Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Nearly 30 years of experience in the Korean/Asian equity research. Major sectors coverage include the following:
- Technology 
- Consumer 
- Special Situations/Deep Value Plays
- Tender Offers/M&As
- Holdcos/Stubs
- Asian Unicorns/Private Companies

Korea/Asia, Events, IPOs

Spin-Offs Can Deliver Real Alpha in Korea

Event-Driven

Ildong Pharmaceutical Co, Ltd. / Event-Driven

Ildong Pharmaceutical Co, Ltd. (249420 KS)

<ul><li><a href="https://www.smartkarma.com/entities/7282" target="_blank" data-smartkarma-citation="entities:7282:1">Ildong Pharmaceutical Co., Ltd. (000230 KS)</a> spin-off is a special situations gem. We expect the combined values of Ildong Pharmaceutical and Ildong Holdings post spin-off will be greater than their values pre spin-off. The keys in this spin-off are the increased financial transparency which results in higher ROE and profitability for Ildong Pharmaceutical, which is likely to result in higher valuation multiples and Chairman's son Yoon Woong Seob and his related parties who will try to grab a bigger ownership stake in Ildong Holdings. We are including both Ildong Pharmaceutical and Ildong Holdings as part of our top monthly picks in August. </li><li>We believe that Yoon Woong Seob and related parties will try to increase their ownership of Ildong Holdings to more than 50%, in order to reduce the possibility of another hostile M&amp;A threat (for the entire Ildong Group) which it has experienced in the past several years. As such, given the increased buying pressure for Ildong Holdings, this will act as a major boost in raising share price of Ildong Holdings. Post spin-off, it is likely that Yoon Woong Seob and related parties are likely to increase their stakes in Ildong Holdings, rather than Ildong Pharmaceutical. A greater ownership control over Ildong Holdings is likely to result in a more secure ownership &amp; management control over the entire Ildong Pharm Group companies. </li><li>There are numerous options of how the insiders could raise their stakes in Ildong Holdings. One of them include the insiders buying the 20% stake in Ildong Holdings currently owned by Sunrise Holdings. Because the spun-off Ildong Holdings represents just 28.8% of the pre spin-off Ildong Pharmaceutical, the insiders need to spend less amount to increase the overall control over the entire Ildong Group companies. </li><li>Ildong Pharmaceutical (post spin-off basis) generated net profit of 14.5 billion won in 1H 2016 and we believe that it could generate net profit of 30 billion won in 2016. Applying 22x net profit of 30 billion won would result in implied market cap of 660 billion won, which would be 30% higher than Ildong Pharm's 71.2% stake of the combined market cap of 714 billion won (prior to the spin-off). </li><li>Valuation based on P/B may be a better approach to value Ildong Holdings at this time. We believe that P/B valuation multiple of 2.8-3.0x (a 20-30% premium to the median 2016E P/B multiple of 2.3x for the pharmaceutical comps in Korea). A 2.8x P/B multiple valuation on equity of 99.5 billion won would suggest implied market cap of 279 billion won (35% upside to 206 billion won: 28.8% of 714 billion won in market cap prior to spin-off). </li><li>A major reason why we believe <a href="https://www.smartkarma.com/entities/23563" target="_blank" data-smartkarma-citation="entities:23563:1">Il Dong Holdings (ILDONG KS)</a> shares are likely to deserve a premium in terms of valuation multiples (as compared to Ildong Pharmaceutical on P/B basis) is the insiders that want to have a better management and ownership control of the entire Ildong Group affiliates. They do not want to repeat what happened with Green Cross Corp's semi hostile attempts to shake up its Board of Directors. As such, we think that there will likely be a stronger pressure to buy Ildong Holdings shares among many insiders of the company, especially Yoon Woong Seob and his related parties.</li><li>While we have positive views on both Ildong Holdings and Ildong Pharmaceutical, we like Ildong Holdings more and believe it has higher upside than Ildong Pharmaceutical. </li><li>On 1 August 2016, <a href="https://www.smartkarma.com/entities/7282" target="_blank" data-smartkarma-citation="entities:7282:1">Ildong Pharmaceutical Co., Ltd. (000230 KS)</a> was essentially separated into four companies, including Ildong Pharmaceutical, Ildong Holdings, Ildong Bioscience, and Ildong Hyaltech. The spin-off ratio is Ildong Pharmaceutical (.712) and Ildong Holdings (.288). Ildong Bioscience and Ildong Hyaltech are private companies 100% owned by Ildong Holdings.</li><li>Ildong Pharmaceutical shares have not been trading since July 28th since the spin-off was completed on August 1st and its shares will relist and trade under two different entities (Ildong Holdings and Ildong Pharmaceutical) starting August 31st.</li></ul>

