Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Thematic (Sector/Industry)

The top 10 events impacting the Korean stock market, economy, &amp; politics in February were as follows:<ul>
<li>Amazon and Comcast have submitted initial bids to acquire <a href="https://www.smartkarma.com/entities/16032" target="_blank" data-smartkarma-citation="entities:16032:1">Nexon Co Ltd (3659 JP)</a>/NXC Corp</li>
<li>HOMEPLUS REIT IPO (the biggest ever REIT IPO in Korea)</li>
<li>CONTINUED CONCERNS ON SEMICONDUCTOR SECTOR</li>
<li>ECOPRO BM IPO 
</li>
<li>WAR AGAINST HUAWEI </li>
<li>CONSOLIDATION OF THE KOREAN SHIPBUILDING SECTOR</li>
<li>CLOSING OUT THE BGF CO/BGF RETAIL PAIR TRADE</li>
<li>DOOSAN HEAVY INDUSTRIES &amp; DOOSAN E&amp;C RIGHTS OFFERINGS</li>
<li>CONSOLIDATION OF KOREAN CABLE TV INDUSTRY</li>
<li>SOLAR STOCKS - POSITIVE BOOST FROM HIGHER CHINESE SUBSIDIES </li>
</ul><hr>The top three reports we wrote in February related to the Korean market were as follows (in terms of views &amp; appreciates): <ul>
<li><a href="https://www.smartkarma.com/insights/nexon-m-a-amazon-comcast-enter-the-race-it-ain-t-over-till-its-over" target="_blank" data-smartkarma-citation="insights:28283">Nexon M&amp;A: Amazon &amp; Comcast Enter the Race - It Ain't Over Till Its Over!</a></li>
<li><a href="https://www.smartkarma.com/insights/homeplus-reit-ipo-the-largest-ever-reit-ipo-in-korea" target="_blank" data-smartkarma-citation="insights:27838">Homeplus REIT IPO - The Largest Ever REIT IPO in Korea</a></li>
<li><a href="https://www.smartkarma.com/insights/a-war-between-netflix-disney-for-studio-dragon" target="_blank" data-smartkarma-citation="insights:27802">A War Between Netflix &amp; Disney = $$$ for Studio Dragon</a></li>
</ul>Our model portfolio was up 2.4% in February (cash is 35% of model portfolio), outperforming KOSPI which was down 0.4% in February. Our model portfolio is equal-weighted at the beginning of each month. The top performing stocks in our model portfolio in February included <a href="https://www.smartkarma.com/entities/15983" target="_blank" data-smartkarma-citation="entities:15983:1">F&amp;F Co Ltd (007700 KS)</a>, <a href="https://www.smartkarma.com/entities/22839" target="_blank" data-smartkarma-citation="entities:22839:1">Netmarble Games (251270 KS)</a>, and LG Chem Pref.

The top 10 events impacting the Korean stock market, economy, &amp; politics in February were as follows:
Amazon and Comcast have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp
HOMEPLUS REIT IPO (the biggest ever REIT IPO in Korea)
CONTINUED CONCERNS ON SEMICONDUCTOR SECTOR
ECOPRO BM IPO 

WAR AGAINST HUAWEI 
CONSOLIDATION OF THE KOREAN SHIPBUILDING SECTOR
CLOSING OUT THE BGF CO/BGF RETAIL PAIR TRADE
DOOSAN HEAVY INDUSTRIES &amp; DOOSAN E&amp;C RIGHTS OFFERINGS
CONSOLIDATION OF KOREAN CABLE TV INDUSTRY
SOLAR STOCKS - POSITIVE BOOST FROM HIGHER CHINESE SUBSIDIES 
The top three reports we wrote in February related to the Korean market were as follows (in terms of views &amp; appreciates): 
Nexon M&amp;A: Amazon &amp; Comcast Enter the Race - It Ain't Over Till Its Over!
Homeplus REIT IPO - The Largest Ever REIT IPO in Korea
A War Between Netflix &amp; Disney = $$$ for Studio Dragon
Our model portfolio was up 2.4% in February (cash is 35% of model portfolio), outperforming KOSPI which was down 0.4% in February. Our model portfolio is equal-weighted at the beginning of each month. The top performing stocks in our model portfolio in February included F&amp;F Co Ltd (007700 KS), Netmarble Games (251270 KS), and LG Chem Pref. 

