Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

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Our base case valuation of Kakao Bank is market cap of 26.8 trillion won or implied price of 56,144 won per share. This represents 44% higher than the high end of the IPO price range of 39,000 won but 34% lower than the current private market value of <a href="http://www.ipo38.co.kr/ipo/index.htm?o=v&amp;key=6&amp;no=1676&amp;l=&amp;page=1" target="_blank" rel="noopener">85,000 won. </a>Given the solid upside versus the IPO price range, we have a Positive Rating of the Kakao Bank IPO. 
All in all, we believe that the there could be a nice 30-50%+ upside relative to the high end of the IPO price range (39,000 won). Nonetheless, although Kakao Bank's share could reach the private market value (85,000 won) on the first day of trading, over a longer time frame (6-12 months), we are more comfortable with the base case valuation of 56,144 won (26.8 trillion won) as a new entrant (Toss Bank) as well as existing major banks are likely to heighten their competitive pressures on the company. 
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Our base case valuation of Kakao Bank is market cap of 26.8 trillion won or implied price of 56,144 won per share. This represents 44% higher than the high end of the IPO price range of 39,000 won but 34% lower than the current private market value of 85,000 won. Given the solid upside versus the IPO price range, we have a Positive Rating of the Kakao Bank IPO. 
All in all, we believe that the there could be a nice 30-50%+ upside relative to the high end of the IPO price range (39,000 won). Nonetheless, although Kakao Bank's share could reach the private market value (85,000 won) on the first day of trading, over a longer time frame (6-12 months), we are more comfortable with the base case valuation of 56,144 won (26.8 trillion won) as a new entrant (Toss Bank) as well as existing major banks are likely to heighten their competitive pressures on the company. 


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

This weekend, several local media published articles stating that all major domestic financial holding companies are positively reviewing interim dividends this year. These media said that they had heard so from insiders in the local financial sector.Hana Financial Group has paid interim dividends every year. Although the other financial holding companies are able to pay interim dividends under the articles of incorporation, they have never done so.<div class="content-highlight">The FSC conducted a stress test on banks and financial holding companies this month, and as all of them passed, the recommendation to limit dividends came to an end at the end of this month.</div>Therefore, it is highly likely that each financial holding company will hold a board meeting to determine an interim dividend after the 2Q earnings release. As dividends were limited at the beginning of this year by the financial authorities, all of them will likely pay interim dividends.

This weekend, several local media published articles stating that all major domestic financial holding companies are positively reviewing interim dividends this year. These media said that they had heard so from insiders in the local financial sector.Hana Financial Group has paid interim dividends every year. Although the other financial holding companies are able to pay interim dividends under the articles of incorporation, they have never done so.The FSC conducted a stress test on banks and financial holding companies this month, and as all of them passed, the recommendation to limit dividends came to an end at the end of this month.Therefore, it is highly likely that each financial holding company will hold a board meeting to determine an interim dividend after the 2Q earnings release. As dividends were limited at the beginning of this year by the financial authorities, all of them will likely pay interim dividends.

Interim Div Yield Projections of Korean Financial Holdcos Ahead of June 29 Ex-Div Date

