Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

I investigate special situations, pairs, and index rebalancing trades in Korea.

Korea / Special Sits, Pairs, Index Rebalancing

Equity Capital Markets

C&amp;G Hi Tech Co Ltd (264660 KS) is basically an semiconductor equipment (precisely, chemical central supply system - CCSS for short) maker and supplier. It was founded in 2002 by the former Samsung engineer named Hong Sa-moon. Thanks to Hong's Samsung background and connections, the company immediately joined Samsung's supply chain inner circle in 2002. 4 years later in 2006, it also became SK Hynix' supply partner. The following year, the company caught the attention of Japan's NAGASE and eventually got equity investment (10%) from NAGASE who will continue to own a 5.07% stake after the IPO.What does this CCSS do?CCSS is a system that automatically supplies essential chemical materials to the critical equipment in the semiconductor and display panel production process. The key factor for a CCSS is the blending part. That is, blending precise chemical materials in the most accurate manner is the key differentiating factor, and exactly in this sense, C&amp;G Hi Tech is having a great success with the mega clients such as Samsung Electronics and Hynix. In fact, C&amp;G Hi Tech was Korea's first one to successfully commercialize CCSS, and its system structure is quite unique that it blends chemical materials at the central unit instead of each production unit. This way, it delivers much higher production capacity at a much lower error rate. Thanks to this unique system structure, the company is now a nearly monopolistic supplier of CCSS in Korea, and in the overall central supply system market it takes about 15-20% market share. (C&amp;G Hi Tech's actual CCSS equipment - Courtesy - News 1)plans to offer a total of 1,288,000 shares (100% new rights offering) at ₩16,000 - ₩20,000 which gives a market cap of ₩69.3bil - ₩86.6bil. Shinhan is the bookrunner. It will be listed in KOSDAQ later this month.IPO summaryCompany nameC&amp;G Hi Tech Co Ltd (264660 KS)FoundationJuly 16, 2002CEOHong Sa-moonHQ address162 Seungnyang−gil, Wongok−myeon, Anseong−si, Gyeonggi−do, KoreaCorporate homepagewww.cnghitech.comIndustry / specialtySemiconductor equipment and precision flow control systemTotal number of share offerings1,288,000 shares(100% new rights offering)Indicative price band₩16,000 - ₩20,000Total amount to be raised (at ₩16,000)₩20,608,000,000Target valuation (at ₩43,000)₩69.3bilBookrunnersMirae Asset Daewoo Securities Co Ltd (006800 KS)Yuanta Securities Korea (003470 KS)Hanwha Securities Co Ltd (003530 KS)BourseKOSDAQSource: DARTCCSS blending unit is the anchor business with a 44.31% share of its total sales. CCSS regenerative unit accounts for another 12,75%. So, CCSS alone accounts for 57.06% of its total sales. In addition, the company makes money by installing CCSS at the site of a client. This installation job generates 14.89% of its total sales as of 3Q17. So, the total coming from the CCSS business amounts to 71.95%. The company also provides one of the key chemical materials called 'fluoroplastics'. This accounts for 10.68% of its total sales. So, we can safely say that the CCSS related business is responsible for more than 80% of its current sales. Samsung Electronics, Japan's NAGASE and Hynix, these 3 clients are responsible for more than 80% of its sales. By client type, semiconductor makers are responsible for 72% of the total sales, whereas display panel makers are responsible for 17%.Sales breakdown by product type (₩ mil)2016Accu. 3Q17Chemical central supply system - blending unit20,69346.66%27,13744.31%Chemical central supply system - regenerative uint5,43512.26%7,80912.75%Sub-total26,12858.92%34,94657.06%Fluoroplastics8,28118.67%6,54410.68%Chemical central supply system installation4,2339.55%9,11814.89%Others5,70312.86%10,64117.37%Total44,345100.00%61,249100.00%Source: DARTSales breakdown by client type (as of 3Q17)Semiconductor72%Display17%Others11%Source: DARTSales breakdown by client (as of 3Q17)Samsung Electronics39.2%NAGASE (Japan)33.2%SK Hynix7.8%Others19.8%Source: DARTNow let's look at the valuations.The following 3 local peers were picked as the valuation peers. Their avg. PER on FY17e NP is 13.0x.3 local