South Korea

• Environmental:  KEPCO’s power transmission tower construction is destroying ecosystems and posing a climate risk in various areas, which is also why the coal mine development project in Australia was suspended. 
• Social : 58% of KEPCO’s suppliers were found to be illegal subcontractors leading to controversy over work environment issues. Also, the construction of power transmission towers sparked serious community conflicts.
• Governance : Despite KEPCO’s large deficit, the company’s moral risk and poor risk management issues, such as corruption and excessive wages of employers, continue to surface. 

• There is no unlocking of treasury shares, so a flow betting on dramatic value accretion will not occur. For tendering, the proration risk appears to be relatively high.
• Passive trackers will sell at the close on February 24 and repurchase (likely only for Solutions) at the close on March 31. The flow size would be around 5.5x ADTV.
• ECO risk wouldn’t be a concern as the new rule will grant appraisal/preemptive rights to the existing shareholders. Also, Hanwha hinted at the possibility of choosing private placement over ECO.

• SillaJen Inc (215600 KS) has developed a differentiated pipeline of oncolytic vaccinia immunotherapy. Its lead drug candidate Pexa-Vec is in phase 2 clinical trial for renal cell carcinoma.
• SillaJen has acquired a first-in-class anti-cancer drug candidate BAL0891 from Basilea for upfront payment of $14 million. The company’s cash position is capable to fund the acquisition and R&D expenses.
• Korean Stock Exchange is expected to announce its decision on SillaJen stock trading resumption by October 12.

• WCP’s institutional subscription rate was 33.28 to 1, one of the lowest for an IPO this size. And nearly all orders sit below the lower end.
• WCP set the price at ₩60,000, even lower than the floor, at an implied market cap of ₩2T. And the issuer also reduced the offering volume from 9M to 7.2M. 
• Passive flows equivalent to about 3% of SO will likely flow into WCP by March next year. It is substantial enough to consider designing a flow trade setup.

• Access Bio Inc (950130 KS) has been reporting triple-digit revenue growth since 2020, thanks to massive demand for the COVID-19 tests. The performance continued in this year too.
• Going forward, the stellar revenue growth is not expected to be replicated as demand for COVID-19 tests looks uncertain beyond 2022. Revenue from the company’s malaria test is declining.
• Access Bio has developed monkeypox tests. However, monkeypox does not seem be a large and attractive market opportunity, which can compensate for the revenue loss from COVID-19 tests.

• WCP (WCP KS), a lithium-ion batteries separator company, has set its IPO price at KRW60,000 per share, a hefty 25-40% discount on the “desired” IPO price range of KRW80,000-100,000. 
• The target raise has declined from KRW720-900 billion (US$517-646 million) to KRW432 billion (US$310 million) due to the lower IPO price and offer shares.
• While the final IPO price is now reasonable, the process smacks desperation and calls into question the credibility of the syndicate’s forecasts. This is still an avoid.

In our next Webinar, we welcome Analyst Soo Young Kim , who will take us through the ESG risks present in South Korea and her analysis based on negative ESG incidents. 

The webinar will be hosted on Wednesday, 21 September 2022, 17:00 SGT/HKT.

Soo Young is the Head of ESG Intelligence at Who’s Good, Asia’s first AI-driven ESG Insight Provider. Using AI technologies and public data, Who’s Good provides objective and up-to-date corporate ESG insights on Asian companies.

• The value accretion that will occur by unlocking treasury shares will be more significant than Hyundai Dept. The treasury shares account for 10.64%, compared with 6.61% for Hyundai Dept.
• Neither Holdco nor Opco will likely remain in the KOSPI 200 after relisting. So we cannot expect PASSIVE inflow at the time of relisting.
• A tender will likely follow. However, neither is available for shorting. So, we should use Opco’s overheated price adjustment as an exit timing for our positions aimed at value accretion.

• Juice for cash & carry arbitrage doesn’t seem like much. Several names in contango, but the basis widening isn’t at a sufficiently arb-tradable level.
• Reverse cash & carry isn’t all that attractive either, but it certainly does offer more juice, even with borrow fees. Ssangyong C&E, SKT, Shinhan, and KB deserve our attention.
• A bit uncertain is whether the pattern of “LONG Spot until ex-dividend and Conversion to Short” through cash & carry will repeat itself this time.

• This is an equity spinoff where the existing shareholders receive shares in the spun-off company. But this creates two LISTED companies. In such a case, there won’t be appraisal rights.
• PASSIVE’s selling flow towards the trade suspension tends to be offset by ACTIVE’s buying flow aiming for value accretion. So, developing a timely entry/exit between these opposing flows is critical.
• Holdco’s 30% rule dynamic generally, in relative terms, leads to an increase in the value of Opco’s stake and a decline in the value of Holdco’s stake.

