In this briefing:
- List of 23 Tradable Prefs in Korea: Samsung E-M & CJ CheilJedang Currently Catch the Eye
- Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)
- SK Hynix: Attractive at Current Level
- 31 January TOPIX & JPX Nikkei 400 Major Index Changes
- Korean Stubs Spotlight: A Pair Trade Between SK Telecom & SK Hynix
1. List of 23 Tradable Prefs in Korea: Samsung E-M & CJ CheilJedang Currently Catch the Eye
- This is the list of the realistically tradable prefs in Korea. Korea has a total 116 perfs. I filtered them by > ₩100bil market cap and > ₩0.2bil DTV. This filtering gives a total 23 pairs for share class trade. It is generally shown that dividend yield difference and liquidity affect pref discount. The higher div yield difference and the higher liquidity are, the less pref discount is.
- Two names are currently catching my eye. Samsung E-M had a major recovery move last Friday mainly on bargain hunting. The duo made +2σ jump in one single day. Common/pref price ratio is now at 142% of σ. This much premium for Common is something we haven’t seen in nearly 6 months. The recent price rally should be more of a sentimental boost. Short-term correction should be expected.
- CJ CheilJedang is also an interesting one here. The duo made -1.3σ jump last Friday. They are now at -185% of σ. Common/pref price ratio is currently close to 120D low on a 20D MA. The shares have been drifting sideways for almost a year now. There is no signal indicating any distinct trend that will break this sideways drift. This duo is also expected to see a quick mean reversion.
2. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)
- 2018 full results due on the 18th February 2019: Since our initial report on 3rd September 2018, SIQ’s share price has declined some 21% versus the ASX All Ordinaries fall of circa 8%. With results due, we expect the market to refocus on Smartgroup and its good growth story. This is important as much of the focus for the group in the last two years has been on the acquisitions being made. To see management return focus to organic growth, post these acquisitions should help investor confidence in SIQ. Specifically concentrating on the cross-selling of its services whilst benefiting from Australia’s tight labour market and corporates chasing incremental cost savings can only be positives.
- Review and upgrade to forecasts: With the benefit of further time to review SIQ’s business progress and the composition of our forecasts, we have increased fiscal 2018 and 2019 EPS forecasts 10% and 12% respectively. Much of our thought process is at the SG&A line, whilst the view that the overall trajectory of earnings remains on track.
- 2019 we expect to be a year of consolidation, with consistent growth: In the two years to the end of fiscal 2017, SIQ had made six acquisitions. These acquisitions were aimed at both industry consolidation, as well as complementary product build out. We expect 2019 to be a year where the benefits from these acquisitions are exhibited in both the bottom and top-line growth. We expect this even though 2019 may present macro challenges.
- We reiterate our view that SIQ offers Growth at a Reasonable price: SIQ’s forward multiples are positive for a company which has posted a long term book value growth rate of circa 7% (net of dividend) and is forecast to post a similar rate 2019 and in 2020. Based on our 2019 EPS forecasts SIQ should be able to deliver circa A$0.62/share, which implies 18% YoY growth and a 13 times P/E.
3. SK Hynix: Attractive at Current Level
Multiple news article mentioned SK Hynix’ weak Q4 2018 numbers due to the slowdown in the smartphone markets but the fact remains that:
- smartphone is the dominant communication tools
- smartphone penetration still has room to grow
- current model of smartphone is likely to remain the same for the next foreseeable future
- lower end smartphones will likely be the next growth driver
In this report we will discuss the following:
Q4 2018 result
Price action in 2018
Margin comparison with the peers
Exposure to the growing affordable smartphone segment
4. 31 January TOPIX & JPX Nikkei 400 Major Index Changes
On December 17th 2018, the TSE announced a somewhat strange and unexpected treatment of the TSE-calculated indices for two companies where shares were issued to shareholders of a foreign company where the Japanese company had acquired the foreign company through a Scheme of Arrangement under foreign jurisdiction.
The two companies were LIFULL (2120 JP) and Takeda Pharmaceutical (4502 JP).
The announcements for TOPIX and JPX Nikkei 400 were made then, and despite the events being entirely similar in construct, but different in month of Scheme Effective Date, they were put in the same month for Mitula and the first tranche of the Takeda inclusion, which was split between two months because of its large impact.
The large IPO last month of Softbank Corp (9434 JP) means there is another large inclusion going effective as of the open of trading on 31 January.
Wednesday is going to be a big day.
If everyone trades their required index amount on the day, it should be a trillion yen plus of flows.
5. Korean Stubs Spotlight: A Pair Trade Between SK Telecom & SK Hynix
In this report, we provide an analysis of our pair trade idea between SK Telecom (017670 KS) and SK Hynix Inc (000660 KS). Our strategy will be to long SK Telecom (017670 KS) and short SK Hynix Inc (000660 KS). Our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 25th are used in our pair trade. [Long SK Telecom – $0.5 million; Short SK Hynix – $0.5 million for total of $1.0 million].
The following are the major catalysts that could boost SK Telecom shares higher than SK Hynix shares within the next six to twelve months:
- Finally, a Higher DPS for SK Telecom is Likely, but Market Has Not Fully Factored In
- SK Hynix’s Plan for a 40% Lower Capex in 2019 Implies an Excess Inventory Condition
- 5G Service Ready to Start in March; Higher ARPU Typically Results in Higher Share Price
- SK Telecom’s Establishment of an Intermediate Holding Company Will Take Place in 2019
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