Korea Stock Market Monthly Recap #33 (February 2019)

Event-Driven

In a surprising move, it was reported after the market close today that <a href="https://www.smartkarma.com/entities/409" target="_blank" data-smartkarma-citation="entities:409:1">Amazon.com Inc (AMZN US)</a> (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire <a href="https://www.smartkarma.com/entities/16032" target="_blank" data-smartkarma-citation="entities:16032:1">Nexon Co Ltd (3659 JP)</a>/NXC Corp. The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon's share price. Prior to the entrance of Amazon and Comcast in this M&amp;A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.Now, Amazon and Comcast's entrance into this M&amp;A battle has made it a lot more exciting and uncertain. <a href="https://www.smartkarma.com/entities/16032" target="_blank" data-smartkarma-citation="entities:16032:1">Nexon Co Ltd (3659 JP)</a>'s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon's share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon's share price. Prior to the entrance of Amazon and Comcast in this M&amp;A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.Now, Amazon and Comcast's entrance into this M&amp;A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)'s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon's share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

Nexon M&A: Amazon & Comcast Enter the Race - It Ain't Over Till Its Over!

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/000/original/2019-02-16_10-06-13.png?1550279195" class="editor-image img-responsive" data-smartkarma-image-id="79000"></figure><div class="content-caption">Source: Japan Analytics</div>WORST Q SINCE AUTUMN 2016 - Since our last Results Flash in November - <a href="https://www.smartkarma.com/insights/japan-autumn-results-revisions-flash-flatlining-weakest-quarter-in-two-years" target="_blank" data-smartkarma-citation="insights:25804">Japan: Autumn Results &amp; Revisions Flash - Flatlining + Weakest Quarter in Two Years</a> - the operating and net profits of Japanese listed companies have peaked and declined by 2.0% and 7.5%, respectively while forecasts for the same have fallen by 1.7% and 4.1%. The stock market's initial reaction to the peaking of earnings for this cycle was a sharp 15.5% decline which climaxed on Christmas Day. A softer tone from the US Federal Reserve and a weaker Yen have helped restore a degree of confidence and the recent 12.1% rally has taken aggregate market capitalisation back to early-December.  As a result of the downturn in profits, trailing and forecast earnings multiples have reverted to August 2018 levels and can no longer be considered a bargain. For the restoration of a 'normal' market multiple (16.7x), either share prices have to rise by 18% (all else equal) or net income has to decline by a further 16%. Our money is on the latter being the more likely outcome.<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/004/original/2019-02-16_10-43-29.png?1550281425" class="editor-image img-responsive" data-smartkarma-image-id="79004"></figure>Source: Japan Analytics
</div>ROLLING TTMs - Our series of rolling trailing-twelve-month (TTM) quarterly aggregates of all listed companies confirm the profit peak. Revenues are still increasing by 5-6% a year, and by 1-2% a quarter, however, the rate of increase is slowing and the implied growth rate for the current quarter is just 0.5%. Operating Income declined by 1.9% qoq in the quarter just declared and will be flat this quarter, although, as few companies revise full-year forecasts with Q3 earnings results, this forecast should be considered optimistic. Operating margins are forecast to be 33bps lower than in TTM-3. TTM Net Income fell by 8% qoq, although yoy growth is still a positive 3%. The 1.6% forecast growth for this quarter implies that the most recent quarter had an excessive level of write-offs. We are not so sanguine.SECTOR BREAKDOWNS - In the DETAIL section below we shall examine the trends in earnings results and forecasts for the 30 sectors that make up our Market Composite.

