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

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Equity Capital Markets

Lotte Data Communication Co / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/27180" target="_blank" data-smartkarma-citation="entities:27180:1">Lotte Data Communication Co (1554842D KS)</a> IPO price was set at ₩29,800. This is even lower than the mid level of the indicative price band, ₩28,300 - 33,800. The subscription competition rate was 79.33 to 1, which is better than initially feared but still substantially lower than this year's other IPOs in Korea. A total of 423 local and overseas institutional investors have participated in this bookbuilding. Overseas institutions accounted for 10.40% in terms of participating institutions and…</p>

Lotte Data Communication Co (1554842D KS) IPO price was set at ₩29,800. This is even lower than the mid level of the indicative price band, ₩28,300 - 33,800. The subscription competition rate was 79.33 to 1, which is better than initially feared but still substantially lower than this year's other IPOs in Korea. A total of 423 local and overseas institutional investors have participated in this bookbuilding. Overseas institutions accounted for 10.40% in terms of participating institutions and…

Lotte Data Communication IPO: Bookbuilding Results Analysis & Post IPO Preview

Below is the regulatory filing for the Lotte Data Communication Co (1554842D KS) IPOLink: https://dart.fss.or.kr/dsaf001/main.do?rcpNo=20180621000116For more details about the process of this IPO, please jump to the DETAIL section of this insight.Valuation in IPO bookThe following 2 companies, Posco Ict Co Ltd (022100 KS) and Shinsegae Information &amp; Communication Co (035510 KS), are the valuation peers. The avg. PER based on both valuation peers' FY2017 NP was 36.46x. But the banker also came up with a 28.3x PER based on the 1Q18 annualized projected NP, which is a kinda uncommon practice. Valuation peersPosco Ict Co Ltd (022100 KS)Shinsegae Information &amp; Communication Co (035510 KS)FY17 NP to controlling stake₩41,900mil₩9,918milMarket cap₩1,035,357mil₩230,480milPER24.7x23.2xAvg. PER24.0xSource: DARTValuation peersPosco Ict Co Ltd (022100 KS)Shinsegae Information &amp; Communication Co (035510 KS)1Q18 NP to controlling stake₩7,703mil₩2,499milFY18 annualized projected NP₩30,812mil₩9,996milMarket cap₩1,035,357mil₩230,480milPER33.3x23.1xAvg. PER28.3xSource: DARTBelow shows how the banker arrived at ₩38,883 as Lotte Data Communication's intrinsic price per share on a sorta pro forma basis. The banker again used the company's both FY17 earnings and FY18 projected earnings with a 28.30x PER multiple which they derived from the above two valuation peers.Lotte Data Communication valuationFY2017FY2018 (annualized based on 1Q18 NP)NoteNP to controlling stake₩20,782mil₩21,628mil (₩5,407mil × 4)APER24.0x28.3xBTarget market cap₩498,235mil₩612,717milC = A × BAvg. target market cap₩555,476milEShares outstanding14,286,000FPrice per share₩38,883G = E / FSource: DARTThe banker then came up with a 13.30 - 27.40% discount. So, the indicative price band is set at ₩28,300 - ₩33,800.Indicative price bandTarget price per share₩38,883Discount13.30% - 27.40% Indicative price band₩28,300 - ₩33,800Source: DARTValuation studyFirst, the local market seems to be having no problem with the selection of valuation peers. Personally, I don't have any problem with the valuation peers either. In Korea, we have nearly 600 SI companies. Below are the top 8 players in this field. Samsung SDS is simply too big. Moreover, SDS is getting substantial valuation premiums for the stake owned by the Samsung owner family. Other than POSCO ICT and Shinsegae I&amp;C, no one really matches Lotte Data Communication by sales/OP size. Duzonbizon is another exception which we can't really do an apple-to-apple comparison with Lotte Data Communication since Duzonbizon is significant different in business nature with its local SI peers. So, I would also personally pick POSCO ICT and Shinsegae I&amp;C as valuation peers for this IPO.RankKorea's top SI (system integration) companiesFY2017 salesFY2017 OPFY2017 NP1Samsung SDS Co Ltd (018260 KS)9,299,206731,559530,3482Posco Ict Co Ltd (022100 KS)950,59256,07141,9003Lotte Data Communication Co (1554842D KS)819,67034,17520,6184Shinsegae Information &amp; Communication Co (035510 KS)320,15015,4509,9185Itcen (124500 KS)311,5493,5249906S Net Systems (privately-held)213,4184,5701,4157Duzonbizon Co Ltd (012510 KS)205,60651,68540,0588Hyundai Information Tech (026180 KS)* Subsidiary of Lotte Data Communication (owns 59.69%)157,4322,976995Note: ₩ milSource: DARTAs shown below, Lotte Data is