South Korea

• Hanwha Galleria (452260 KS) is the 23rd company in our Korea Small Cap Gems series. 
• Hanwha Galleria is a spun-off company from Hanwha Solution. Hanwha Galleria’s shares have declined 39% since being relisted on 31 May 2023. 
• Hanwha Galleria is a deep value stock with undervalued real estate assets. Chairman’s son is also buying aggressively and there is a big catalyst for Five Guys launch in Korea. 

• Ecopro BM (247540 KS) and Kum Yang (001570 KS)’s shares are down 2.5% and 4.5%, respectively today, driven by news of insiders at these companies selling their shares.
• It is estimated that the total amount of Ecopro BM shares sold by insiders and related parties was about 20 billion won in July by more than 12 insiders/related parties.
• We are increasingly concerned about insiders selling at Ecopro BM and Kum Yang. Coupled with lofty valuations, we think there is a higher probability of downside risk on these names. 

• On 1 August, the Korea Exchange approved the transfer of listing of Nice Information Service Co (030190 KS) from KOSDAQ to KOSPI. 
• Nice Information Service will also be deleted from KOSDAQ 150 index and it will be replaced by Hydro Lithium (101670 KS). 
• The recent share price decline in Nice Info Service has resulted in more attractive valuations for the company.

• We discuss the end of the mandatory lock-up periods for 40 stocks in Korea in August 2023, among which 2 are in KOSPI and 38 are in KOSDAQ.
• These 40 stocks on average could be subject to further selling pressures in August and could underperform relative to the market. 
• Among these 40 stocks, the top five market cap stocks include HK inno.N, PhilEnergy, CJ CGV Co Ltd, Sure Soft Tech, and CanariaBio.

• On 28 July, Macquarie Korea Infra Fund (088980 KS) announced that it will conduct a rights offering worth 361 billion won, representing 7.4% of its current market cap. 
• The major uses of funds from the rights offering include acquisition of a city gas supplier (128 billion won) and investment in Incheon-Gimpo Expressway private investment project (128 billion won).
• We have a positive view of this rights offering. We believe the acquisition of CN City Energy and the investment in Incheon-Gimpo Expressway will add additional value on the company. 

• Starting Monday, July 31st, the FSS-operated disclosure website, DART (Data Analysis, Retrieval, and Transfer System), will provide an English search service for all disclosures.
• This measure will open up possibilities for diverse position strategies that require timeliness and comparability for Korean local stocks, leading to a significant turning point.
• This calls for a more comprehensive approach in identifying the overall market flow. We should be attentive to potential alterations in the structure of foreign flows.

• We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 111 Inc (YI US), Chindata Group (CD US), Estia Health (EHE AU), ENM Holdings (128 HK), JSR Corp (4185 JP), Costa Group Holdings (CGC AU).
• Lowest spreads – Healius (HLS AU), Liontown Resources (LTR AU), Toyo Construction (1890 JP), Penguin International (PBS SP), Kenedix Retail REIT (3453 JP), ARTERIA Networks Corp (4423 JP).

• This is a classic swap arbitrage of shorting the acquirer and using the tendered shares to repay it. However, executing now would be meaningless as the swap ratio isn’t finalized.
• Nevertheless, we should consider securing a long position in OCI Holdings in advance. The target (45%) is quite substantial, indicating that the practical allocation rate won’t plummet dangerously below 1.
• Additionally, the likelihood of OCI Holdings’ swap price plummeting to completely nullify the 5.6% spread immediately after its determination appears to be low based on the current context.

• The KRX has approved Nice Information Service Co (030190 KS)‘s transfer from the KOSDAQ Board to the KOSPI Board. The transfer could take place in the next two weeks.
• Hydro Lithium (101670 KS) was the highest ranked non-constituent from the Industrials sector at the June rebalance and could replace Nice Information Service (030190 KS) in the KOSDAQ 150 Index.
• Nice Information Service Co (030190 KS) has no chance of inclusion in the Korea Stock Exchange KOSPI 200 (KOSPI2 INDEX) and will not be short sell eligible post section transfer.

• I tally 42 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Two new deals this week: Talon Energy (TPD AU)‘s non-binding Offer from Strike Energy (STX AU); and Pacific Current (PAC AU)‘s cash/scrip NBIO from Regal Partners (RPL AU).
• Key updates took place for Toshiba Corp (6502 JP), Eoflow (294090 KS), and 111 Inc (YI US).

