Daily Industrials: HDC Holdings Stub Trade: Current Status & Trade Approach and more

In this briefing:

1. HDC Holdings Stub Trade: Current Status & Trade Approach
2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War
3. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments
4. U.S. Equity Strategy: Oversold Rally Continues
5. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail

1. HDC Holdings Stub Trade: Current Status & Trade Approach

• HDC Holdings (012630 KS) and HDC-OP (294870 KS) price gap is now at a nearly record high. Holdco discount is now 60% to NAV. On a 20D MA, Holdco and Sub are currently below -1 σ.
• I initiated a stub trade on the duo on Dec 11. It paid off on a short term horizon until the duo reached within -0.5~0 σ on a 20D MA. Yield peaked at 4.6% on Dec 14. If you approached with a longer term horizon, things wouldn’t have been as enjoyable.
• The only possibly explainable factor for the recent price divergence is HDC I-Controls’ need to dump a 1.78% Holdco stake. 1.78% overhang risk is not enough to sustain this much divergence and current 60% Holdco discount.
• The duo has again entered < -1 σ territory at yesterday’s closing prices. I’d first make another short-term stub trade. I’d hold onto the position until they reach within -0.5~0 σ on a 20D MA with a loss cut at -5%. But a little longer term approach to hunt for a higher yield wouldn’t be a bad idea at this point.

2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a bid. On 7 January 2019, Konnectivity launched a voluntary conditional offer (VGO) at S$2.06 cash per share. Konnectivity is jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP).

3. Korea National Pension Fund & Voting Rights of Outsourced Korean Equity Investments

In this report, we discuss some of the major changes in regulation and recent important news related to the Korea National Pension Fund Service (NPS), including changes to the voting rights of outsourced Korean equity investments by NPS as well as how it may deal with the Hanjin Kal Corp (180640 KS) corporate governance issues. 

It was reported yesterday that the NPS will allow 57 trillion won ($51 billion) of Korean equity investments which are currently managed indirectly by numerous outsourced asset management companies to have their own respective voting rights. The Financial Services Commission (FSC) announced yesterday that an amendment to the enforcement ordinance of the Capital Market Act was passed allowing NPS’s indirectly managed Korean equity investments’ voting rights to be exercised by the outsourced asset managers rather than by NPS itself passed the Cabinet meeting. 

What are the major implication? As a result of this move, this will act as a key positive catalyst spurring on greater corporate activism since NPS’s outsourced fund managers will have greater freedom to make more aggressive decisions to improve shareholder value of Korean companies. In addition, it also reduces the overall responsibility of carrying out the Stewardship Code changes to not just on NPS but on the rest of the major asset management companies in Korea. 

4. U.S. Equity Strategy: Oversold Rally Continues

A combination of, optimism surrounding U.S.-China trade talks, and Fed Chairman Powell’s comments have led to a continuation of the oversold bounce which began on 12/26, and the S&P 500 is now trading just below the 12/19 pre-Fed rate hike area. ~2,350 on the S&P 500 remains the support level to monitor. A retest of this low remains the most likely scenario, though it is far from a guarantee due to the potential for a “V” reversal. We examine an array of factors leading to our intact cautious outlook, and highlight attractive set-ups within Consumer Discretionary and Health Care Sectors.

5. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail

In this report, we provide an analysis of our pair trade idea between BGF Co Ltd (027410 KS) and Bgf Retail (282330 KS). Our strategy will be to be long BGF Co & Short BGF Retail. BGF Co Ltd (027410 KS)‘s share price plummeted by 48% in the past year while Bgf Retail (282330 KS) had a tiny gain of 0.7% in the same period. In the past year, BGF Co was down versus BGF Retail for pretty much the entire year. The BGF/BGF Retail share price ratio has been trending downwards since March 23rd, 2018. The current ratio is 0.037 and it is now close to approaching two σ. 

The following are the major catalysts that could boost BGF Co shares higher than BGF Retail shares within the next six months. 

• Temporary relief from big market fears, seasonality, & trading volume 

• Market’s concerns about the size of tender offer rather than the value of BGF Co post tender offer in 2018 
• NAV discount to its intrinsic value at an all-time high – Our NAV analysis of BGF Co suggests that it is trading at a 51% discount to its NAV, which is close to its all time highest discount. Typically, the Korean holdcos trade at a 20-40% discount to their intrinsic value so it is unusual for the holdco to trade with so much discount. 
• Government is likely to slow down the minimum wage hikes 

• Potential increases in brand usage fees