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

SK Telecom made another surprising announcement. It just said that it would cancel 8.7M treasury shares (all of them are ordinary shares) on May 6.They represent 10.76% of the total shares and 90.61% of the current treasury shares. They are worth ₩2.64T at the last close. After this cancellation, SKT's treasury shareholding comes down to only 900,000 shares, representing a meager 1.11% of the shares outstanding.<table class="table table-striped">
<colgroup>
<col width="300">
<col width="300">
</colgroup>
<tbody>
<tr><td colspan="2" style="width: 723.636px;" data-sheets-value='{"1":2,"2":"Cancellation overview (₩B)"}'>Cancellation overview</td></tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Shares outstanding"}'>Shares outstanding</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":80745711}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=sum(R[1]C[0]:R[2]C[0])">80,745,711</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Treasury shares"}'>Treasury shares</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":9585568}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=sum(R[1]C[0]:R[2]C[0])">9,585,568</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Target qty."}'>Target quantity for cancellation</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":8685568}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=R[2]C[0]">8,685,568</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of SO"}'>- % of shares outstanding</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":0.10756692699132961}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[-1]C[0]/R[-7]C[0]">10.76%</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of common treasury shares"}'>- % of treasury shares</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":0.9061088503049585}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[-2]C[0]/R[-6]C[0]">90.61%</td>
</tr>
<tr>
<td style="width: 351.818px;">Shares outstanding after cancellation</td>
<td style="text-align: right; width: 350.909px;">72,060,143</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":"Treasury shares after cancellation"}'>Treasury shares after cancellation</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":900000}' data-sheets-numberformat='{"1":2,"2":"#,##0"}' data-sheets-formula="=R[-11]C[0]-R[-6]C[0]">900,000</td>
</tr>
<tr>
<td style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of SO"}'>- % of SO</td>
<td style="text-align: right; width: 350.909px;" data-sheets-value='{"1":3,"3":0.011146102856162849}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[-1]C[0]/R[-15]C[0]">1.25%</td>
</tr>
<tr><td colspan="2" style="width: 351.818px;" data-sheets-value='{"1":2,"2":" - % of pref"}'>Source: DART</td></tr>
</tbody>
</table>Why canceling shares now?<ul>
<li>SKT's treasury shares should come in handy for an eventual merger with SK Holdings. So, the initial speculation was transferring all the treasury shares to SKT intermediary Holdco so that SK Holdings can enjoy an increased amount of voting shares in SKT Opco after a merger.</li>
<li>That means, if there is no such merger in the future, SKT's treasury shares would not be much of use. The announced split is an equity spinoff, but this isn't a typical holding company conversion requiring a post-split tender offer to move SKT Opco under SKT intermediary Holdco. That is, these treasury shares regaining voting rights for SKT Opco wouldn't mean much for the major shareholder.</li>
<li>So, keeping the treasury shares can send a wrong signal to SKT shareholders that a merger with SK Holdings may not be completely thrown away even though the management confirmed no such plan.</li>
<li>Obviously, the short-term priority is getting approval on the split from SKT shareholders, and anything that may impede it should be addressed now.</li>
</ul>

SK Telecom made another surprising announcement. It just said that it would cancel 8.7M treasury shares (all of them are ordinary shares) on May 6.They represent 10.76% of the total shares and 90.61% of the current treasury shares. They are worth ₩2.64T at the last close. After this cancellation, SKT's treasury shareholding comes down to only 900,000 shares, representing a meager 1.11% of the shares outstanding.





Cancellation overview

Shares outstanding
80,745,711


Treasury shares
9,585,568


Target quantity for cancellation
8,685,568


- % of shares outstanding
10.76%


- % of treasury shares
90.61%


Shares outstanding after cancellation
72,060,143


Treasury shares after cancellation
900,000


- % of SO
1.25%

Source: DART

Why canceling shares now?
SKT's treasury shares should come in handy for an eventual merger with SK Holdings. So, the initial speculation was transferring all the treasury shares to SKT intermediary Holdco so that SK Holdings can enjoy an increased amount of voting shares in SKT Opco after a merger.
That means, if there is no such merger in the future, SKT's treasury shares would not be much of use. The announced split is an equity spinoff, but this isn't a typical holding company conversion requiring a post-split tender offer to move SKT Opco under SKT intermediary Holdco. That is, these treasury shares regaining voting rights for SKT Opco wouldn't mean much for the major shareholder.
So, keeping the treasury shares can send a wrong signal to SKT shareholders that a merger with SK Holdings may not be completely thrown away even though the management confirmed no such plan.
Obviously, the short-term priority is getting approval on the split from SKT shareholders, and anything that may impede it should be addressed now.


