Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Event-Driven

<div class="content-highlight">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.</div>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. <div class="content-highlight">
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.  
</div>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.

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

It was announced after the market close on 22 April that <a href="https://www.yna.co.kr/view/AKR20210422140100030?input=1195m" target="_blank" rel="noopener">Lotte Property &amp; Development</a> ("Lotte P&amp;D" or "Lotte Moolsan") will acquire 25% stakes of Lotte Shopping and Hotel Lotte's stakes in Lotte World Tower and Lotte World Mall for 1.4 trillion won ($1.3 billion) (including land and buildings). After this transaction, Lotte P&amp;D will have 100% stakes in Lotte World Tower and Lotte World Mall. Prior to this transaction, Lotte World Tower and Lotte World Mall were owned by Lotte P&amp;D (75%), Lotte Shopping (15%), and Hotel Lotte (10%), respectively. Lotte P&amp;D will pay 831.2 billion won to Lotte Shopping and 555.4 billion won to Hotel Lotte according to the share ratios. The acquisition date is set for 7 May. The transaction amount was determined by calculating the average appraisal values by three companies.

It was announced after the market close on 22 April that Lotte Property &amp; Development ("Lotte P&amp;D" or "Lotte Moolsan") will acquire 25% stakes of Lotte Shopping and Hotel Lotte's stakes in Lotte World Tower and Lotte World Mall for 1.4 trillion won ($1.3 billion) (including land and buildings). After this transaction, Lotte P&amp;D will have 100% stakes in Lotte World Tower and Lotte World Mall. Prior to this transaction, Lotte World Tower and Lotte World Mall were owned by Lotte P&amp;D (75%), Lotte Shopping (15%), and Hotel Lotte (10%), respectively. Lotte P&amp;D will pay 831.2 billion won to Lotte Shopping and 555.4 billion won to Hotel Lotte according to the share ratios. The acquisition date is set for 7 May. The transaction amount was determined by calculating the average appraisal values by three companies. 

Lotte P&D to Buy 25% Stakes in Lotte World Tower & Lotte World Mall for 1.4 Trillion Won - Why?

Equity Bottom-Up

<div class="content-highlight">On 8 April, <a href="https://www.smartkarma.com/entities/e-mart-inc" target="_blank" data-smartkarma-citation="entities:6993:1" rel="noopener">E Mart Inc (139480 KS)</a> double downed on the pricing war against major competitors such as <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a>. Emart started a discount strategy of providing the lowest prices versus the competitors. If the consumers find products sold at other competing e-commerce websites such as Coupang or Lotte Mall that are priced lower than the ones sold at Emart, then the difference in the amount can be accumulated as "e-money" by the Emart customers. </div>On 9 April, Kurly also announced that it will launch a new customer acquisition strategy with interesting marketing and discount promotions lasting until the end of next month. This extreme price competition by Emart, Kurly, and others will likely drive the overall industry margins even further in the next several months.<div class="content-highlight">Overall, we maintain our long-term (one year) positive view on Emart. We think that the company has been making some excellent reorganization moves and SSG.com IPO in the next one to two years is likely to surprise many investors (positively). Nonetheless, it is becoming more apparent that the price competition in the e-commerce/retail industry in Korea by major players such as Emart, Coupang, and Kurly will be getting worse in the next several months and this could negatively impact these players as well others such as <a href="https://www.smartkarma.com/entities/lotte-shopping-co" target="_blank" data-smartkarma-citation="entities:2338:1" rel="noopener">Lotte Shopping Co (023530 KS), and</a> other home shopping companies in the near term. </div>

On 8 April, E Mart Inc (139480 KS) double downed on the pricing war against major competitors such as Coupang (CPNG US). Emart started a discount strategy of providing the lowest prices versus the competitors. If the consumers find products sold at other competing e-commerce websites such as Coupang or Lotte Mall that are priced lower than the ones sold at Emart, then the difference in the amount can be accumulated as "e-money" by the Emart customers. On 9 April, Kurly also announced that it will launch a new customer acquisition strategy with interesting marketing and discount promotions lasting until the end of next month. This extreme price competition by Emart, Kurly, and others will likely drive the overall industry margins even further in the next several months.Overall, we maintain our long-term (one year) positive view on Emart. We think that the company has been making some excellent reorganization moves and SSG.com IPO in the next one to two years is likely to surprise many investors (positively). Nonetheless, it is becoming more apparent that the price competition in the e-commerce/retail industry in Korea by major players such as Emart, Coupang, and Kurly will be getting worse in the next several months and this could negatively impact these players as well others such as Lotte Shopping Co (023530 KS), and other home shopping companies in the near term. 

