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

HMM Perpetual Bond Conversion Situation Update for Short Position

HMM Is Likely the First to Be Subject to the Mandatory Offer that Comes into Force

Privatization of HMM: Enormous Shares Dilution Risk

HMM CB Conversion Is Official: New Share Listing Schedule & KOSPI 200 Corporate Actions

HMM CB Conversion on June 30: Shareholding Dilution & Float Reduction Risks

HMM, Another Massive CB Conversion (Share Dilution) Risk & Short Trading Opportunity

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<p>Today (October 13), HMM posted a "CEO Letter to Shareholders" on its website.</p><div class="content-highlight"><p><a href="http://www.hmm21.com/cms/company/irk/disclosure/dart/1209953_12686.jsp" target="_blank" rel="noopener">Here is the link to the HMM CEO Letter to Shareholders.</a></p></div><p>As shareholders' dissatisfaction grew over <a href="https://www.smartkarma.com/entities/hmm-co-ltd" target="_blank" data-smartkarma-citation="entities:13494:1" rel="noopener">HMM Co., Ltd. (011200 KS)</a> 's recent sharp decline in share price, the company's CEO Bae Jae-hoon took out a shareholder-friendly policy card including dividends to appease shareholders.</p><p>The first sentence of this letter is straightforward and clear: <strong>"We are reviewing shareholder-friendly policies due to shareholders' concerns about the share price decline."</strong> In fact, HMM shares have been corrected more than 40% since peaking at the end of May.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/234/908/original/6.png?1634131311" class="editor-image img-responsive" data-smartkarma-image-id="234908"></figure><hr>
<p><strong>So let's take a look at what this CEO letter contains. There are some pretty significant parts.</strong></p></section><h2>1. Dividend</h2><section class="figure"><p>The first is a dividend. HMM has explicitly stated that it is considering a dividend payment.</p>
<p>However, the company said that at this time, there is no available profit that can pay dividends under the local commercial law. It is because HMM still has a massive accumulated deficit, which stood at ₩4.44T as of the end of 2020. According to local commercial law, dividends are not allowed when there is a deficit. <strong>But the company said that the deficit situation is getting better, so it will actively consider paying dividends when dividend-payable profits are generated. FYI, it will only know the status of this year's deficit size at the end of this year.</strong></p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/234/909/original/1.png?1634131586" class="editor-image img-responsive" data-smartkarma-image-id="234909"></figure></section><h2>2. Massive CB Conversion (Share Dilution) Risk</h2><p>The second is the massive CB conversion risk. That is, this letter tried to address the concern about the possible conversion of the ₩600B perpetual convertible bonds held by KOBC into stocks: the '#191 CB' issued in March 2017. The conversion price is ₩7,173, and if KOBC converts all of them, it will obtain 83,647,009 ordinary shares, causing a share dilution of 16.4%.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/234/923/original/3.png?1634134729" class="editor-image img-responsive" data-smartkarma-image-id="234923"></figure><p>Now, HMM stressed in this letter that it might opt for early full repayment of these CBs as the company is in good cash condition due to the recent brisk business. <strong>But there is a catch here. It also clarified that even if it wanted early full repayment, it wouldn't be able to refuse CB conversion into stocks if the bondholder (KOBC: Korea Ocean Business Corporation) made a request.</strong></p></section><div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/234/910/original/2.png?1634132720" class="editor-image img-responsive" data-smartkarma-image-id="234910"></figure><h2>3. Illegal shorting activities</h2>
<section class="figure"><p>This part is also fun. First, HMM said that it had not found any illegal short-selling activities so far.</p>
<p>However, <strong>local retail investors are arguing that KDB (Korea Development Bank) and KOBC are artificially lowering the stock price to facilitate the sale of their controlling stake. In response, HMM adamantly denied the allegation.</strong> HMM also revealed that KDB and KOBC are not lending their HMM shares to short-sellers.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/234/920/original/4.png?1634133557" class="editor-image img-responsive" data-smartkarma-image-id="234920"></figure></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/234/921/original/5.png?1634133615" class="editor-image img-responsive" data-smartkarma-image-id="234921"></figure></section>
</div>

Today (October 13), HMM posted a "CEO Letter to Shareholders" on its website.Here is the link to the HMM CEO Letter to Shareholders.As shareholders' dissatisfaction grew over HMM Co., Ltd. (011200 KS) 's recent sharp decline in share price, the company's CEO Bae Jae-hoon took out a shareholder-friendly policy card including dividends to appease shareholders.The first sentence of this letter is straightforward and clear: "We are reviewing shareholder-friendly policies due to shareholders' concerns about the share price decline." In fact, HMM shares have been corrected more than 40% since peaking at the end of May.
So let's take a look at what this CEO letter contains. There are some pretty significant parts.1. DividendThe first is a dividend. HMM has explicitly stated that it is considering a dividend payment.
However, the company said that at this time, there is no available profit that can pay dividends under the local commercial law. It is because HMM still has a massive accumulated deficit, which stood at ₩4.44T as of the end of 2020. According to local commercial law, dividends are not allowed when there is a deficit. But the company said that the deficit situation is getting better, so it will actively consider paying dividends when dividend-payable profits are generated. FYI, it will only know the status of this year's deficit size at the end of this year.
2. Massive CB Conversion (Share Dilution) RiskThe second is the massive CB conversion risk. That is, this letter tried to address the concern about the possible conversion of the ₩600B perpetual convertible bonds held by KOBC into stocks: the '#191 CB' issued in March 2017. The conversion price is ₩7,173, and if KOBC converts all of them, it will obtain 83,647,009 ordinary shares, causing a share dilution of 16.4%.Now, HMM stressed in this letter that it might opt for early full repayment of these CBs as the company is in good cash condition due to the recent brisk business. But there is a catch here. It also clarified that even if it wanted early full repayment, it wouldn't be able to refuse CB conversion into stocks if the bondholder (KOBC: Korea Ocean Business Corporation) made a request.
3. Illegal shorting activities
This part is also fun. First, HMM said that it had not found any illegal short-selling activities so far.
However, local retail investors are arguing that KDB (Korea Development Bank) and KOBC are artificially lowering the stock price to facilitate the sale of their controlling stake. In response, HMM adamantly denied the allegation. HMM also revealed that KDB and KOBC are not lending their HMM shares to short-sellers.



HMM CEO Letter to Shareholders Concerning Share Price Decline