• SK Hynix’s Q2’23 revenue increased ~50% QoQ with bit shipment growth of ~35% for DRAM, ~50% for NAND
• AI-Driven demand for DDR5 & HBM pushed DRAM QoQ ASP growth into positive territory for the first time in 9 months. 
• But it’s still stormy weather ahead as mainstream DRAM, along with NAND ASPs continue their downward slide

• On 28 July, OCI Holdings (010060 KS) announced that it plans to conduct a tender offer to purchase up to 45% stake in OCI Co (456040 KS). 
• The tender offer price of OCI Co is 139,000 won. The method of this tender offer is to issue new common shares of OCI Holdings.
• In the short term (one month), we expect OCI Co’s shares to outperform OCI Holdings shares. This deal is structured to mainly benefit the OCI Group’s insiders.

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. 21Vianet Group
2. SK Hynix
3. Yuexiu Property
4. Nameson Holdings
5. China Jinmao Holdings

and more…

SK Hynix has reported weak Q2/23 results as expected. While the Q2 results registered a recovery on account of an improvement in the memory semiconductor market, the recovery was from a very low base in Q1. Performance remained abysmal compared to last year, with revenue falling by half y-o-y and EBITDA plunging 92%. The financial risk profile continued to be very weak, with large negative FCF, fast-increasing debt and soft earnings.

We believe there is a high level of optimism in AI-related companies, including SK Hynix. Despite the weak results (with some signs of recovery from a low base), the company’s share price surged yesterday.

We maintain our forecasts. Considering the industry downturn, we expect FY 2023 EBITDA to decline c. 80-85% y-o-y, with significantly negative FCF. Moreover, debt should spike c. 50% to cover the negative FCF and fund the USD 2 bn payment for Solidigm. This will likely bring Debt/EBITDA to stressed levels (e.g. 7-8x) at year-end. That said, we expect improvement from FY 2024, on the back of an industry recovery.

We see a high likelihood of downgrades by the agencies in the next 1.5 years. SK Hynix is rated Baa2 (negative)/BBB- (negative)/BBB (stable) by Moody’s/S&P/Fitch. We expect the company to hit the negative rating triggers, given the industry decline and debt-funded acquisition of Solidigm.

• HD Hyundai Global Service is getting ready to complete its IPO in 2024.
• The local media currently estimates the value of HD Hyundai Global Service to be about 2 trillion won to 3 trillion won.
• According to our NAV analysis, it suggests a base case valuation of 75,260 won per share for HD Hyundai, representing a 22% upside from current levels.

• On 27 July, SK Telecom announced a sizeable share buyback worth 300 billion won (including shares cancellation of 200 billion won) and quarterly dividend of 181 billion won. 
• SK Telecom will pay a quarterly DPS of 830 won, which represents 1.8% of its current price of 45,900 won. 
• SK Telecom is trying to boost its share price which has been negatively impacted by the regulators’ pressure to cut telecom tariff rates and also increase competition. 

• At the current stage, with the three-month review period almost complete, there will likely be two additions and two deletions: 
• Additions: KG Mobility (003620 KS) & Nexen Tire Corp (002350 KS) Deletions: Sebang Global Battery (004490 KS) & Kumho HT Inc (214330 KS)
• In the past few years, KRX Autos has shown a significant price impact for constituent changes on the rebalancing trading day. This pattern will likely repeat in the upcoming rebalancing.

• Medtronic Plc (MDT US) aims to acquire Eoflow (294090 KS) through share purchase agreements (SPA), a share subscription agreement (SSA) and a public tender offer at KRW30,000.
• Since the deal announcement on 26 May, the spread has widened, reflecting deal risk around patent litigation risk, regulatory approvals and the minimum acceptance condition.
• Our assessment of these risks suggests a low probability of a deal break. At the last close, the gross spread is an attractive 8.5%. 

• The chances of SKT’s inclusion in the August MSCI Review seem slim. SKT narrowly missed meeting the 15% threshold on both Day 1 and Day 2 during this review.
• SK Telecom’s buyback completion can be accelerated to align with the MSCI November Review period, just like the previous case of KT Corp back in April.
• The estimated size of passive funds flowing into SKT is approximately ₩160 billion, which is expected to be around 5.5 times the average daily trading volume (ADTV).