Source: Japan AnalyticsWORST Q SINCE AUTUMN 2016 - Since our last Results Flash in November - Japan: Autumn Results &amp; Revisions Flash - Flatlining + Weakest Quarter in Two Years - the operating and net profits of Japanese listed companies have peaked and declined by 2.0% and 7.5%, respectively while forecasts for the same have fallen by 1.7% and 4.1%. The stock market's initial reaction to the peaking of earnings for this cycle was a sharp 15.5% decline which climaxed on Christmas Day. A softer tone from the US Federal Reserve and a weaker Yen have helped restore a degree of confidence and the recent 12.1% rally has taken aggregate market capitalisation back to early-December.  As a result of the downturn in profits, trailing and forecast earnings multiples have reverted to August 2018 levels and can no longer be considered a bargain. For the restoration of a 'normal' market multiple (16.7x), either share prices have to rise by 18% (all else equal) or net income has to decline by a further 16%. Our money is on the latter being the more likely outcome.
Source: Japan Analytics
ROLLING TTMs - Our series of rolling trailing-twelve-month (TTM) quarterly aggregates of all listed companies confirm the profit peak. Revenues are still increasing by 5-6% a year, and by 1-2% a quarter, however, the rate of increase is slowing and the implied growth rate for the current quarter is just 0.5%. Operating Income declined by 1.9% qoq in the quarter just declared and will be flat this quarter, although, as few companies revise full-year forecasts with Q3 earnings results, this forecast should be considered optimistic. Operating margins are forecast to be 33bps lower than in TTM-3. TTM Net Income fell by 8% qoq, although yoy growth is still a positive 3%. The 1.6% forecast growth for this quarter implies that the most recent quarter had an excessive level of write-offs. We are not so sanguine.SECTOR BREAKDOWNS - In the DETAIL section below we shall examine the trends in earnings results and forecasts for the 30 sectors that make up our Market Composite.  

Japan: Winter Results & Revisions Flash - Cycle Earnings Peak Was December 26th

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/5169" target="_blank" data-smartkarma-citation="entities:5169:1">NCsoft Corp (036570 KS)</a>'s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). </li>
<li>Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. </li>
<li>We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. </li>
</ul>



NCsoft Corp (036570 KS)'s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 


NCsoft: Major Highlights of 4Q18 Earnings Conference Call

<a href="https://www.smartkarma.com/entities/22839" target="_blank" data-smartkarma-citation="entities:22839:1">Netmarble Games (251270 KS)</a> officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:<ul>
<li>Avoid the cultural backlash from Korean gamers</li>
<li>Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. </li>
<li>Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. </li>
</ul>

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:
Avoid the cultural backlash from Korean gamers
Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 


Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Japan

CAPCOM CO., LTD. develops consumer video game software.  The Company also develops, manufactures, markets, and leases arcade game machines.  Capcom also operates amusement facilities.

Konami Holdings Corporation provides digital entertainment, health and fitness and gaming products. The Company develops and sells video games, mobile games and computer games, gaming machines, pachislot and pachinko machines, and fitness machines as well as operates health and fitness clubs.

ORACLE CORPORATION JAPAN sells a variety of software, including database management system software, application development tools, decision-making support tools, and business related applications.  The Company also provides support services for users.

Trend Micro Incorporated develops and markets anti-virus computer software and internet security software.  The Company also sells its products in the United States, Europe, and Asia.

SQUARE ENIX HOLDINGS CO., LTD. develops and sells entertainment software for home video game consoles including Dragon Quest and Final Fantasy series. The Company also publishes books such as informational guide books for its game software, and comic magazines and books.  Additionally, Square Enix sells character goods and stationery items from its software products.

OBIC Business Consultants Co.,Ltd. develops and markets business solution packaged software. The Company's products include software for accounting, banking, wage calculation, sales management, inventory control, and tax calculation. OBIC Business Consultants Co Ltd. also provides support and training services.