Emart & Kurly - Double Down On the Pricing War Against Coupang

Telco/Internet specialist

Kirk Boodry

Redex Research

<a target="_blank"></a>Coupang is by far the leader in one of the most compelling markets for eCommerce globally and one of the most attractive of the Vision Fund portfolio companies. But it is expensive: the $30 max offer price implies a 5x appreciation in value from its last private funding round in 2018 and a FY21 EV/sales multiple of 2.6x almost on par with Amazon which is a global leader in both eCommerce and cloud.  We value Coupang below the range at $26 using a 9-year DCF driven by 17% revenue CAGR and an 8% terminal OP margin.    This report includes our initial forecasts, valuation, a summary of the investment highlights and a list of questions we would ask on the roadshow.<h2>Highlights</h2>Coupang dominates a very attractive eCommerce market.  Korea scores high on two measures of eCommerce predictive success, Internet penetration and population density and Coupang is by-far the leading provider. It helps that global competition has been unable to gain traction whilst traditional retailers are smaller scale relative to other markets.eCommerce demand has accelerated as Covid-19 accelerates augments a secular shift in retail sales to online platforms.  Revenue growth expanded from 71% in Q4 19 to 100% in Q4 20 but expanding growth was a feature through 2019 as well. eCommerce penetration of c. 25% may have nearly doubled in FY20 although some of that demand shift may revert as the impact of Covid-19 fades.The company is flirting with profitability. Operating margins have moved from -30% in FY16 to -4% in FY20 with corresponding improvement in EBITDA (-30% to -3%).  In our model, we assume Coupang breaks even in FY21 although higher share-based compensation and/or higher spending as it puts IPO proceeds to work could extend that.But it is still burning a lot of cash.  Coupang might be close to break-even operationally but it has largely spent the money it received from <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>  in 2018. Over the last three years, $2.7bn has gone out the door including c. $800mn in FY20 alone (our measure of operating cash flow).Comparable valuations and relative changes to valuation highlight the premium valuation. <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a>  max offer price values the company similarly to Amazon on FY21 EV/sales (2.7x v 2.8x) but the latter is a global leader and not just in eCommerce but cloud too. Similarly, Coupang’s value appreciation from its last private funding and March 2020 lows has outpaced peer group, sometimes significantly.

Coupang is by far the leader in one of the most compelling markets for eCommerce globally and one of the most attractive of the Vision Fund portfolio companies. But it is expensive: the $30 max offer price implies a 5x appreciation in value from its last private funding round in 2018 and a FY21 EV/sales multiple of 2.6x almost on par with Amazon which is a global leader in both eCommerce and cloud.  We value Coupang below the range at $26 using a 9-year DCF driven by 17% revenue CAGR and an 8% terminal OP margin.    This report includes our initial forecasts, valuation, a summary of the investment highlights and a list of questions we would ask on the roadshow.HighlightsCoupang dominates a very attractive eCommerce market.  Korea scores high on two measures of eCommerce predictive success, Internet penetration and population density and Coupang is by-far the leading provider. It helps that global competition has been unable to gain traction whilst traditional retailers are smaller scale relative to other markets.eCommerce demand has accelerated as Covid-19 accelerates augments a secular shift in retail sales to online platforms.  Revenue growth expanded from 71% in Q4 19 to 100% in Q4 20 but expanding growth was a feature through 2019 as well. eCommerce penetration of c. 25% may have nearly doubled in FY20 although some of that demand shift may revert as the impact of Covid-19 fades.The company is flirting with profitability. Operating margins have moved from -30% in FY16 to -4% in FY20 with corresponding improvement in EBITDA (-30% to -3%).  In our model, we assume Coupang breaks even in FY21 although higher share-based compensation and/or higher spending as it puts IPO proceeds to work could extend that.But it is still burning a lot of cash.  Coupang might be close to break-even operationally but it has largely spent the money it received from Softbank Group (9984 JP)  in 2018. Over the last three years, $2.7bn has gone out the door including c. $800mn in FY20 alone (our measure of operating cash flow).Comparable valuations and relative changes to valuation highlight the premium valuation. Coupang (CPNG US)  max offer price values the company similarly to Amazon on FY21 EV/sales (2.7x v 2.8x) but the latter is a global leader and not just in eCommerce but cloud too. Similarly, Coupang’s value appreciation from its last private funding and March 2020 lows has outpaced peer group, sometimes significantly.

