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

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Event-Driven

Daelim Industrial announces a three-way demerger plan.It is part of the long-planned and anticipated holding company conversion reorganization.First, Daelim Industrial undergoes an equity spin-off at a split ratio of 0.44 to 0.56. As a result, we will have two separate entities: 1. DL Corp (holding company) and 2. DL E&amp;C (operating company - construction).Second, Daelim then spins out the petrochemical unit in the form of physical division. This newly spun-out company, DL Chemical, will become a wholly-owned subsidiary of DL Corp.<table class="table table-striped">
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<tr><td colspan="4" rowspan="1" data-sheets-value='{"1":2,"2":"Overview"}'>Overview</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Name"}'>Name</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Daelim Industrial Co Ltd"}' data-sheets-formula='=googlefinance(R[1]C[0], "name")'>Daelim Industrial Co Ltd</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Ticker"}'>Ticker</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"000210"}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula='="000210"'>000210</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Surviving"}'>Surviving</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"DL Corp"}'>DL Corp</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Ticker"}'>- Ticker</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"000210"}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[-2]C[0]">000210</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Bourse"}'>- Bourse</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"KOSPI"}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>KOSPI</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Ratio"}'>- Ratio</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":3,"3":0.4437144}' data-sheets-numberformat='{"1":3,"2":"0.00000%","3":1}'>44.37144%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Type"}'>- Type</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Holding company"}'>Holding company</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Business"}'>- Business</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Subsidiary management &amp; investment"}'>Subsidiary management &amp; investment</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Stock split"}'>- Stock split</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":3,"3":1}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}'>1.0</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"New 1"}'>New 1</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"DL E&amp;C Corp"}'>DL E&amp;C Corp</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Type"}'>- Type</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Equity spin-off"}'>Equity spin-off</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Ticker"}'>- Ticker</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"TBA"}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>TBA</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Bourse"}'>- Bourse</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"KOSPI"}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>KOSPI</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Ratio"}'>- Ratio</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":3,"3":0.5562856}' data-sheets-numberformat='{"1":3,"2":"0.00000%","3":1}'>55.62856%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Type"}'>- Type</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Operating company"}'>Operating company</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Business"}'>- Business</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Construction"}'>Construction</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Stock split"}'>- Stock split</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":3,"3":1}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}'>1.0</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"New 2"}'>New 2</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"DL Chemical Corp"}'>DL Chemical Corp</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Type"}'>- Type</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Spin-out (physical division)"}'>Spin-out (physical division)</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Ticker"}'>- Ticker</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"N/A"}'>N/A</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Bourse"}'>- Bourse</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"N/A"}'>N/A</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Ratio"}'>- Ratio</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"N/A"}'>N/A</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Type"}'>- Type</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Operating company"}'>Operating company</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Business"}'>- Business</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"Petro chemical"}'>Petrochemical</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Stock split"}'>- Stock split</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":3,"3":1}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}'>1.0</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stock purchase"}'>Stock purchase</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"N/A"}' data-sheets-numberformat='{"1":2,"2":"#,##0.0000000","3":1}'>N/A</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Banker"}'>Banker</td>
<td colspan="3" rowspan="1" style="text-align: right;" data-sheets-value='{"1":2,"2":"N/A"}' data-sheets-numberformat='{"1":2,"2":"#,##0.0000000","3":1}'>N/A</td>
</tr>
<tr><td colspan="4" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART"}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>Source: DART</td></tr>
</tbody>
</table><table class="table table-striped">
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<td data-sheets-value='{"1":2,"2":"Financials - 3Q19 (₩ bil)"}'>Financials - 3Q19 (₩ bil)</td>