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In this insight, we provide an update of Kakao Bank which is getting ready to release its IPO prospectus in the coming days. Even without the prospectus, the company has already provided a lot of the the company's financials, industry analysis, and other materials in its annual and quarterly earnings filings. In this insight, we try to provide some of our key findings from its financial filings of Kakao Bank, but excluding the bankers' valuation assessment which is not yet available. 
Kakao Bank is expected to be one of the largest IPOs in Korea in 2021. In the gray market, it is currently trading at 96,500 won per share or 39.5 trillion won. The two largest banks in Korea are <a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">KB Financial (105560 KS)</a> and <a href="https://www.smartkarma.com/entities/shinhan-financial-group-ltd" target="_blank" data-smartkarma-citation="entities:6978:1" rel="noopener">Shinhan Financial (055550 KS),</a> which have market caps of 22.9 trillion won and 20.6 trillion won, respectively. As a result, Kakao Bank's market cap (in the gray market) is close to the combined market caps of KB Financial and Shinhan Financial (43.5 trillion won) which is quite remarkable. 
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In this insight, we provide an update of Kakao Bank which is getting ready to release its IPO prospectus in the coming days. Even without the prospectus, the company has already provided a lot of the the company's financials, industry analysis, and other materials in its annual and quarterly earnings filings. In this insight, we try to provide some of our key findings from its financial filings of Kakao Bank, but excluding the bankers' valuation assessment which is not yet available. 
Kakao Bank is expected to be one of the largest IPOs in Korea in 2021. In the gray market, it is currently trading at 96,500 won per share or 39.5 trillion won. The two largest banks in Korea are KB Financial (105560 KS) and Shinhan Financial (055550 KS), which have market caps of 22.9 trillion won and 20.6 trillion won, respectively. As a result, Kakao Bank's market cap (in the gray market) is close to the combined market caps of KB Financial and Shinhan Financial (43.5 trillion won) which is quite remarkable. 


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

Thematic (Sector/Industry)

Does holding company ("holdco") discount in Korea apply to the likes of <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://www.smartkarma.com/entities/sk-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:393:1" rel="noopener">SK Holdings (034730 KS)</a> (now Inc), <a href="https://www.smartkarma.com/entities/osstem-implant-co-ltd" target="_blank" data-smartkarma-citation="entities:1450:1" rel="noopener">Osstem Implant (048260 KS)</a> , <a href="https://www.smartkarma.com/entities/lg-chem-ltd" target="_blank" data-smartkarma-citation="entities:3583:1" rel="noopener">LG Chem Ltd (051910 KS)</a> , <a href="https://www.smartkarma.com/entities/kakao-corp" target="_blank" data-smartkarma-citation="entities:15002:1" rel="noopener">Kakao Corp (035720 KS)</a> , <a href="https://www.smartkarma.com/entities/fila-holdings-corp" target="_blank" data-smartkarma-citation="entities:10699:1" rel="noopener">Fila Holdings (081660 KS)</a> and others? To answer that question I think we need to know the history of the holdco in Korea.

Does holding company ("holdco") discount in Korea apply to the likes of SK Telecom (017670 KS) , SK Holdings (034730 KS) (now Inc), Osstem Implant (048260 KS) , LG Chem Ltd (051910 KS) , Kakao Corp (035720 KS) , Fila Holdings (081660 KS) and others? To answer that question I think we need to know the history of the holdco in Korea.

The Holding Company Dilemma in Korea -  What's the Right Discount?

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Similar to Hana and BNK, KB Financial Group catches the eye in terms of value-quality trends and fundamental momentum. South Korea commands some top quartile opportunities within our global universe of bank stocks. There are similar opportunities and risks plus trends with all the South Korean lenders.A PH Score™ of 7.9 reflects an enhancement in Profitability, in headline Efficiency, in headline Asset Quality, and in Provisioning. While Common Equity/Assets (a PH Score™ variable) showed discrete erosion, other Capitalisation ratios mostly showed marked progression, indicating that the underlying Score may understate KB’s progression. Having said that, the positive improvement in the headline CIR may paint a slightly flattering view of Efficiency enhancement which was on an underlying basis somewhat eroded YoY (double-digit OPEX expansion) while headline NPL amelioration may also mask the Asset Quality picture somewhat though we are relatively comfortable with delinquency levels. Liquidity deteriorated somewhat from a high LDR level.If there is an issue that concerns us, in line with other South Korean lenders, it is relatively subpar Earnings Quality, not picked up by the PH Score™ gauge. Bank Earnings here are highly dependent on trading gains and “other Noninterest Income”. This can flatter headline ratios. Debt/Equity remains high too.<div class="content-highlight">A FV of 7% a PBV of 0.55x are not unattractive given the respective thresholds of 10% and 1.0x. An Earnings Yield of 17.6% and a Total Return Ratio of 2.4x add to the attraction of the proposition. The Dividend Yield of 3.1% is a bonus. The bank commands well above-average fundamental momentum as testified by a robust PH Score™ while the VFM rankings reside in the top quartile globally.</div>KB balances consumer credit (53.4% of Loan book) including a strong mortgage presence with corporates (45.4%), backed mainly by (an increasing) transaction account funding base (52.8% of Deposits) and by Time Deposits (47.2% of Deposits).

