Daily Equities Bottom-Up: South Korea’s Plummeting Population Growth – Long Term Structural Impact on Korean Banks and more

In this briefing:

1. South Korea’s Plummeting Population Growth – Long Term Structural Impact on Korean Banks
2. UFO Moviez-Q2FY19 Results Update
3. Som Distelleries-Q2FY19 Results Update
4. CapitaLand Ltd – Premium Price for Ascendas-Singbridge
5. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun

1. South Korea’s Plummeting Population Growth – Long Term Structural Impact on Korean Banks

It was reported that South Korea’s population increased only 0.09% YoY at the end of 2018. The population growth has been declining in the past three decades in Korea. The population growth rate of 0.09% YoY in 2018 is even lower than the growth rate of 0.16% YoY in 2017. (Source: Korean Ministry of the Interior and Safety) The previous general estimates by various government agencies/research institutes of when the population in South Korea would decline were around 2028-2032. 

With the new available data, it is likely that these estimates will be revised drastically. In fact, it is possible that South Korea’s population could start declining around 2020-2022, contrary to previous estimates that suggested that South Korea’s population to start declining around 2028-2032.

The two leading Korean banks including Shinhan Financial (055550 KS) and Kb Financial Group (105560 KS) have been in a decade plus bear market. While these stocks may move up or down 10-15% within a short period of time, we think they are a structural, long-term short. Bank of Korea has been hesitant on raising the base interest rate. There are simply an overwhelming pressure to not to crash the real estate market. Because of this enormous pressure, the Korean banks have been losing out on the higher interest rate spreads they could have earned if the interest rates were raised much higher.  

2. UFO Moviez-Q2FY19 Results Update

Ufo Moviez India (UFOM IN) Q2FY19 results were in line with our expectations. While revenues declined by 4% YoY in Q2 FY19, PAT also declined by 4% YoY in the same period primarily due to the impact of D-Cinema sunset. We have mentioned in our earlier reports (click here and here) that the company is phasing out its distributor revenues from the Hollywood studio that may only last till FY20. We analyze the result.

3. Som Distelleries-Q2FY19 Results Update

Som Distilleries And Breweries (SDB IN) Q2FY19 results were in line with our expectations. While revenues witnessed a flat growth, PAT declined by 37% YoY in Q2 FY19 primarily due to seasonality impact on the beer volumes and higher depreciation on the new Karnataka plant. We analyze the results.

4. CapitaLand Ltd – Premium Price for Ascendas-Singbridge

CapitaLand Ltd announced yesterday that it will be acquiring Ascendas-Singbridge (“ASB”) from Temasek Holdings.

The agreed enterprise value for ASB was S$10,907 mil and the equity value of ASB payable to Temasek Holdings was S$6,036 mil.

This is a transaction that makes good strategic sense. CapitaLand and ASB’s businesses, sector and geographical exposures complement each other well.  Any tangible benefits from the synergies are likely to be seen over the mid to long term.  The increase in AUM and addition of new capital recycling platforms will make CapitaLand more appealing as a real estate fund manager to institutional investors and sovereign wealth funds.

However, the acquisition consideration for ASB is not cheap. CapitaLand is acquiring ASB at a price-to-book ratio of 1.15x. But this is a necessary step that CapitaLand has to take in order to execute its CapitaLand 3.0 strategy. 

From an investor’s perspective, concerns on the valuation of the deal, CapitaLand’s worsening credit metrics, and execution of the integration plan are likely to affect CapitaLand’s short-term share price performance. Management needs to demonstrate the ability to extract quantifiable synergistic value from the acquisition in order to justify the premium paid but this can only happen over the longer term.

5. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun

Lee Seo-Hyun (age 46), the billionaire second daughter of the Samsung Group Lee Gun-Hee, recently stepped down from her position as the CEO of Samsung C&T (028260 KS)‘s fashion business. After resigning from Samsung C&T, Lee Seo-Hyun will become a chairperson of the Samsung Foundation, focusing on corporate social responsibility activities.

Among the various fashion brands, the most problematic has been the 8 Seconds SPA brand, which has been continuing to lose money. Despite big ambitions to make 8 Seconds as one of the leading global SPA brands, this plan has fluttered, especially in the overseas markets such as China. This strongly suggests that there could be a big restructuring of the company’s fashion business in the coming months. 

Our NAV analysis of Samsung C&T suggests a range of 122k won to 139k won, which would represent an upside of 11% to 27%. In our NAV analysis, the investment stakes in affiliates were 19.2 trillion won, core business operating value was estimated at 9.9 trillion won (using 8x consensus OP in 2019), net cash of 2.2 trillion won, and Samsung Everland land value (post 50% taxes) of 1.8 trillion won. The range of value reflects the different discount for the quasi-holdco structure (20-30% discount).