valuation peers(₩ mil)Systems Technology Inc (039440 KS)Dms Co Ltd (068790 KS)Oceanbridge (241790 KS)Accu. 3Q17 NP22,8886,1716,502Annualized FY17 NP30,5178,2288,669Number of issued shares12,733,67022,937,4879,124,980EPS (₩)2,396359950Reference price (₩)20,8686,95010,380PER (x)8.7119.3810.93Avg. PER (x)13.00Note: FY17 annualized NPs are derived by multiplying each valuation peer's accu. 3Q17 NP by 4/3. Source: DARTAt this 13.0x PER, C&amp;G Hi Tech's total value amounts to ₩111.4bil. From this, a 22.22% - 37.78% discount range was given. As a result, we have this indicative price band of ₩16,000 - ₩20,000 which gives a market cap of ₩69.3bil - ₩86.6bil.C&amp;G Hi Tech's PER valuation (₩ mil)Accu. 3Q17 NP6,425Annualized FY17 NP8,567Number of issued shares4,332,165EPS (₩)1,978PER (x)13.0xPrice per share (₩)25,715Note: FY17 annualized NP is derived by multiplying each valuation peer's accu. 3Q17 NP by 4/3. Source: DARTIndicative price bandPER based price per share₩25,715Discount %22.22% - 37.78%Indicative price band₩16,000 - ₩20,000Market cap₩69.3bil - ₩86.6bilSource: DART→ Local market mood and personal thoughtsBookbuilding actually began today and it will end tomorrow. Subscription will take place on Jan 16-17, and allocation will be done on Jan 19. Listing date will be announced later.Upcoming eventsCorporate IRJan 10BookbuildingJan 11-12IPO price determinationTBASubscriptionJan 16-17AllocationJan 19ListingTBASource: DARTShould we take this deal? I think we should. We all know Korea's local semicon equipment makers do not get much appreciation in the stock market. Generally, a 10x PER (or less) is granted. This is mainly because their heavy dependence on a few mega clients (yes SamE) and more importantly many of Korea's local semicon equipment makers lack 'real' differentiating technological values. However, in the case of this company, things are a bit different. Yes, C&amp;G Hi Tech is also heavily dependent on SamE. But unlike many other suppliers in SamE's supply chain, C&amp;G Hi Tech enjoys a nearly monopolistic status (at least in the field of CCSS), which is quite rare among SamE supply chain players. And its unique approach to the system structure is making this possible. That is, this company is a different breed which has actual technological differentiating values.Valuation wise, its indicative price band is like a 7.7x-9.6x PER on FY17e (if we assume its FY17 NP will be about ₩9.0bil). If this company is just one of the typical SamE value chain players with no clear technological differentiating value, this 7.7x-9.6x PER can hardly be an attractive point. But as I said, this company is a little more value-added company. It should deserve a higher valuation than the 7.7x-9.6x PER, and the mood of Korea's local market also seems to be agreeing with me on this. The general perception/mood among local investors seems that C&amp;G Hi Tech's valuation should be at least what its local peer called Systems Technology Inc (039440 KS) is currently getting from the market. STI (for short) makes a different type of chemical material processing equipment (similar but different from the one that C&amp;G Hi Tech makes), and it is currently getting a 12.0x PER on FY17e.(Systems Technology Inc (039440 KS) 1 year price chart - Courtesy Naver Finance)Systems Technology Inc (039440 KS) consensus(₩ mil)20162017E2018ESales180305400OP224159NP173146EPS (₩)1,3112,4573,635PER (x)8.8512.008.12Source: FnGuideYes, we all know that this debate of whether the semicon industry has peaked out or not is still going on and getting more heated. But some names still seem to be going very strong and unaffected by this peak-out debate. One great example is STI. Its share price has more than tripled just in one year, and it is still staying hot until now. This means, if you are a value creator rather than a mere value follower, then the market will continue to appreciate you no matter what the macro market conditions are. And the local perception seems to be that C&amp;G Hi Tech is another rare value creator in Korea's semicon supply chain. So, my personal feeling is you should consider taking this deal and if you will, then it will be better to be aggressive in the pricing in the bookbuilding.

C&G Hi Tech IPO Summary - Unfancy but Attractive Valuation Wise