Similar to Hana and BNK, KB Financial Group catches the eye in terms of value-quality trends and fundamental momentum. South Korea commands some top quartile opportunities within our global universe of bank stocks. There are similar opportunities and risks plus trends with all the South Korean lenders.A PH Score™ of 7.9 reflects an enhancement in Profitability, in headline Efficiency, in headline Asset Quality, and in Provisioning. While Common Equity/Assets (a PH Score™ variable) showed discrete erosion, other Capitalisation ratios mostly showed marked progression, indicating that the underlying Score may understate KB’s progression. Having said that, the positive improvement in the headline CIR may paint a slightly flattering view of Efficiency enhancement which was on an underlying basis somewhat eroded YoY (double-digit OPEX expansion) while headline NPL amelioration may also mask the Asset Quality picture somewhat though we are relatively comfortable with delinquency levels. Liquidity deteriorated somewhat from a high LDR level.If there is an issue that concerns us, in line with other South Korean lenders, it is relatively subpar Earnings Quality, not picked up by the PH Score™ gauge. Bank Earnings here are highly dependent on trading gains and “other Noninterest Income”. This can flatter headline ratios. Debt/Equity remains high too.A FV of 7% a PBV of 0.55x are not unattractive given the respective thresholds of 10% and 1.0x. An Earnings Yield of 17.6% and a Total Return Ratio of 2.4x add to the attraction of the proposition. The Dividend Yield of 3.1% is a bonus. The bank commands well above-average fundamental momentum as testified by a robust PH Score™ while the VFM rankings reside in the top quartile globally.KB balances consumer credit (53.4% of Loan book) including a strong mortgage presence with corporates (45.4%), backed mainly by (an increasing) transaction account funding base (52.8% of Deposits) and by Time Deposits (47.2% of Deposits).

KB: The Dichotomy Between Valuation and Earnings Quality

South Korea

KB Financial Group Inc. (the "Company"), in accordance with Financial Holding Companies Act, was established on September 29, 2008, through stock transfer with the former shareholders of its subsidiaries including Kookmin Bank in order to provide management services and financing to associated companies. The headquarters are located at Seoul, Korea

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KB Financial ADR (KB US)

Kakao Bank Valuation Analysis

Our base case valuation of Kakao Bank is market cap of 26.8 trillion won or implied price of 56,144 won per share. This represents 44% higher than...

Douglas Kim

Interim Div Yield Projections of Korean Financial Holdcos Ahead of June 29 Ex-Div Date

This post projects the interim dividend yields of the four major Korean financial holding companies ahead of the June 29 ex-dividend date.

Sanghyun Park

An Update on the Kakao Bank IPO

We provide an update of Kakao Bank which is getting ready to release its IPO prospectus in the coming days. In the gray market, it is trading at...

Douglas Kim

The Holding Company Dilemma in Korea - What's the Right Discount?

The discount rate to NAV that is rule of thumb in Korea is 30% but does not make sense across the board? We discuss if there is a better way to...

Ken S. Kim

KB: The Dichotomy Between Valuation and Earnings Quality

KB shares can hardly be called dear and fundamental trends are strong. We do caution though on Earnings Quality and a high LDR and D/E ratio.

Paul Hollingworth

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