</p></div><p>Just a reminder that the ban on short selling of KOSPI 200 and KOSDAQ 150 included stocks will remain in place until May 2nd and investors will be able to resume their shorting on these 350 stocks starting on May 3rd. Once this ban on short selling of stocks ends, there could be more investors that may look to add to the holdco shares and short the opco shares (especially among the pairs where the holdco shares have underperformed the opco shares in the past year). However, some of these moves have already started to take place in the past few weeks, which could reduce the overall profits on the pair trades. </p><p>Traditionally, the pair trades involving Korean holdcos and opcos have been a trading strategy that many hedge funds have employed for many years. However, the ban on short selling of stocks in Korea have prevented many of these funds from employing these pair trade strategies. Once the ban ends, you will likely see these funds becoming more active in these trading methods once again. </p><div class="content-highlight">
<p>In the section below, we separated the pair trades into two different sections. The first table involves major opcos outperforming holdcos (regular and quasi) in the past year. Of the 26 pair trade strategies mentioned in this insight, this section I involves 19 of them (73% of total). The section II (which involve holdcos outperforming the opcos in the past year) involves 7 pair trade strategies (27% of total).</p>
<p>In other words, the opcos in general have vastly outperformed the holdcos in the past year, especially due to the ban on the short selling of stocks in Korea. Because the opcos tend to be the bigger company than the holdcos in terms of market cap, many fund managers (both active and passive) have tended to just invest in the opcos and pay less attention to the holdcos.  </p>
</div><p>Also, we described the holdcos as either regular or quasi. SK Telecom and Samsung C&amp;T would be examples of "quasi" holdcos whereas Orion Holdings and Hanjin Kal would be examples of regular holdcos. </p>

In this insight, we highlight the closing of the pricing gaps between the major Korean holdcos and opcos, especially with the upcoming end of the ban on the short selling of shares in Korea in May. In this insight, we highlight 26 pair trades that involve Korean holdcos and opcos.Just a reminder that the ban on short selling of KOSPI 200 and KOSDAQ 150 included stocks will remain in place until May 2nd and investors will be able to resume their shorting on these 350 stocks starting on May 3rd. Once this ban on short selling of stocks ends, there could be more investors that may look to add to the holdco shares and short the opco shares (especially among the pairs where the holdco shares have underperformed the opco shares in the past year). However, some of these moves have already started to take place in the past few weeks, which could reduce the overall profits on the pair trades. Traditionally, the pair trades involving Korean holdcos and opcos have been a trading strategy that many hedge funds have employed for many years. However, the ban on short selling of stocks in Korea have prevented many of these funds from employing these pair trade strategies. Once the ban ends, you will likely see these funds becoming more active in these trading methods once again. 
In the section below, we separated the pair trades into two different sections. The first table involves major opcos outperforming holdcos (regular and quasi) in the past year. Of the 26 pair trade strategies mentioned in this insight, this section I involves 19 of them (73% of total). The section II (which involve holdcos outperforming the opcos in the past year) involves 7 pair trade strategies (27% of total).
In other words, the opcos in general have vastly outperformed the holdcos in the past year, especially due to the ban on the short selling of stocks in Korea. Because the opcos tend to be the bigger company than the holdcos in terms of market cap, many fund managers (both active and passive) have tended to just invest in the opcos and pay less attention to the holdcos.  
Also, we described the holdcos as either regular or quasi. SK Telecom and Samsung C&amp;T would be examples of "quasi" holdcos whereas Orion Holdings and Hanjin Kal would be examples of regular holdcos. 

Closing the Gap: Korean Holdcos Vs. Opcos

South Korea

LOTTE Corporation is a pure holding company of Lotte Group Korea. It was established in 2017. Lotte Group Korea develops various high quality products and services in the five main business areas: food production/sales, distribution, sightseeing service, heavy chemical/construction and finance/investment.

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LOTTE Corporation (004990 KS)

IMM PE Has Reportedly Decided to Cancel Hanssem's 26.7% Treasury Shares

IMM PE has reportedly decided to cancel Hanssem's treasury shares (26.7%). This post examines two reasons behind this decision and the dynamic we...

Sanghyun Park

Initial Thoughts on the Lotte Rental IPO

Lotte Rental is getting ready to complete its IPO in Korea in 2H 2021. It has been reported in the media that the company may be seeking a...

Douglas Kim

Korea Top Conglomerates Synthetic Pair Trading

This post explores pair trading opportunities on Korea's top conglomerates using their major subsidiaries as a synthetic target for a hedge.

Sanghyun Park

Korea Pair Trades: High Risk/Reward Names with Short Sell Screen

With the resumption of short selling in Korea, we highlight correlated pairs from the same GICS sub-industry that are near reversion points and...

Brian Freitas

Closing the Gap: Korean Holdcos Vs. Opcos

In this insight, we highlight the closing of the pricing gaps between the major Korean holdcos and opcos, especially with the upcoming end of the...

Douglas Kim

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