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

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Event-Driven

<p>Samsung postponed the finalization of a new 3-yr shareholder return plan. Also, they delayed the execution of the current plan's remaining to meet the 3-yr 50% FCF target to the next quarterly earnings call.</p><p>Was it a surprise?</p><p>Well, they need price management in the next two months to prevent the price from soaring for the inheritance taxes.</p><p>It is a 2-month before and after the passing date. The 60D prior was ₩58,515. The 60D post so far sits at ₩59,325. Understandably, they would want to be cautious.</p><table class="table table-striped">
<colgroup>
<col width="300">
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Family shareholding in Electronics"}'>Inheritance taxes calculation period</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Start"}'>Start</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Ending"}'>Ending</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"60D avg."}'>60D avg.</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Reference date"}'>Reference date</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44129}' data-sheets-numberformat='{"1":5,"2":"yyyy\". \"m\". \"d","3":1}'>2020. 10. 25</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"60D prior"}'>60D prior</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44068}' data-sheets-numberformat='{"1":5,"2":"yyyy\". \"m\". \"d","3":1}'>2020. 8. 25</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44128}' data-sheets-numberformat='{"1":5,"2":"yyyy\". \"m\". \"d","3":1}'>2020. 10. 24</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":58515}' data-sheets-numberformat='{"1":4,"2":"[$₩]#,##0"}' data-sheets-formula="=average(R[10]C[-2]:R[49]C[-2])">₩58,515</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"60D post"}'>60D post</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44129}' data-sheets-numberformat='{"1":5,"2":"yyyy\". \"m\". \"d","3":1}'>2020. 10. 25</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44189}' data-sheets-numberformat='{"1":5,"2":"yyyy\". \"m\". \"d","3":1}'>2020. 12. 24</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":59325}' data-sheets-numberformat='{"1":4,"2":"[$₩]#,##0"}' data-sheets-formula="=average(R[5]C[-2]:R[8]C[-2])">₩59,325</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - So far"}'>- So far</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44068}' data-sheets-numberformat='{"1":5,"2":"yyyy\". \"m\". \"d","3":1}'>2020. 8. 25</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44133}' data-sheets-numberformat='{"1":5,"2":"yyyy\". \"m\". \"d","3":1}'>2020. 10. 29</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":58588.63636363636}' data-sheets-numberformat='{"1":4,"2":"[$₩]#,##0"}' data-sheets-formula="=average(R[4]C[-2]:R[47]C[-2])">₩58,589</td>
</tr>
<tr><td colspan="4" rowspan="1" data-sheets-value='{"1":2,"2":"Source: KRX"}'>Source: KRX</td></tr>
</tbody>
</table><p><strong>But it doesn't mean that we have less chance to hear year-end special bonus (either dividends or buyback) for this year.</strong></p><p><strong>So, let's objectively estimate the current 50% FCF situation based on the latest data given in yesterday's earnings call.</strong></p>

Samsung postponed the finalization of a new 3-yr shareholder return plan. Also, they delayed the execution of the current plan's remaining to meet the 3-yr 50% FCF target to the next quarterly earnings call.Was it a surprise?Well, they need price management in the next two months to prevent the price from soaring for the inheritance taxes.It is a 2-month before and after the passing date. The 60D prior was ₩58,515. The 60D post so far sits at ₩59,325. Understandably, they would want to be cautious.








Inheritance taxes calculation period
Start
Ending
60D avg.


Reference date
2020. 10. 25
-
-


60D prior
2020. 8. 25
2020. 10. 24
₩58,515


60D post
2020. 10. 25
2020. 12. 24
₩59,325


- So far
2020. 8. 25
2020. 10. 29
₩58,589

Source: KRX

But it doesn't mean that we have less chance to hear year-end special bonus (either dividends or buyback) for this year.So, let's objectively estimate the current 50% FCF situation based on the latest data given in yesterday's earnings call.

Samsung Electronics FY18~20 FCF Estimations & Issues

Chart based progressive global trading strategies, Chart Partners

Thomas Schroeder

Chart based progressive global trading strategies

Chart Partners

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Our methodology fuses global market variables and isolates drivers in trends. We specialize in FX, index trade in NY and Asia with a focus on Asian stocks. 

Technical Analysis

<p>SPX turned bearish below 3,410 and we used the DJI to short at 27,700 (break below 28k pivot support) given the Dow is underperforming the SPX. NDX below 11,600 is the core risk driver. Lack of stimulus clarity and Covid on the rise weighing on pivot support breaks. Big tech earnings today expected to give NDX a lift (bounce trade up).</p><p>SPX 3,410 and NDX 11,600 represent key pivot resistance points for a fresh short phase and the bull/bear line.</p><p>Asia long levels outlined on weakness.</p>

SPX turned bearish below 3,410 and we used the DJI to short at 27,700 (break below 28k pivot support) given the Dow is underperforming the SPX. NDX below 11,600 is the core risk driver. Lack of stimulus clarity and Covid on the rise weighing on pivot support breaks. Big tech earnings today expected to give NDX a lift (bounce trade up).SPX 3,410 and NDX 11,600 represent key pivot resistance points for a fresh short phase and the bull/bear line.Asia long levels outlined on weakness.