FUJI SOFT INCORPORATED is an independent software developer, specializing in communications and machine control software, business application software for bank and insurance companies, and operating system software.  Fuji Soft also installs, manages, and maintains computer systems.  The Company develops and sells word processing packaged software and also provides internet service.

Koei Tecmo Holdings Co.,Ltd. is a holding company which was established through the merger of Koei Co., Ltd. and Tecmo Ltd. The Company develops and distributes video game software for personal computers and home video game consoles. The Company also operates other media business such as marketing of books and CDs and amusement facility operation.

NSD CO., LTD is an independent computer software development company. The Company's products include operating systems, business software for financial industry, and process control systems.  NSD also provides computer services including managing computer systems and data entry. The Company also sells computers and its peripheral equipment.

Justsystems Corporation develops and sells computer application software. The Company's products include Ichitaro, a Japanese language word processing program.  Justsystems also develops network software.

Xero Limited offers an online accounting system.  The software features bank transaction importing, a cashbook, a general ledger, invoicing, accounts receivable, accounts payable, financial reporting, and management of expense claims.

Aspen Technology, Inc. provides software solutions. The Company offers asset optimization software that optimizes asset design, operations, and maintenance in complex, industrial environments to enable organizations to meet their business goals for sustainability and profitability. Aspen Technology serves customers worldwide.

Paycom Software Inc provides cloud-based HCM software solution delivered as Software-as-a-Service.  The Company provides functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement.

Check Point Software Technologies Ltd. develops, markets and supports a range of software and hardware products and services for information technology (IT) security and offers its customers a network and gateway security solutions, data and endpoint security solutions and management solutions.

SS&C Technologies Holdings, Inc. develops and markets computer software for financial services providers.  The software enables trading and modeling, portfolio management and reporting, accounting, performance measurement, reconciliation, reporting, processing, and clearing.

Manhattan Associates, Inc. provides information technology solutions for distribution centers.  The solutions are designed to enable the efficient movement of goods through the supply chain.  The Company's solutions optimize the receipt, storage, and distribution of inventory, as well as manage equipment and personnel within a distribution center.

HubSpot, Inc. provides a cloud-based marketing and sales software platform. The Company offers integrated applications that helps in lead generation and social marketing.

Oracle Financial Services Software Ltd. provides comprehensive information technology solutions to the financial services industry worldwide. The Company provides transaction processing and accounting software for banks, investment managers and mutual funds. Oracle Financial also provides internet delivery of financial services as well as business intelligence and analytical applications.

PTC Inc. develops and delivers technology solutions, comprised of software and services. The Company's technology is primarily used by discrete manufacturers to design, operate and maintain complex products. PTC's technology is also used to connect products to the Internet for purposes of capturing and analyzing information from them.

Tyler Technologies, Inc. provides end-to-end information management solutions and services for local governments. The Company's client base includes local government offices throughout the United States, Canada, Puerto Rico, and the United Kingdom.

Nexon Co., Ltd. mainly develops and services, online games for PC and mobile devices. The company also offers consulting services related to online-games. Nexon operates in Japan.

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Nexon (3659 JP)

Korea Stock Market Monthly Recap #33 (February 2019)

The top 10 events impacting the Korean stock market, economy, & politics in February were as follows: Amazon and Comcast have submitted initial...

Douglas Kim

Nexon M&A: Amazon & Comcast Enter the Race - It Ain't Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176...

Douglas Kim

Japan: Winter Results & Revisions Flash - Cycle Earnings Peak Was December 26th

WORST Q SINCE AUTUMN 2016 - Since our last Results Flash in November - Japan: Autumn Results & Revisions Flash - Flatlining + Weakest Quarter...

Campbell Gunn

NCsoft: Major Highlights of 4Q18 Earnings Conference Call

NCsoft Corp (036570 KS)'s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down...

Douglas Kim

Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing...

Douglas Kim

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