slightly less profitable relative to its two valuation peers. Well, this is Korean SI industry. That is, technology wise, it is really hard to find any differentiating point/value between these companies. With the rare exception of Duzonbizon, it is pretty much safe to say that none of these Korean SI companies are an Oracle-type technologically advanced company that is capable of generating technological values on its own. So, overall profitability mainly depends on how effectively and efficiently they operate their manpower and how cheaply they source external solutions/systems. In this regard, as indicated in the below tables, we can't really say Lotte Data is better than its two valuation peers. In other words, Lotte Data should be traded at a little discount (not much though) to the two valuation peers. Lotte Data Communication (₩ bil)2015201620171Q171Q18Sales734.9768.7819.6149.1183.9COGS679.4722.2755.7137.4170.5Gross income55.546.563.911.713.4SG&amp;A26.627.629.76.57.6OP29.018.934.25.35.7OPM3.94%2.46%4.17%3.53%3.12%NP16.911.820.62.44.5NPM2.30%1.55%2.52%1.64%2.47%Note: Consolidated basisSource: DARTPOSCO ICT (₩ bil)2015201620171Q171Q18Sales840.5866.9950.6230.1219.5COGS742.0748.7820.3197.5193.4Gross income98.5118.2130.332.626.0SG&amp;A84.665.974.216.117.0OP14.052.256.116.59.0OPM1.67%6.02%5.90%7.17%4.10%NP-56.337.642.017.97.6NPM-6.70%4.34%4.42%7.78%3.46%Note: Consolidated basisSource: FnGuideShinsegae I&amp;C (₩ bil)2015201620171Q171Q18Sales77.576.988.377.581.0COGS63.863.573.163.366.9Gross income13.713.415.214.214.1SG&amp;A9.011.910.39.910.2OP4.71.54.94.33.9OPM6.06%1.95%5.55%5.55%4.81%NP3.00.94.21.92.5NPM3.87%1.17%4.76%2.45%3.09%Note: Consolidated basisSource: FnGuideThen, how much discount? Currently, 6 local brokerages are covering POSCO ICT and gave their earnings projections for FY2018. The average PER based on their consensus is 19.85x.FnGuide market consensus on POSCO ICT for FY2018Sales₩1,033bilOP₩67bilNP₩51bilNP to controlling stake₩52bil EPS₩340PER on FY18 earnings19.9xNote: Based on the 6 local brokerages' earnings forecastsSource: FnGuideGeneral consensus among local investors for Lotte Data's FY18 full year earnings is around ₩23.0bil. Then, with a 10% discount to POSCO ICT's PER on FY18 full year market consensus earnings (17.9x), we get a market cap of ₩411.7bil which gives ₩28,818 for each share. Unfortunately, this is rather close to the lower end of the indicative price band (₩28,300 - ₩33,800).Lotte Data Communication projected earnings for FY20181Q18 NP to controlling stake₩5.4bilFY18 full year NP to controlling stake (estimate)₩23.0bilPER17.9x* 10% discount to POSCO ICT's PER on FY18 earningsTarget market cap₩411.7bilPrice per share₩28,818Source: DARTOne possible twist to this is merger with Hyundai Information Tech (026180 KS). Lotte isn't denying this possibility at all. In fact, they are publicly saying that they will do this merger not long after this IPO. Part of the reasons of this IPO is to get a fair value of Lotte Data ahead of a merger with Hyundai Information in which Lotte Data owns a 59.69% stake. This suggests that Lotte will do many efforts to support Lotte Data share price even after the IPO relative to Hyundai Information shares. Even after the IPO, Lotte Holdings will continue to own a 70% stake in Lotte Data. So, the stronger Lotte Data share price is, the better Lotte Holdings will be. Then how much extra push should we expect from this IPO? Well, I surely expect some push. But fundamental valuation wise, this wouldn't be strong enough to push the IPO price to a level near the upper end of the indicative price band. So, my thinking is the IPO price will be settled at somewhere around the middle of the indicative price band.

Lotte Data Communication IPO - Valuation Study

South Korea

Hyundai Information Technology Co., Ltd. (HIT), an affiliate of Hyundai Group, offers network consulting and integration services.  The Company also provides systems management, maintenance, and training services.  HIT's customers include government offices, corporations, Internet companies, and financial institutions, such as banks, brokerage firms, and insurance companies.

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Hyundai Information Tech (026180 KS)

Lotte Data Communication IPO: Bookbuilding Results Analysis & Post IPO Preview

Lotte Data Communication Co (1554842D KS) IPO price was set at ₩29,800. This is even lower than the mid level of the indicative price band, ₩28,300...

Sanghyun Park

Lotte Data Communication IPO - Valuation Study

Below is the regulatory filing for the Lotte Data Communication Co (1554842D...

Sanghyun Park

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