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Equity Bottom-Up

Taiwan Semiconductor (TSMC) / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a> is currently trading at more than 2 standard deviations above its 5yr- and 10yr historical average PE range.  A premium makes sense given a significant improvement in their competitive positioning and being in the early stages of a cyclical upswing given the advent of 5G, which should also accelerate the adoption of Internet-of-Things applications. </p>
<p>This raises the question as to what a fair valuation multiple for TSMC should be. In this insight I make a comparative valuation by looking at, arguably, the two most important companies in TSMC’s value chain, both dominant in their competitive environments, namely TSMC’s largest supplier <a href="https://www.smartkarma.com/entities/asml-holding-nv" target="_blank" data-smartkarma-citation="entities:21097:1" rel="noopener">ASML Holding NV (ASML NA)</a> and their largest customer <a href="https://www.smartkarma.com/entities/apple-inc" target="_blank" data-smartkarma-citation="entities:666:1" rel="noopener">Apple Inc (AAPL US)</a>. </p>
<p>My analysis focuses on the companies’ competitive positioning, geographic exposure, customer concentration, growth profile and outlook, cash flow generation, balance sheets, capital allocation and returns on invested capital to assess what a fair relative valuation might look like.</p>

TSMC (2330 TT) is currently trading at more than 2 standard deviations above its 5yr- and 10yr historical average PE range.  A premium makes sense given a significant improvement in their competitive positioning and being in the early stages of a cyclical upswing given the advent of 5G, which should also accelerate the adoption of Internet-of-Things applications. 
This raises the question as to what a fair valuation multiple for TSMC should be. In this insight I make a comparative valuation by looking at, arguably, the two most important companies in TSMC’s value chain, both dominant in their competitive environments, namely TSMC’s largest supplier ASML Holding NV (ASML NA) and their largest customer Apple Inc (AAPL US). 
My analysis focuses on the companies’ competitive positioning, geographic exposure, customer concentration, growth profile and outlook, cash flow generation, balance sheets, capital allocation and returns on invested capital to assess what a fair relative valuation might look like.

<p>The market is awaiting two news from the October 29 3Q earnings call concerning shareholder return.</p><p><strong>The first one is a special dividend (or buyback) to meet the 50% 3-yr rolling FCF target.</strong></p><p>My estimation of the remaining room to hit the target is ₩10T, giving a ₩1,350 additional dividend. The latest estimation put out by a local brokerage (KTB) is ₩6.2T, delivering a ₩914 special dividend.</p><p>But please be aware that buyback instead of dividend is always possible.</p><p><strong>The other one is a new 3-yr shareholder return plan.</strong></p><p>The current one ends this year. Given the narrative heard lately, Samsung will likely continue the current level (50% FCF), if not more generous.</p><p>Well, the passing of Chairman Lee Kun-hee results in immense inheritance taxes. The family also needs a very generous shareholder return from Electronics.</p><div class="content-highlight">
<p>The latest report today by Chosun strongly speculates that the family won't take any creative path to address the tax situation.</p>
<p>They will directly inherit all of the father-owned stocks and pay inheritance taxes accordingly.</p>
<p><a href="http://www.investchosun.com/2020/10/27/3254585" target="_blank" rel="noopener">The link to the Chosun report.</a></p>
</div><p>So, the chances are pretty high that we will hear both this Thursday.</p><p><strong>Then, the question is buyback or dividend.</strong></p><p><strong>Even for a new 3-yr plan, buyback-heavy or dividend-focused?</strong></p>

The market is awaiting two news from the October 29 3Q earnings call concerning shareholder return.The first one is a special dividend (or buyback) to meet the 50% 3-yr rolling FCF target.My estimation of the remaining room to hit the target is ₩10T, giving a ₩1,350 additional dividend. The latest estimation put out by a local brokerage (KTB) is ₩6.2T, delivering a ₩914 special dividend.But please be aware that buyback instead of dividend is always possible.The other one is a new 3-yr shareholder return plan.The current one ends this year. Given the narrative heard lately, Samsung will likely continue the current level (50% FCF), if not more generous.Well, the passing of Chairman Lee Kun-hee results in immense inheritance taxes. The family also needs a very generous shareholder return from Electronics.
The latest report today by Chosun strongly speculates that the family won't take any creative path to address the tax situation.
They will directly inherit all of the father-owned stocks and pay inheritance taxes accordingly.
The link to the Chosun report.
So, the chances are pretty high that we will hear both this Thursday.Then, the question is buyback or dividend.Even for a new 3-yr plan, buyback-heavy or dividend-focused?