• On 16 September, Hyundai Dept Store and Hyundai Greenfood announced that they will complete equity spin-offs to create holding companies structures.
• It appears that the real reason these companies are trying to set up these structures maybe to raise the control by the major shareholders including Ji-Seon Chung and Kyo-Seon Chung.
• The spin-off ratio between the two companies is 23.24% for Hyundai Department Store Holdings and 76.76% for Hyundai Department Store. 

• Golfzon Commerce is getting ready to complete its IPO in Korea in October. The total offering amount is from 80.2 billion won to 99.8 billion won. 
• The expected market cap of the IPO is from 323 billion won to 336 billion won. The book building for the institutional investors starts on 11 October. 
• Golfzon Commerce operates Golfzon Market (a leading golf shop chain in Korea) and Golping (golf related e-commerce site). 

• HPSP (403870 KS) and Sungeel Hitech (365340 KS) are the candidates for Early Entry in the December rebalancing as they sit comfortably within the Early Entry zone.
• Rsupport (131370 KS) and Kona I (052400 KS) are safe deletion bets. If they are not deleted through the rebalancing process, they will most likely be excluded by Early Entry.
• HPSP and SungEel should see an inflow equivalent to 0.9x and 0.8x ADTVs, respectively. Rsupport and Kona I will likely suffer an outflow of 3.4x and 3.8x ADTVs, respectively.

• After the market close today, S.M.Entertainment announced that its Chairman Lee Soo Man will end the contract with Like Planning, a contents producing company owned by Lee Soo Man.
• We estimate that S.M.Entertainment has paid more than 160 billion won to Like Planning in the past 10 years.
• By ending the relationship between Chairman Lee Soo Man and Like Planning, this should have a major positive impact on S.M.Entertainment shares in the coming weeks. 

• Several local Korean media reported that the initial book building results for the WCP IPO has been disappointing.
• The IPO could be priced close to 60,000 won to 65,000 won won, which would be about 19%-25% lower than the low end of the IPO price range.
• The final decision as to whether or not WCP will go ahead with the IPO at lower price or delay it altogether is expected to be made on/near 19 September.

• The rebalancing trading will be at the close on October 13. The AUM currently amounts to ₩1.32T with 28 constituents, implying that the passive impacts wouldn’t be insignificant.
• It will likely show a similar pattern to the last rebalancing. With no constituent change, weight adjustment by 10% cap of top stocks leads to weight adjustment of the rest.
• An important variable here is the entry of newly listed stocks. SungEel Hitech and Sebitchem, the two larger cap stocks, appear to have a reasonably high inclusion probability.

• Openedges Technology (394280 KS) announced its IPO book building results. The IPO price has been determined at 10,000 won (33% lower than the low end of the IPO range).
• We maintain our Positive View on this IPO but we lowered our base case valuation by 33% to 16,542 won per share, representing a 65% upside from the IPO price.
• Open Edges Technology is a system semiconductor IP specialist with one of the world’s only integrated AI semiconductor design asset IP platform. Its sales increased by 376% YoY in 2021.

• Hyundai Heavy Industries (HHI) was listed on Korea Exchange on 17th September, 2021. Its one year lock-up will expire on 17th Sep, 2022.
• Hyundai Heavy Industries (HHI) is a South Korean shipbuilder. The company is majority owned by Korea Shipbuilding & Offshore Engineering (009540 KS) after the latter’s spin-off in 2019.
• In this note, we will talk about the upcoming lock-up expiry, along with recent updates.

• The Korea NPS released the yearly report for 2021 last week, which is attached at the bottom of this post. Yes, for this, an English version is available.
• The NPS also releases a status report every month that contains limited data. Based on the annual and monthly status reports, we can infer the allocation breakdown and flow trends.
• Through this post, let’s look at the shareholding changes and flow trends with the release of this annual report. Please note that this post does not make any investment recommendations.

• WCP aims to raise around US$690m via selling a mix of primary and secondary shares in its Korean IPO. Its demand forecasting is slated to take place today and tomorrow.
• WCP designs, manufactures, and sells separators, which are one of the four core materials for secondary Lithium-ion batteries
• In this note, we will talk about the updates from the revised filing, and re-look at valuations.

• KODEX Battery ETF rebalancing began on September 8 and runs until this Tuesday, the 14th.  Its AUM is 1.3 trillion won, and the number of constituents is only 25.
• The quantity change in one CU for the 13th was confirmed. Tomorrow’s are estimates based on equal daily weights. With still two-thirds to go, the flow/price impact looks still juicy.
• SK Innovation, L&F, LG Energy, and Ecopro will show a significant size in weight change and passive flow, so they are safe names for a LONG SHORT basket trading.

• WCP (WCP KS), a lithium-ion batteries separator company, is set to launch its IPO of KRW900 billion (US$692 million). 
• We last discussed the IPO in WCP IPO: Updated Prospectus, Solid 1H22, Unchanged and Unattractive Price Range.
• Although the de-rating of peer multiples resulted in a decline in the syndicate’s intrinsic value, the IPO price range of KRW80,000-100,000 remains unchanged. The IPO price range is unattractive.