<td style="text-align: right;" data-sheets-formula="=R[-67]C[-1]" data-sheets-value='{"1":2,"2":"Surviving"}'>Surviving</td>
<td style="text-align: right;" data-sheets-formula="=R[-60]C[-2]" data-sheets-value='{"1":2,"2":"New 1"}'>New 1</td>
<td style="text-align: right;" data-sheets-formula="=R[-52]C[-3]" data-sheets-value='{"1":2,"2":"New 2"}'>New 2</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Name"}'>Name</td>
<td style="text-align: right;" data-sheets-formula="=R[-68]C[0]" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":2,"2":"DL Corp"}'>DL Corp</td>
<td style="text-align: right;" data-sheets-formula="=R[-61]C[-1]" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":2,"2":"DL E&amp;C Corp"}'>DL E&amp;C Corp</td>
<td style="text-align: right;" data-sheets-formula="=R[-53]C[-2]" data-sheets-value='{"1":2,"2":"DL Chemical Corp"}'>DL Chemical Corp</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Split type"}'>Split type</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":2,"2":"-"}'>-</td>
<td style="text-align: right;" data-sheets-formula="=R[-61]C[-1]" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":2,"2":"Equity spin-off"}'>Equity spin-off</td>
<td style="text-align: right;" data-sheets-formula="=R[-53]C[-2]" data-sheets-value='{"1":2,"2":"Spin-out (physical division)"}'>Spin-out (physical division)</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Total assets"}'>Total assets</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":3292.553730996}'>3,292.6</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":6339.708505598}'>6,339.7</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":1385.835086962}'>1,385.8</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Total liabilities"}'>Total liabilities</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":718.549764572}'>718.5</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":3112.674847365}'>3,112.7</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":572.053354996}'>572.1</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Total equity"}'>Total equity</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":2574.003966424}'>2,574.0</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":3227.033658233}'>3,227.0</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":813.781731966}'>813.8</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Capital"}'>- Capital</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":111.136885}'>111.1</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":107.363115}'>107.4</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":30}'>30.0</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Split ratio"}'>Split ratio</td>
<td style="text-align: right;" data-sheets-formula="=R[-71]C[0]" data-sheets-numberformat='{"1":3,"2":"0.00000%"}' data-sheets-value='{"1":3,"3":0.4437144}'>44.37144%</td>
<td style="text-align: right;" data-sheets-formula="=R[-63]C[-1]" data-sheets-numberformat='{"1":3,"2":"0.00000%"}' data-sheets-value='{"1":3,"3":0.5562856}'>55.62856%</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"FY19 de-consolidated sales"}'>FY19 de-consolidated sales</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":19.425641927}'>19.4</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":6213.26356221}'>6,213.3</td>
<td style="text-align: right;" data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-value='{"1":3,"3":1115.058658494}'>1,115.1</td>
</tr>
<tr><td colspan="4" rowspan="1" data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}' data-sheets-value='{"1":2,"2":"Source: DART"}'>Source: DART</td></tr>
</tbody>
</table>There is no appraisal right. But it still requires shareholder approval.The shareholder meeting is on December 4. Upon approval, the stock trading will get suspended from December 29 to January 22. The trading will resume on January 25.<table class="table table-striped">
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<tr><td colspan="4" rowspan="1" style="width: 723.727px;" data-sheets-note="Sang Hyun Park: We have to buy shares until BOD+1 and hold onto them until the day immediately before the ex-rights date to be eligible to receive stock purchase rights. We then have to notify our dissenting opinion until the end of dissenting opinion notice period." data-sheets-value='{"1":2,"2":"Timetable"}'>Timetable</td></tr>
<tr>
<td style="width: 278.542px;" data-sheets-value='{"1":2,"2":"BOD meeting"}'>BOD meeting</td>
<td colspan="3" rowspan="1" style="text-align: right; width: 424.468px;" data-sheets-numberformat='{"1":5,"2":"[$-1009]mmmm\\ d\\,\\ yyyy","3":1}' data-sheets-value='{"1":3,"3":44084}'>September 10, 2020</td>
</tr>
<tr>
<td style="width: 278.542px;" data-sheets-value='{"1":2,"2":"Shareholder approval at EGM"}'>Shareholder approval at EGM</td>
<td colspan="3" rowspan="1" style="text-align: right; width: 424.468px;" data-sheets-numberformat='{"1":5,"2":"[$-1009]mmmm\\ d\\,\\ yyyy","3":1}' data-sheets-value='{"1":3,"3":44169}'>December 4, 2020</td>
</tr>
<tr>
<td style="width: 278.542px;" data-sheets-value='{"1":2,"2":"Trade suspension begins"}'>Trade suspension begins</td>
<td colspan="3" rowspan="1" style="text-align: right; width: 424.468px;" data-sheets-numberformat='{"1":5,"2":"[$-1009]mmmm\\ d\\,\\ yyyy","3":1}' data-sheets-value='{"1":3,"3":44194}'>December 29, 2020</td>
</tr>
<tr>
<td style="width: 278.542px;" data-sheets-value='{"1":2,"2":"Trade suspension ends"}'>Trade suspension ends</td>
<td colspan="3" rowspan="1" style="text-align: right; width: 424.468px;" data-sheets-numberformat='{"1":5,"2":"[$-1009]mmmm\\ d\\,\\ yyyy","3":1}' data-sheets-value='{"1":3,"3":44218}'>January 22, 2021</td>
</tr>
<tr>
<td style="width: 278.542px;" data-sheets-value='{"1":2,"2":"Re-listing"}'>Re-listing</td>
<td colspan="3" rowspan="1" style="text-align: right; width: 424.468px;" data-sheets-numberformat='{"1":5,"2":"[$-1009]mmmm\\ d\\,\\ yyyy","3":1}' data-sheets-value='{"1":3,"3":44221}'>January 25, 2021</td>
</tr>
<tr><td colspan="4" rowspan="1" style="width: 723.727px;" data-sheets-value='{"1":2,"2":"Source: DART"}'>Source: DART</td></tr>
</tbody>
</table>

Daelim Industrial announces a three-way demerger plan.It is part of the long-planned and anticipated holding company conversion reorganization.First, Daelim Industrial undergoes an equity spin-off at a split ratio of 0.44 to 0.56. As a result, we will have two separate entities: 1. DL Corp (holding company) and 2. DL E&amp;C (operating company - construction).Second, Daelim then spins out the petrochemical unit in the form of physical division. This newly spun-out company, DL Chemical, will become a wholly-owned subsidiary of DL Corp.







Overview

Name
Daelim Industrial Co Ltd


Ticker
000210


Surviving
DL Corp


- Ticker
000210


- Bourse
KOSPI


- Ratio
44.37144%


- Type
Holding company


- Business
Subsidiary management &amp; investment


- Stock split
1.0


New 1
DL E&amp;C Corp


- Type
Equity spin-off


- Ticker
TBA


- Bourse
KOSPI


- Ratio
55.62856%


- Type
Operating company


- Business
Construction


- Stock split
1.0


New 2
DL Chemical Corp


- Type
Spin-out (physical division)


- Ticker
N/A


- Bourse
N/A


- Ratio
N/A


- Type
Operating company


- Business
Petrochemical


- Stock split
1.0


Stock purchase
N/A


Banker
N/A

Source: DART










Financials - 3Q19 (₩ bil)
Surviving
New 1
New 2


Name
DL Corp
DL E&amp;C Corp
DL Chemical Corp


Split type
-
Equity spin-off
Spin-out (physical division)


Total assets
3,292.6
6,339.7
1,385.8


Total liabilities
718.5
3,112.7
572.1


Total equity
2,574.0
3,227.0
813.8


- Capital
111.1
107.4
30.0


Split ratio
44.37144%
55.62856%
-


FY19 de-consolidated sales
19.4
6,213.3
1,115.1

Source: DART

There is no appraisal right. But it still requires shareholder approval.The shareholder meeting is on December 4. Upon approval, the stock trading will get suspended from December 29 to January 22. The trading will resume on January 25.







Timetable

BOD meeting
September 10, 2020


Shareholder approval at EGM
December 4, 2020


Trade suspension begins
December 29, 2020


Trade suspension ends
January 22, 2021


Re-listing
January 25, 2021

Source: DART



Daelim Industrial Divestiture: Terms & Trading Situations (1P Diversion)

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

MSCI Emerging Markets Index / Technical Analysis

Global equities continue to trend higher following breakouts that have occurred during the past two weeks. Over this timeframe we have been recommending adding exposure to cyclical Sectors and, despite them getting near-term extended, we believe these upside moves are likely just getting going. Additionally, the US dollar is breaking below support and EM equities are breaking above resistance, only adding to our bullish outlook on global equities. We highlight actionable set-ups within the Consumer Discretionary, Global Real Estate and Utilities Sectors.

Global equities continue to trend higher following breakouts that have occurred during the past two weeks. Over this timeframe we have been recommending adding exposure to cyclical Sectors and, despite them getting near-term extended, we believe these upside moves are likely just getting going. Additionally, the US dollar is breaking below support and EM equities are breaking above resistance, only adding to our bullish outlook on global equities. We highlight actionable set-ups within the Consumer Discretionary, Global Real Estate and Utilities Sectors.

Global Equity Strategy: Still Bullish, But Extended Near-Term

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

In this upcoming Smartkarma Webinar, <a href="https://www.smartkarma.com/profiles/yeaseul-lim" target="_blank" data-smartkarma-citation="accounts:9306" rel="noopener">Yeaseul Lim</a> will discuss recent developments on the corporate governance front in South Korea, including changes in South Korea's beneficial ownership rules and the NPS' guidelines on stewardship and governance. The webinar will be held on 26 February 2020 at 1700hrs Singapore/Hong Kong time.

In this upcoming Smartkarma Webinar, Yeaseul Lim will discuss recent developments on the corporate governance front in South Korea, including changes in South Korea's beneficial ownership rules and the NPS' guidelines on stewardship and governance. The webinar will be held on 26 February 2020 at 1700hrs Singapore/Hong Kong time.

Smartkarma Webinar | Corporate Governance in South Korea

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

Preferred shares in Korea have historically traded at a discount. At times the discount has been so wide that funds have been set up just to invest in Korean preferred shares. What makes the trade attractive are the low valuations of Korean stocks, the discount on the preferred shares and the higher dividend on preferred shares compared to common shares.This year, the discount on a few preferred shares has tightened noticeably accompanied by a big pick up in trading volume. There have also been some huge moves in some of the preferred shares as corporate boardroom battles pick up.In this Insight, we look at a few names where the preferred shares have significantly outperformed the common shares year to date and recommend a basket of preferred shares that trade at a big discount to the common shares while sporting significantly higher dividend yields.

Preferred shares in Korea have historically traded at a discount. At times the discount has been so wide that funds have been set up just to invest in Korean preferred shares. What makes the trade attractive are the low valuations of Korean stocks, the discount on the preferred shares and the higher dividend on preferred shares compared to common shares.This year, the discount on a few preferred shares has tightened noticeably accompanied by a big pick up in trading volume. There have also been some huge moves in some of the preferred shares as corporate boardroom battles pick up.In this Insight, we look at a few names where the preferred shares have significantly outperformed the common shares year to date and recommend a basket of preferred shares that trade at a big discount to the common shares while sporting significantly higher dividend yields. 

Korea Preferred Shares - Liquidity Picks Up Amid Some Big Moves

Korea Event-Driven and Corporate Governance, DewPoint Research

Yeaseul Lim

Korea Event-Driven and Corporate Governance

Independent Equity Research Provider - South Korea

DewPoint Research

At DewPoint, we aim to convey a clear understanding of a company’s approach to capital allocation. As a matter of corporate governance, capital allocation reflects whose interests a company prioritizes when making management decisions. Given the Korean context, it comes down to a question of whether the company undermines the interests of minority shareholders for private benefits of controlling shareholders. This is what we focus on as a fundamental starting point in our research.
 
Capital allocation principles and practices provide the foundation for a company’s sustainable value creation. Thus, investors need to be alert to any possible distortions in capital allocation, especially when they take a long-term perspective. They also want to find safe stocks with committed management, no separation between ownership and control, and robust business models. We seek to fulfill such needs in a disciplined manner.
 
We also work as a representative of foreign investors who are willing to exercise active ownership in their investee companies. Our service may include identifying stocks that are fundamentally strong but vulnerable to activist attacks.

The amended Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea (the "Capital Markets Act") went into effect starting on February 1, 2020. One major change made by this amendment (Article 154) is the clarification and improvement of the beneficial ownership disclosure rule which is a so-called "5% rule" in Korea. We think that this latest amendment provides a legal basis for institutional investor activism in South Korea.
The substantial shareholders whose minimum shareholding is 5 percent are required to disclose information including their investment intentions whether or not to influence company management and policies. Before the amendment, it was not clear whether institutional investors should be regarded as having an intention to influence management when exercising stewardship responsibilities such as publicly sending letters to management and filing shareholder proposals to (i) raise dividends, (ii) limit CEO pay, and/or (iii) dismiss directors who were found guilty of illegally damaging the firm. However, this latest amendment finally clarified it by creating a new criterion that is no longer categorized as either "influencing management" or "just a simple portfolio investment". And then, it moved the aforementioned stewardship activities to this new category, which we named "investment with limited stewardship". 
In our previous insight <a href="https://www.smartkarma.com/insights/two-notable-changes-in-national-pension-service-of-korea-activism-guideline-and-delegation-of-votes" target="_blank" data-smartkarma-citation="insights:36290" rel="noopener">Two Notable Changes in National Pension Service of Korea: Activism Guideline and Delegation of Votes</a>, we noted that NPS would pay particular attention to three major issues - (i) dividend policy, (ii) executive compensation scheme, and (iii) qualifications of directors - which are all closely linked to a company's approach to capital allocation. The amended Capital Markets Act empowers institutional investors to exert more pressure on boards to resolve the exact same issues from (i) to (iii) as we described above. 
<blockquote>
Just a few clarifications. Regarding (i) dividend and (ii) executive compensation issues, it is true that the amended Capital Markets Act newly allowed institutional investors to exercise minority shareholder rights conferred by the law without changing their investment intentions to "influencing management". However, state-run pension funds have already been allowed to do so even before the amendment. Also, this amendment added one clarifying sentence to Article 154-1, which stipulates that investors are now allowed to exercise minority shareholder rights to dismiss directors who were convicted of illegal actions and/or bringing irrecoverable damages to the company. Some local media reported that this is a major change, but this is not true. Article 385-2 and Article 402 of the Commercial Act of Korea have already provided such exception. That is, this latest revision of the Capital Markets Act aims at making those two Acts consistent with each other so that investors can be more vocal about (iii) qualifications of directors with no worries over conflicts of law. 
</blockquote>
As of February 7, 2020, NPS and a few value-oriented institutional investors changed their investment intentions from "simple portfolio investment" to "investment with limited stewardship" for some of their invested stocks. We listed those stocks in the Detail section. We selected <a href="https://www.smartkarma.com/entities/daelim-industrial-co-ltd" target="_blank" data-smartkarma-citation="entities:18095:1" rel="noopener">Daelim Industrial (000210 KS)</a> as a primary entity of our insight because it is highly likely that NPS files shareholder proposals to raise its dividends and/or to remove Lee Hae-wook on the board. Though Lee Hae-wook is not yet convicted illegally damaging the firm, he is facing trial for alleged embezzlement and breach of duty on April 21, 2020. NPS holds 12.82% in <a href="https://www.smartkarma.com/entities/daelim-industrial-co-ltd" target="_blank" data-smartkarma-citation="entities:18095:1" rel="noopener">Daelim Industrial (000210 KS).</a>
<hr>
Here is a summary of the key changes.
<ul>
<li>Institutional investors are required to report their investment intentions based on three criteria - (i) simple portfolio investment, (ii) investment with limited stewardship, and (iii) influencing management. The first two purposes are NOT considered to influence decision making of management, and thus, less strict rules on disclosure are applied. 
</li>
<li>
ALL stewardship activities that are not specified as "influencing management" in the Article 154-1 are now considered as "not influencing management". 
</li>
</ul>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="2" style="text-align: center; width: 229px;">Investment Purpose</td>
<td style="text-align: center; width: 474px;">Key Issues to Address </td>
</tr>
<tr>
<td colspan="2" style="text-align: center; width: 229px;">Influencing Management</td>
<td style="width: 474px;">
<ul>
<li>Resignation and dismissal of directors </li>
<li>Mergers and spin-offs</li>
<li>Acquisitions and transfer of business</li>
<li>Purchase and disposal of assets</li>
<li>Changes in Articles of Incorporation</li>
<li>Changes in share capital</li>
<li>Leasing all businesses or delegating business administration or entirely sharing the profit and loss with another person or entity</li>
<li>Dissolution of the company</li>
</ul>
*Regarding all the above issues, there are some conditions where an exception occurs. We elaborate on that in the Detail section. 
</td>
</tr>
<tr>
<td rowspan="2" style="text-align: center; width: 89px;">Not Seeking to Influence Management</td>
<td style="text-align: center; width: 119px;">Investment with Limited Stewardship</td>
<td style="width: 474px;">
All issues that are not specified in either investment purposes, which include:

<ul>
<li>Dividend raises </li>
<li>Executive compensation scheme </li>
<li>Resignation and dismissal of directors only when they were found guilty of illegally damaging corporate value (based on the Commercial Act of Korea)</li>
</ul>
</td>
</tr>
<tr>
<td style="text-align: center; width: 119px;">Simple Portfolio Investment</td>
<td style="width: 474px;">
The most basic rights granted to shareholders no matter how many shares they own, such as: 

<ul>
<li>Voting rights</li>
<li>Dividend rights </li>
<li>Rights offering </li>
</ul>
</td>
</tr>
</tbody>
</table>
<ul>
<li>Institutional investors (including state-run pension funds) are allowed to exercise minority shareholder rights to make changes to Articles of Incorporation of companies only when they target ALL companies in their portfolios based on the principles that are publicly disclosed.</li>
<li>
Institutional investors are not required to change their investment intentions to "influencing management" when they send shareholder letters or publicly deliver their opinions to companies. However,  they have to do so when soliciting other minority shareholder to exercise voting rights by proxy to vote for or against the resolutions.</li>
<li>The amendment requires institutional investors whose investment purpose is "simple portfolio investment" to submit an official document that promises to only exercise the basic rights of shareholders. Otherwise, they should change their investment purpose to "investment with limited stewardship". Recently, NPS and other institutional investors made such changes. Those updated disclosures indicate that they will exert more pressure on boards.  
</li>
</ul>

The amended Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea (the "Capital Markets Act") went into effect starting on February 1, 2020. One major change made by this amendment (Article 154) is the clarification and improvement of the beneficial ownership disclosure rule which is a so-called "5% rule" in Korea. We think that this latest amendment provides a legal basis for institutional investor activism in South Korea.
The substantial shareholders whose minimum shareholding is 5 percent are required to disclose information including their investment intentions whether or not to influence company management and policies. Before the amendment, it was not clear whether institutional investors should be regarded as having an intention to influence management when exercising stewardship responsibilities such as publicly sending letters to management and filing shareholder proposals to (i) raise dividends, (ii) limit CEO pay, and/or (iii) dismiss directors who were found guilty of illegally damaging the firm. However, this latest amendment finally clarified it by creating a new criterion that is no longer categorized as either "influencing management" or "just a simple portfolio investment". And then, it moved the aforementioned stewardship activities to this new category, which we named "investment with limited stewardship". 
In our previous insight Two Notable Changes in National Pension Service of Korea: Activism Guideline and Delegation of Votes, we noted that NPS would pay particular attention to three major issues - (i) dividend policy, (ii) executive compensation scheme, and (iii) qualifications of directors - which are all closely linked to a company's approach to capital allocation. The amended Capital Markets Act empowers institutional investors to exert more pressure on boards to resolve the exact same issues from (i) to (iii) as we described above. 

Just a few clarifications. Regarding (i) dividend and (ii) executive compensation issues, it is true that the amended Capital Markets Act newly allowed institutional investors to exercise minority shareholder rights conferred by the law without changing their investment intentions to "influencing management". However, state-run pension funds have already been allowed to do so even before the amendment. Also, this amendment added one clarifying sentence to Article 154-1, which stipulates that investors are now allowed to exercise minority shareholder rights to dismiss directors who were convicted of illegal actions and/or bringing irrecoverable damages to the company. Some local media reported that this is a major change, but this is not true. Article 385-2 and Article 402 of the Commercial Act of Korea have already provided such exception. That is, this latest revision of the Capital Markets Act aims at making those two Acts consistent with each other so that investors can be more vocal about (iii) qualifications of directors with no worries over conflicts of law. 

As of February 7, 2020, NPS and a few value-oriented institutional investors changed their investment intentions from "simple portfolio investment" to "investment with limited stewardship" for some of their invested stocks. We listed those stocks in the Detail section. We selected Daelim Industrial (000210 KS) as a primary entity of our insight because it is highly likely that NPS files shareholder proposals to raise its dividends and/or to remove Lee Hae-wook on the board. Though Lee Hae-wook is not yet convicted illegally damaging the firm, he is facing trial for alleged embezzlement and breach of duty on April 21, 2020. NPS holds 12.82% in Daelim Industrial (000210 KS).

Here is a summary of the key changes.

Institutional investors are required to report their investment intentions based on three criteria - (i) simple portfolio investment, (ii) investment with limited stewardship, and (iii) influencing management. The first two purposes are NOT considered to influence decision making of management, and thus, less strict rules on disclosure are applied. 


ALL stewardship activities that are not specified as "influencing management" in the Article 154-1 are now considered as "not influencing management". 





Investment Purpose
Key Issues to Address 


Influencing Management


Resignation and dismissal of directors 
Mergers and spin-offs
Acquisitions and transfer of business
Purchase and disposal of assets
Changes in Articles of Incorporation
Changes in share capital
Leasing all businesses or delegating business administration or entirely sharing the profit and loss with another person or entity
Dissolution of the company

*Regarding all the above issues, there are some conditions where an exception occurs. We elaborate on that in the Detail section. 



Not Seeking to Influence Management
Investment with Limited Stewardship

All issues that are not specified in either investment purposes, which include:


Dividend raises 
Executive compensation scheme 
Resignation and dismissal of directors only when they were found guilty of illegally damaging corporate value (based on the Commercial Act of Korea)




Simple Portfolio Investment

The most basic rights granted to shareholders no matter how many shares they own, such as: 


Voting rights
Dividend rights 
Rights offering 






Institutional investors (including state-run pension funds) are allowed to exercise minority shareholder rights to make changes to Articles of Incorporation of companies only when they target ALL companies in their portfolios based on the principles that are publicly disclosed.

Institutional investors are not required to change their investment intentions to "influencing management" when they send shareholder letters or publicly deliver their opinions to companies. However,  they have to do so when soliciting other minority shareholder to exercise voting rights by proxy to vote for or against the resolutions.
The amendment requires institutional investors whose investment purpose is "simple portfolio investment" to submit an official document that promises to only exercise the basic rights of shareholders. Otherwise, they should change their investment purpose to "investment with limited stewardship". Recently, NPS and other institutional investors made such changes. Those updated disclosures indicate that they will exert more pressure on boards.  



Key Changes In South Korea's Beneficial Ownership Disclosure Rule: Legal Basis For Activism

South Korea

DL Holdings Co., Ltd. provides civil engineering, architectural, and plant construction services. The Company constructs bridges, highways, tunnels, harbors, and governmental buildings. DL also manufactures petrochemical products , including polyester, benzene, butane, and methyl tertiary butyl ether (MTBE).

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