Samsung Elec Dividend or Buyback? Tax & Net Cash-In Calculations to the Family

<p>What's clear at this point is that the Lee family has to address immense inheritance tax (at least ₩9T).</p><p>Which family member gets how much is a secondary question. What's important now is the amount of the tax that the entire family has to bear.</p><table class="table table-striped">
<colgroup>
<col width="300">
<col width="150">
<col width="150">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Wealth owned by Lee Kun-hee (₩B)"}'>Lee Kun-hee's shareholding (₩B)</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Shareholding"}'>Shareholding</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Value"}'>60D avg. value</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Samsung Electronics Co Ltd"}' data-sheets-formula='=googlefinance(R[0]C[3], "name")'>Samsung Electronics Co Ltd</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.04175582576286636}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=Shareholding!R[7]C[2]">4.18%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":15006.24664}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-formula='=googlefinance(R[0]C[1], "price")*googlefinance(R[0]C[1], "shares")*R[0]C[-1]/1000000000'>15,006.2</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Samsung Life Insurance co., Ltd"}' data-sheets-formula='=googlefinance(R[0]C[3], "name")'>Samsung Life Insurance co., Ltd</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.2075959}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=Shareholding!R[99]C[2]">20.76%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":2619.860258}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-formula='=googlefinance(R[0]C[1], "price")*googlefinance(R[0]C[1], "shares")*R[0]C[-1]/1000000000'>2,619.9</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Samsung C&amp;T Corp"}' data-sheets-formula='=googlefinance(R[0]C[3], "name")'>Samsung C&amp;T Corp</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.029032145887066426}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=Shareholding!R[-19]C[2]">2.90%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":564.276232}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-formula='=googlefinance(R[0]C[1], "price")*googlefinance(R[0]C[1], "shares")*R[0]C[-1]/1000000000'>564.3</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Total"}'><strong>Total</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}'><strong>-</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":17626.106898}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-formula="=sum(R[-3]C[0]:R[-2]C[0])"><strong>17,626.1</strong></td>
</tr>
<tr><td colspan="3" rowspan="1" data-sheets-value='{"1":2,"2":"Source: KRX FIND"}'>Source: KRX FIND</td></tr>
</tbody>
</table><section class="figure"><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Wealth owned by Lee Kun-hee (₩B)"}'>Inheritance tax (₩B)</td></tr>
<tr>
<td><p>Total shareholding value</p></td>
<td style="text-align: right;">17,626.1</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Taxable after various deductibles (70%)"}'>Taxable after various deductibles (70%)</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":12432.1}' data-sheets-numberformat='{"1":2,"2":"#,##0.00","3":1}'>12,432.1</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"20% extra charge (management premium)"}'>20% extra charge (management premium)</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":14918.6}' data-sheets-numberformat='{"1":2,"2":"#,##0.00","3":1}'>14,918.6</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Inheritance tax at a 60% tax rate"}'><strong>Inheritance tax at a 60% tax rate</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":8951.1}' data-sheets-numberformat='{"1":2,"2":"#,##0.00","3":1}'><strong>8,951.1</strong></td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: KRX FIND"}'>Source: KRX FIND</td></tr>
</tbody>
</table></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/167/324/original/2.png?1603665274" class="editor-image img-responsive" data-smartkarma-image-id="167324"></figure><div class="content-highlight"><p><strong>The first question that will likely hit the market must be how the family would approach this tax situation.</strong></p></div></section>

What's clear at this point is that the Lee family has to address immense inheritance tax (at least ₩9T).Which family member gets how much is a secondary question. What's important now is the amount of the tax that the entire family has to bear.







Lee Kun-hee's shareholding (₩B)
Shareholding
60D avg. value


Samsung Electronics Co Ltd
4.18%
15,006.2


Samsung Life Insurance co., Ltd
20.76%
2,619.9


Samsung C&amp;T Corp
2.90%
564.3


Total
-
17,626.1

Source: KRX FIND







Inheritance tax (₩B)

Total shareholding value
17,626.1


Taxable after various deductibles (70%)
12,432.1


20% extra charge (management premium)
14,918.6


Inheritance tax at a 60% tax rate
8,951.1

Source: KRX FIND

The first question that will likely hit the market must be how the family would approach this tax situation.

LJY's New Samsung May Begin with Sale of Financial Arm (Life)

South Korea

Samsung Electronics Co., Ltd. manufactures a wide range of consumer and industrial electronic equipment and products such as semiconductors, personal computers, peripherals, monitors, televisions, and home appliances including air conditioners and microwave ovens. The Company also produces Internet access network systems and telecommunications equipment including mobile phones.

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