Coupang IPO and Softbank Group - A Vision Fund Jewel Emerges but It Is Pricey

It was announced after the market close yesterday that the minimum wage for 2021 has been determined at 8,720 won, up 1.5% YoY, which would be the lowest increase ever. From 2013 to 2021, the average annual increase in the minimum wage in Korea was 7.7% so this low increase in minimum wage rates is much lower than the historical average.There are several sectors that are clear beneficiaries of this low growth in minimum wages in 2021. One of them is the convenience stores sector, which includes <a href="https://www.smartkarma.com/entities/gs-retail-co-ltd" target="_blank" data-smartkarma-citation="entities:3867:1" rel="noopener">GS Retail (007070 KS)</a> and <a href="https://www.smartkarma.com/entities/bgf-retail-co-ltd" target="_blank" data-smartkarma-citation="entities:26731:1" rel="noopener">BGF Retail (282330 KS)</a>.In addition to the CVS sector, the following companies should also benefit from the low minimum wage growth:<ul>
<li><a href="https://www.smartkarma.com/entities/6993" target="_blank" data-smartkarma-citation="entities:6993:1" rel="noopener">E Mart Inc (139480 KS)</a></li>
<li><a href="https://www.smartkarma.com/entities/2338" target="_blank" data-smartkarma-citation="entities:2338:1" rel="noopener">Lotte Shopping Co (023530 KS)</a></li>
<li><a href="https://www.smartkarma.com/entities/cj-korea-express-corp" target="_blank" data-smartkarma-citation="entities:11557:1" rel="noopener">Cj Logistics (000120 KS)</a></li>
<li><a href="https://www.smartkarma.com/entities/20987" target="_blank" data-smartkarma-citation="entities:20987:1" rel="noopener">Shinsegae Co Ltd (004170 KS).</a></li>
<li>
<a href="https://www.smartkarma.com/entities/cj-cheiljedang-corp" target="_blank" data-smartkarma-citation="entities:1970:1" rel="noopener">CJ Cheiljedang (097950 KS)</a> </li>
</ul>

It was announced after the market close yesterday that the minimum wage for 2021 has been determined at 8,720 won, up 1.5% YoY, which would be the lowest increase ever. From 2013 to 2021, the average annual increase in the minimum wage in Korea was 7.7% so this low increase in minimum wage rates is much lower than the historical average.There are several sectors that are clear beneficiaries of this low growth in minimum wages in 2021. One of them is the convenience stores sector, which includes GS Retail (007070 KS) and BGF Retail (282330 KS).In addition to the CVS sector, the following companies should also benefit from the low minimum wage growth:
E Mart Inc (139480 KS)
Lotte Shopping Co (023530 KS)
Cj Logistics (000120 KS)
Shinsegae Co Ltd (004170 KS).

CJ Cheiljedang (097950 KS) 


A Surprising Low Increase of Minimum Wages in Korea in 2021

South Korea

Lotte Shopping Co., Ltd. operates department stores and discount stores in South Korea.  The Company retails clothing, household goods, foods and other items through several branches.  Lotte Shopping also operates supermarkets and movie theaters.

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Lotte Shopping Co (023530 KS)

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

Lotte P&D to Buy 25% Stakes in Lotte World Tower & Lotte World Mall for 1.4 Trillion Won - Why?

Lotte Property & Development will acquire 25% stakes of Lotte Shopping and Hotel Lotte's stakes in Lotte World Tower and Lotte World Mall for 1.4...

Douglas Kim

Emart & Kurly - Double Down On the Pricing War Against Coupang

On 8 April, E Mart Inc double downed on the pricing war against major competitors such as Coupang (CPNG US). Emart started a discount strategy of...

Douglas Kim

Coupang IPO and Softbank Group - A Vision Fund Jewel Emerges but It Is Pricey

Coupang's IPO is a win for the company and its largest holder Softbank but the max offer price of $30 is too pricey - we think it is worth closer...

Kirk Boodry

A Surprising Low Increase of Minimum Wages in Korea in 2021

It was announced after the market close yesterday that the minimum wage for 2021 has been determined at 8,720 won, up 1.5% YoY, which would be the...

Douglas Kim

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