• LGES provided a lower sales guidance in 3Q 2023 due to slower sales in Europe. LGES expects its sales in 3Q 2023 to decline in a QoQ basis.
• The share prices of the top 12 rechargeable battery names in Korea are down on average 13.9% in the past two trading days.
• We believe that the overall sentiment on the rechargeable battery sector in Korea has started to turn sour which could have a further negative impact on companies such as LGES. 

• Samsung Biologics (207940 KS) reported record-high revenue and operating profit of KRW866 billion and KRW253 billion, up 33% and 49%, YoY, respectively in 2Q23, aided by contract signing spree.
• With continued orders from the leading global pharmas, the company’s total cumulative CMO contracts reached to $11.3B in July, up 19% from $9.5B at the end of 2022.
• Outlook for H2 is more positive with revenue from Plant 4 will be reflected from Q3. Two new biosimilars launch in the U.S. and EU will also add to revenue.

• Fadu’s IPO price has been confirmed at 31,000 won (top end of the IPO valuation range). A total of 1,082 institutions participated, with a demand ratio of 362.9 to 1.
• Fadu is one of the biggest IPOs in Korea so far in 2023. 
• Our base case valuation analysis suggests implied market cap of 2.2 trillion won or 43,676 won per share, which represents 41% higher than the IPO price.

• The review period for the September rebalance ends on 31 July, the changes will be announced towards end August and implemented at the close of trading on 7 September.
• There is one change currently for each of the Secondary Battery, Bio and Game indices. Then there are a couple of changes for the Internet and BBIG indices.
• There are four stocks that will have over 2 days of ADV to trade from passive trackers and these stocks could move around announcement of the changes.

• In this insight, we provide an update of Medtronic’s tender offer of Eoflow. 
• The foreign ownership of Eoflow has surged in the past two months from 6.5% on 25 May to 33.2% as of 24 July. 
• We continue to believe that there is 95%+ probability of this M&A getting completed at the tender offer price of 30,000 won and Eoflow eventually becoming delisted in 2H 2023. 

• As the possibility of implementing the pre-disclosure rule in the second half of this year arises, the local block deal market is expected to become more active. 
• Specifically, there are observable movements among Kosdaq mid-sized companies that are particularly sensitive to deal execution risk. This suggests that LHJ’s KIS may further solidify its dominance.
• Significant increases in trading volume through KB Securities could serve as potential clues indicating the imminence of block deals in companies where the likelihood of such deals is high.

• KRX stated in this press release that they have identified the suspected stocks involved in illegal trading and have reported them to the financial authorities (Korea FSC and Korea FSS).
• The primary concern in the short term seems to revolve around whether the battery stocks are among the ones suspected of illegal trading, as reported to the financial authorities.
• We must remain vigilant and ready for the potential recurrence of CFD-related price plunges, as seen in the recent two instances, affecting specific stocks in the short term.

• We expect CPNG to report C2Q23 revenue and profit in-line and (31.6%) vs. cons., respectively. CPNG’s profit miss is largely due to rapid expansion in Taiwan…
• …which we estimate it will impact net profit by up to 40% this year.  AliExpress continues its development in South Korea, Temu, is expected to put pressure on Coupang. 
• We maintain SELL on Coupang and revise down this year’s EPS estimate by 16% and cut our TP to US$ 13.7 to reflect the changes on the profit side.

• In this insight, we discuss the alpha generation through companies that announced share buybacks in Korea in June and July 2023.
• We provide a list of 38 stocks in the Korean stock market that have announced share buyback programs in June and July 2023.
• The top four market cap stocks that have announced share repurchases include Celltrion Inc, Celltrion Healthcare, Hyundai Elevator, and SFA.

• The review period for the September rebalance of the KOSPI Size Indices started 1 June and will end 31 August. The changes will be implemented at the close 7 September.
• We see 8 migrations from MidCap to LargeCap, 7 migrations from LargeCap to MidCap, 6 new adds to MidCap, and 16 migrations from SmallCap to MidCap.
• Historically, stocks migrating from SmallCap to MidCap have outperformed stocks that are migrating between other categories.