SK Telecom Share Cancellation: Why Doing It Now & Potential Impacts

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<a href="https://www.smartkarma.com/entities/sk-telecom-co-ltd-bbccd86c-474d-4a4d-946d-10e911a225a2" target="_blank" data-smartkarma-citation="entities:395:1" rel="noopener">SK Telecom (017670 KS)</a><a href="https://finance.naver.com/item/news_read.nhn?article_id=0003905702&amp;office_id=011&amp;code=017670&amp;sm=title_entity_id.basic" target="_blank" rel="noopener">announced</a> this morning that it will cancel 2.6 trillion won worth of treasury shares (8,685,568 shares, representing 10.8% of total shares outstanding). We believe this is a tremendous willingness of the company to improve shareholder value of the company. We believe this move will have a major positive impact on the SK Telecom's share price. This is the second largest ever cancellation of treasury shares by a Korean company (after Samsung Electronics). This massive treasury share cancellation will result in increasing the respective ownership stakes by the existing shareholders as well as improve the overall long-term ROE of the company and returns on capital. The cancellation of the treasury shares is expected to take place on 6 May 2021. Currently, SK Telecom has 9,418,558 treasury shares. <div class="content-highlight">
SK Telecom is currently trading at 12.3x P/E (2021E). In the past two years, SK Telecom's shares have traded at an average P/E of 17.1x. The combination of the tremendous treasury shares cancellation as well as the expectation of the holdco structure are likely to lead to many investors willing to attach higher valuation multiples.
If we attach a 17.1x P/E multiple to 2021 earnings, it would suggest a market cap of 34.4 trillion won or 426,000 won, which would be 40% upside from current levels. Given these positives, SK Telecom remains a Strong Buy.
</div>

SK Telecom (017670 KS)announced this morning that it will cancel 2.6 trillion won worth of treasury shares (8,685,568 shares, representing 10.8% of total shares outstanding). We believe this is a tremendous willingness of the company to improve shareholder value of the company. We believe this move will have a major positive impact on the SK Telecom's share price. This is the second largest ever cancellation of treasury shares by a Korean company (after Samsung Electronics). This massive treasury share cancellation will result in increasing the respective ownership stakes by the existing shareholders as well as improve the overall long-term ROE of the company and returns on capital. The cancellation of the treasury shares is expected to take place on 6 May 2021. Currently, SK Telecom has 9,418,558 treasury shares. 
SK Telecom is currently trading at 12.3x P/E (2021E). In the past two years, SK Telecom's shares have traded at an average P/E of 17.1x. The combination of the tremendous treasury shares cancellation as well as the expectation of the holdco structure are likely to lead to many investors willing to attach higher valuation multiples.
If we attach a 17.1x P/E multiple to 2021 earnings, it would suggest a market cap of 34.4 trillion won or 426,000 won, which would be 40% upside from current levels. Given these positives, SK Telecom remains a Strong Buy.


SK Telecom: A Massive Treasury Shares Cancellation - Watching Paint Dry No More!

<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

Founder/CEO of ROK Advisory, ROK Advisory LLC

Ken S. Kim

Founder/CEO of ROK Advisory

ROK Advisory LLC

ROK is an independent research advisory firm. We guide you to minimize the information gap between foreign and local investors in Northeast Asia with a focus in Korea, Taiwan and Japan.

Independent Research Advisory Firm

Equity Bottom-Up

In Korea the safest way to invest is to align your interest as a minority shareholder with those of the family?  Usually the key asset of the chaebol is apparent but what about SK Group? It seems we have an opportunity to hone in what the key asset is.

In Korea the safest way to invest is to align your interest as a minority shareholder with those of the family?  Usually the key asset of the chaebol is apparent but what about SK Group? It seems we have an opportunity to hone in what the key asset is.

The Chaebol Dilemma - What's the Family Jewel(S)?

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Last Week in Event SPACE: Toshiba, Grab, Huarong, Invesco Office, Intouch, Jardines

South Korea

SK Telecom Co., Ltd. is a Korean mobile and telecommunications operator. The Company provides cellular voice, wireless data, and wireless internet services. SK Telecom also offers fixed line services and platform services.

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SK Telecom (017670 KS)

SK Telecom: A Massive Treasury Shares Cancellation - Watching Paint Dry No More!

SK Telecom (017670 KS) announced this morning that it will cancel 2.6 trillion won worth of treasury shares (8,685,568 shares, representing 10.8%...

Douglas Kim

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

The Chaebol Dilemma - What's the Family Jewel(S)?

What is the key asset of the SK Group and how should we play this over the course of time ? Here's at least what we should consider

Ken S. Kim

Last Week in Event SPACE: Toshiba, Grab, Huarong, Invesco Office, Intouch, Jardines

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

SK Telecom Share Cancellation: Why Doing It Now & Potential Impacts

SK Telecom made a huge treasury share cancellation announcement this morning. This post discusses why doing it now and examines potential impacts.

Sanghyun Park

SK Telecom: A Massive Treasury Shares Cancellation - Watching Paint Dry No More!

SK Telecom (017670 KS) announced this morning that it will cancel 2.6 trillion won worth of treasury shares (8,685,568 shares, representing 10.8%...

Douglas Kim

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

The Chaebol Dilemma - What's the Family Jewel(S)?

What is the key asset of the SK Group and how should we play this over the course of time ? Here's at least what we should consider

Ken S. Kim

Last Week in Event SPACE: Toshiba, Grab, Huarong, Invesco Office, Intouch, Jardines

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett