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

<ul>
<li>KOSPI Size Index Series rebalances twice a year in March and September. The base date is February 28. It is a three-month review, so, from December 1 to February 28.</li>
<li>In the KOSPI size index rebalancing, an increase in the buying volume of local institutions for stocks moving from LargeCap to MidCap is generally detected. </li>
<li>14 new MidCap entrants are expected to have a sizable passive impact.</li>
</ul>


KOSPI Size Index Series rebalances twice a year in March and September. The base date is February 28. It is a three-month review, so, from December 1 to February 28.
In the KOSPI size index rebalancing, an increase in the buying volume of local institutions for stocks moving from LargeCap to MidCap is generally detected. 
14 new MidCap entrants are expected to have a sizable passive impact.


KOSPI Size Index Series Rebalancing Screening Results

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

<ul>
<li>The family of the accused has said that the embezzlement was not an act of one man but due to orders taken from superiors.</li>
<li>The recovery shoudn't be an issue as the accused had bought in gold in Dec and Dongjin Chem has not had a substantial drop for the period in question.  </li>
<li>When did this start? According to the Capital Market Act, if an investor incurs loss due to false statements/omissions in the business/quarterly report, the company is responsible for damages.  </li>
</ul>


The family of the accused has said that the embezzlement was not an act of one man but due to orders taken from superiors.
The recovery shoudn't be an issue as the accused had bought in gold in Dec and Dongjin Chem has not had a substantial drop for the period in question.  
When did this start? According to the Capital Market Act, if an investor incurs loss due to false statements/omissions in the business/quarterly report, the company is responsible for damages.  


HD Korea Shipbuilding & Offshore Engineering / Event-Driven

HD Korea Shipbuilding & Offshore Engineering

<p>The listing of Hyundai Heavy Industries is due tomorrow, and the time has come to consider the timing of short-selling Korea Shipbuilding &amp; Offshore Engineering (KSOE) due to the holding company discount risk.</p><div class="content-highlight">
<p><strong>In general, we have often witnessed a trading pattern in which a holding company's stock price plummets when one of its major operating subsidiaries goes public.</strong></p>
<p><strong>The KSOE is also highly likely to be a target of this trading pattern.</strong></p>
</div><hr><p>KSOE is an intermediate holding company of Hyundai Heavy Industries Group, and its major subsidiaries include:</p><ul>
<li><strong>Hyundai Heavy Industries</strong></li>
<li><strong>Hyundai Mipo Dockyard</strong></li>
<li><strong>Hyundai Samho Heavy Industries</strong></li>
</ul><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/011/original/1.png?1631749332" class="editor-image img-responsive" data-smartkarma-image-id="230011"></figure></section><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
<col width="100">
<col width="100">
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<tbody>
<tr>
<td data-sheets-value="{&quot;1&quot;:2,&quot;2&quot;:&quot;KSOE's major subsidiaries&quot;}">KSOE's major subsidiaries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Ticker"}'>Ticker</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Stake %"}'>Stake %</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Stake value"}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}'>Stake value</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Note"}'>Note</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Mipo Dockyard Co., Ltd."}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Hyundai Mipo Dockyard</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"010620"}' data-sheets-formula='="010620"'>010620</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.424}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>42.40%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1298.9506391992}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}' data-sheets-formula='=googlefinance(R[0]C[-2], "price")*googlefinance(R[0]C[-2], "shares")/1000000000*R[0]C[-1]'><strong>₩1,298.95B</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Market value"}'>Market value</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Heavy Industries"}'>Hyundai Heavy Industries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Unlisted"}'>Unlisted</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.7972}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>79.72%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":4246.20608}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}' data-sheets-formula="=R[0]C[2]*R[0]C[-1]"><strong>₩4,246.21B</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"At the IPO price"}'>At the IPO price</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Samho Heavy Industries"}'>Hyundai Samho Heavy Industries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Unlisted"}'>Unlisted</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.8054}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'>80.54%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1200.213}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.00B"}'><strong>₩1,200.21B</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Book value"}'>Book value</td>
</tr>
<tr><td colspan="5" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table><p>In fact, KSOE's biggest investment point so far is that it is the only channel through which to invest in Hyundai Heavy Industries and Hyundai Samho Heavy Industries, the world's largest shipyards.</p><div class="content-highlight"><p><strong>However, after Hyundai Heavy Industries is listed, the investment points of KSOE will inevitably fade. As KSOE is an intermediate holding company of Hyundai Heavy Industries Group, dividends and brand royalties from its subsidiaries such as Hyundai Heavy Industries will likely flow into the ultimate holding company, <a href="https://www.smartkarma.com/entities/hyundai-heavy-industries-holdings" target="_blank" data-smartkarma-citation="entities:24075:1" rel="noopener">Hyundai Heavy Industries Holdings (267250 KS)</a>, making it less attractive for investment.</strong></p></div><p>Nevertheless, its discount to NAV is 7.52% based on the current share price. This is significantly lower than the 50% level of the average discount rate of local holding companies.</p><table class="table table-striped">
<colgroup>
<col width="70">
<col width="70">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"NAV"}' data-sheets-note="Sang Hyun Park: Cases when a company's net cash position and the value of its publically traded interests are worth more than its market cap create the opportunity of a stub trade, in which investors can take a view that the company's core business will rise by shorting the minority stakes whilst going long the underlying. Such an opportunity has arisen in the wake of the Alibaba listing which has seen early investing company Yahoo trade at a discount to the value of its stake in Alibaba.">NAV</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of listed holdings"}'><strong>Value of listed holdings (including Hyundai Heavy Industries)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":5831.62191898336}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[8]C[5])"><strong>₩5,831.6B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - % of Holdco market cap"}'>- % of Holdco market cap</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.7012666341045598}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[-1]C[0]/((R[3]C[-3]*R[0]C[-3])/1000000000)">70.13%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of unlisted holdings"}'><strong>Value of unlisted holdings (which includes Hyundai Samho Heavy Industries)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1825.212}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[7]C[5])"><strong>₩1,825.2B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stub value"}'>Stub value</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":659.0072110166407}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=(R[1]C[-3]*R[-2]C[-3]/1000000000)-R[-3]C[0]-R[-1]C[0]">₩659.0B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stub value per share"}'>Stub value per share</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":9311.547212597516}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]*1000000000/R[-3]C[-3]">₩9,312</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of operating assets"}'>Value of operating assets</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=SUM(R[8]C[5])">₩0.0B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"GAV"}'>GAV</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7656.8339189833605}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[-6]C[0]+R[-4]C[0]+R[-1]C[0]">₩7,656.8B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"GAV per share"}'>GAV per share</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":108277.93228902365}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]/R[4]C[-3]*1000000000">₩108,278</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Discount to GAV (excl. treasury shares)"}'>Discount to GAV (excl. treasury shares)</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-0.08517033449031985}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-4]C[-3])/R[-1]C[0]">-8.52%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Holdco net cash/debt (de-consolidated)"}'><strong>Holdco net cash/debt (de-consolidated)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1327.7}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[5]C[5]"><strong>₩1,327.7B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Value of pref shares"}'>Value of pref shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=(R[-5]C[-3]*R[-2]C[-3]+R[-5]C[-2]*R[-2]C[-2])/1000000000">₩0.0B</td>
</tr>
<tr><td colspan="2"></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NAV"}'><strong>NAV</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":8984.533918983361}' data-sheets-numberformat='[null,2,"₩#,##0.0B"]' data-sheets-formula="=R[-5]C[0]+R[-2]C[0]-R[-1]C[0]"><strong>₩8,984.5B</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NAV per share (excl. treasury shares)"}'><strong>NAV per share (excl. treasury shares)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":127053.3964327235}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-1]C[0]/R[-1]C[-3]*1000000000"><strong>₩127,053</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Discount to NAV"}'><strong>Discount to NAV</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.07519197991517018}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-9]C[-3])/R[-1]C[0]"><strong>7.52%</strong></td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: KRX &amp; DART","6":1}'>Source: KRX &amp; DART</td></tr>
</tbody>
</table><p>As an intermediate holding company, KSOE plans to play a role as a control tower by conducting R&amp;D, M&amp;A, and new and renewable businesses, but at this point, its own operating operation is virtually non-existent. In other words, since the value of the operating operation is zero, the current valuation is based on the cash assets held and the value of the stake in the subsidiaries.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/013/original/2.png?1631750466" class="editor-image img-responsive" data-smartkarma-image-id="230013"></figure><p>Of course, it is true that KSOE's PBR is lower than the local peers in the same sector. However, there is a question as to whether it is appropriate to apply the PBR valuation as KSOE is a pure holding company rather than a shipbuilding company.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"PBR comparisons on FY2022E net assets"}'>PBR comparisons on FY2022E net assets</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Ticker"}'>Ticker</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"PBR"}'>PBR</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Hyundai Mipo Dockyard Co., Ltd."}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Hyundai Mipo Dockyard</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"010620"}' data-sheets-formula='="010620"'>010620</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"1.31x"}'><strong>1.31x</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Daewoo Shipbuilding &amp; Marine Engineering"}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Daewoo Shipbuilding &amp; Marine Engineering</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"042660"}' data-sheets-formula='="042660"'>042660</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"1.25x"}'><strong>1.25x</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Samsung Heavy Industries Co.,Ltd"}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Samsung Heavy Industries</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"010140"}' data-sheets-formula='="010140"'>010140</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"1.05x"}'><strong>1.05x</strong></td>
</tr>
<tr><td colspan="3"><strong> </strong></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Korea Shipbuilding &amp;Offshore Engn Co Ltd"}' data-sheets-formula='=googlefinance(R[0]C[1], "name")'>Korea Shipbuilding &amp;Offshore Engn</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"009540"}' data-sheets-formula='="009540"'>009540</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"0.79x"}'><strong>0.79x</strong></td>
</tr>
<tr><td colspan="3" data-sheets-value='{"1":2,"2":"Source: FnGuide"}'>Source: FnGuide</td></tr>
</tbody>
</table><p>Lastly, KSOE has an event to acquire Daewoo Shipbuilding &amp; Marine Engineering (DSME). Currently, the acquisition is awaiting approval from foreign countries.</p><p>If approved, KSOE will swap shares with Korea Development Bank through issuance of new shares. In other words, Korea Development Bank will hand over its stake in DSME (55.68%) to KSOE, and will receive a stake in KSOE instead. In this process, KSOE needs to issue more than 2 trillion won worthy of new shares. In other words, it is unlikely that this DSME acquisition event will lead to KSOE's valuation re-rating.</p>

The listing of Hyundai Heavy Industries is due tomorrow, and the time has come to consider the timing of short-selling Korea Shipbuilding &amp; Offshore Engineering (KSOE) due to the holding company discount risk.
In general, we have often witnessed a trading pattern in which a holding company's stock price plummets when one of its major operating subsidiaries goes public.
The KSOE is also highly likely to be a target of this trading pattern.
KSOE is an intermediate holding company of Hyundai Heavy Industries Group, and its major subsidiaries include:
Hyundai Heavy Industries
Hyundai Mipo Dockyard
Hyundai Samho Heavy Industries










KSOE's major subsidiaries
Ticker
Stake %
Stake value
Note


Hyundai Mipo Dockyard
010620
42.40%
₩1,298.95B
Market value


Hyundai Heavy Industries
Unlisted
79.72%
₩4,246.21B
At the IPO price


Hyundai Samho Heavy Industries
Unlisted
80.54%
₩1,200.21B
Book value

Source: DART &amp; KRX

In fact, KSOE's biggest investment point so far is that it is the only channel through which to invest in Hyundai Heavy Industries and Hyundai Samho Heavy Industries, the world's largest shipyards.However, after Hyundai Heavy Industries is listed, the investment points of KSOE will inevitably fade. As KSOE is an intermediate holding company of Hyundai Heavy Industries Group, dividends and brand royalties from its subsidiaries such as Hyundai Heavy Industries will likely flow into the ultimate holding company, Hyundai Heavy Industries Holdings (267250 KS), making it less attractive for investment.Nevertheless, its discount to NAV is 7.52% based on the current share price. This is significantly lower than the 50% level of the average discount rate of local holding companies.





NAV

Value of listed holdings (including Hyundai Heavy Industries)
₩5,831.6B


- % of Holdco market cap
70.13%


Value of unlisted holdings (which includes Hyundai Samho Heavy Industries)
₩1,825.2B


Stub value
₩659.0B


Stub value per share
₩9,312


Value of operating assets
₩0.0B


GAV
₩7,656.8B


GAV per share
₩108,278


Discount to GAV (excl. treasury shares)
-8.52%


Holdco net cash/debt (de-consolidated)
₩1,327.7B


Value of pref shares
₩0.0B



NAV
₩8,984.5B


NAV per share (excl. treasury shares)
₩127,053


Discount to NAV
7.52%

Source: KRX &amp; DART

As an intermediate holding company, KSOE plans to play a role as a control tower by conducting R&amp;D, M&amp;A, and new and renewable businesses, but at this point, its own operating operation is virtually non-existent. In other words, since the value of the operating operation is zero, the current valuation is based on the cash assets held and the value of the stake in the subsidiaries.Of course, it is true that KSOE's PBR is lower than the local peers in the same sector. However, there is a question as to whether it is appropriate to apply the PBR valuation as KSOE is a pure holding company rather than a shipbuilding company.







PBR comparisons on FY2022E net assets
Ticker
PBR


Hyundai Mipo Dockyard
010620
1.31x


Daewoo Shipbuilding &amp; Marine Engineering
042660
1.25x


Samsung Heavy Industries
010140
1.05x

 

Korea Shipbuilding &amp;Offshore Engn
009540
0.79x

Source: FnGuide

Lastly, KSOE has an event to acquire Daewoo Shipbuilding &amp; Marine Engineering (DSME). Currently, the acquisition is awaiting approval from foreign countries.If approved, KSOE will swap shares with Korea Development Bank through issuance of new shares. In other words, Korea Development Bank will hand over its stake in DSME (55.68%) to KSOE, and will receive a stake in KSOE instead. In this process, KSOE needs to issue more than 2 trillion won worthy of new shares. In other words, it is unlikely that this DSME acquisition event will lead to KSOE's valuation re-rating.

Outright Shorting KSOE or Long/Short Setup with HHI on a Likely Widening Holdco Discount

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

HD Hyundai Heavy Industries  / Equity Capital Markets

<p>In this insight, we provide a detailed analysis about one of the biggest risks for <a href="https://news.mt.co.kr/mtview.php?no=2021090214420546193" target="_blank" rel="noopener">Hyundai Heavy Industries (HHI) IPO</a> which involves the regulators potentially blocking its acquisition of <a href="https://www.smartkarma.com/entities/daewoo-shipbuilding-marine-engineering" target="_blank" data-smartkarma-citation="entities:12531:1" rel="noopener">Daewoo Shipbuilding &amp; Marine Engineering (042660 KS) (DSME). </a>We also discuss five other major <strong>recent issues</strong> which could impact the IPO of Hyundai Heavy Industries. The following are the major issues we discuss in this insight:</p><ul>
<li>
<strong>Issue #1</strong> [Will EU &amp; Japan Finally Block the Acquisition of Daewoo Shipbuilding?] [Negative]</li>
<li>
<strong>Issue #2</strong> [Solid Results of Employees Stock Ownership Association Subscription of IPO Shares] [Positive]</li>
<li>
<strong>Issue #3</strong> [Low Free Float] [Positive]</li>
<li>
<strong>Issue #4</strong> [BOK raises interest rate] [Negative]</li>
<li>
<strong>Issue #5</strong> [Share Price Performances of HHI's Comps] [Positive]</li>
<li>
<strong>Issue #6</strong> [Impact of steel plate price deals with POSCO for 2H 2021] [Negative]</li>
</ul><div class="content-highlight"><p>We continue to maintain a Negative view of the Hyundai Heavy Industries IPO. Despite improving shipbuilding orders, low free float, and solid employees subscription to the IPO shares, we believe the negatives outweigh these positives.  </p></div>

In this insight, we provide a detailed analysis about one of the biggest risks for Hyundai Heavy Industries (HHI) IPO which involves the regulators potentially blocking its acquisition of Daewoo Shipbuilding &amp; Marine Engineering (042660 KS) (DSME). We also discuss five other major recent issues which could impact the IPO of Hyundai Heavy Industries. The following are the major issues we discuss in this insight:

Issue #1 [Will EU &amp; Japan Finally Block the Acquisition of Daewoo Shipbuilding?] [Negative]

Issue #2 [Solid Results of Employees Stock Ownership Association Subscription of IPO Shares] [Positive]

Issue #3 [Low Free Float] [Positive]

Issue #4 [BOK raises interest rate] [Negative]

Issue #5 [Share Price Performances of HHI's Comps] [Positive]

Issue #6 [Impact of steel plate price deals with POSCO for 2H 2021] [Negative]
We continue to maintain a Negative view of the Hyundai Heavy Industries IPO. Despite improving shipbuilding orders, low free float, and solid employees subscription to the IPO shares, we believe the negatives outweigh these positives.  

Hyundai Heavy Industries - Will EU & Japan Finally Block the Acquisition of DSME?

<div class="content-highlight">
<p>Our base case valuation of Hyundai Heavy Industries is implied market cap of 5.9 trillion won or 66,573 won per share, which is 11% higher than the high end of the IPO price range of 60,000 won per share.</p>
<p>Typically, we like to rate an IPO positive if our base case valuation is at least 15% higher than the high end of the IPO price range and as such we have a NEGATIVE view of this IPO. The valuation sits on the borderline case and our base case valuation does not provide a big upside to the IPO price range. </p>
</div><p>Our base case valuation is based on 1x our estimated equity of 6.1 trillion won for the company at the end of 2021. Our valuation multiple of 1.0x P/B is based on the average P/B valuation multiple of the peers.</p><p>HHI had 22.7% market share of new orders for shipbuilding in 2020, rising to 24.1% in 1Q 2021. It had new orders of 3,2m GT in 1Q 2021, which was nearly 84% of total new orders in 2020. </p>


Our base case valuation of Hyundai Heavy Industries is implied market cap of 5.9 trillion won or 66,573 won per share, which is 11% higher than the high end of the IPO price range of 60,000 won per share.
Typically, we like to rate an IPO positive if our base case valuation is at least 15% higher than the high end of the IPO price range and as such we have a NEGATIVE view of this IPO. The valuation sits on the borderline case and our base case valuation does not provide a big upside to the IPO price range. 
Our base case valuation is based on 1x our estimated equity of 6.1 trillion won for the company at the end of 2021. Our valuation multiple of 1.0x P/B is based on the average P/B valuation multiple of the peers.HHI had 22.7% market share of new orders for shipbuilding in 2020, rising to 24.1% in 1Q 2021. It had new orders of 3,2m GT in 1Q 2021, which was nearly 84% of total new orders in 2020. 

Hyundai Heavy Industries IPO Valuation Analysis

South Korea

Hanwha Ocean Co., Ltd. operates as a shipbuilding and offshore company. The Company provides floating structure construction, steel wire drying, commercial vessels, specialty vessels, gas carrier, tanker, containership, ro ro, bulk carrier, submarine, warship, auxiliaries, cruise ships, and ferries manufacturing services. Hanwha Ocean also offers onshore plants services.

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Hanwha Ocean (042660 KS)

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