Ildong Pharmaceutical Co., Ltd. (000230 KS) spin-off is a special situations gem. We expect the combined values of Ildong Pharmaceutical and Ildong Holdings post spin-off will be greater than their values pre spin-off. The keys in this spin-off are the increased financial transparency which results in higher ROE and profitability for Ildong Pharmaceutical, which is likely to result in higher valuation multiples and Chairman's son Yoon Woong Seob and his related parties who will try to grab a bigger ownership stake in Ildong Holdings. We are including both Ildong Pharmaceutical and Ildong Holdings as part of our top monthly picks in August. We believe that Yoon Woong Seob and related parties will try to increase their ownership of Ildong Holdings to more than 50%, in order to reduce the possibility of another hostile M&amp;A threat (for the entire Ildong Group) which it has experienced in the past several years. As such, given the increased buying pressure for Ildong Holdings, this will act as a major boost in raising share price of Ildong Holdings. Post spin-off, it is likely that Yoon Woong Seob and related parties are likely to increase their stakes in Ildong Holdings, rather than Ildong Pharmaceutical. A greater ownership control over Ildong Holdings is likely to result in a more secure ownership &amp; management control over the entire Ildong Pharm Group companies. There are numerous options of how the insiders could raise their stakes in Ildong Holdings. One of them include the insiders buying the 20% stake in Ildong Holdings currently owned by Sunrise Holdings. Because the spun-off Ildong Holdings represents just 28.8% of the pre spin-off Ildong Pharmaceutical, the insiders need to spend less amount to increase the overall control over the entire Ildong Group companies. Ildong Pharmaceutical (post spin-off basis) generated net profit of 14.5 billion won in 1H 2016 and we believe that it could generate net profit of 30 billion won in 2016. Applying 22x net profit of 30 billion won would result in implied market cap of 660 billion won, which would be 30% higher than Ildong Pharm's 71.2% stake of the combined market cap of 714 billion won (prior to the spin-off). Valuation based on P/B may be a better approach to value Ildong Holdings at this time. We believe that P/B valuation multiple of 2.8-3.0x (a 20-30% premium to the median 2016E P/B multiple of 2.3x for the pharmaceutical comps in Korea). A 2.8x P/B multiple valuation on equity of 99.5 billion won would suggest implied market cap of 279 billion won (35% upside to 206 billion won: 28.8% of 714 billion won in market cap prior to spin-off). A major reason why we believe Il Dong Holdings (ILDONG KS) shares are likely to deserve a premium in terms of valuation multiples (as compared to Ildong Pharmaceutical on P/B basis) is the insiders that want to have a better management and ownership control of the entire Ildong Group affiliates. They do not want to repeat what happened with Green Cross Corp's semi hostile attempts to shake up its Board of Directors. As such, we think that there will likely be a stronger pressure to buy Ildong Holdings shares among many insiders of the company, especially Yoon Woong Seob and his related parties.While we have positive views on both Ildong Holdings and Ildong Pharmaceutical, we like Ildong Holdings more and believe it has higher upside than Ildong Pharmaceutical. On 1 August 2016, Ildong Pharmaceutical Co., Ltd. (000230 KS) was essentially separated into four companies, including Ildong Pharmaceutical, Ildong Holdings, Ildong Bioscience, and Ildong Hyaltech. The spin-off ratio is Ildong Pharmaceutical (.712) and Ildong Holdings (.288). Ildong Bioscience and Ildong Hyaltech are private companies 100% owned by Ildong Holdings.Ildong Pharmaceutical shares have not been trading since July 28th since the spin-off was completed on August 1st and its shares will relist and trade under two different entities (Ildong Holdings and Ildong Pharmaceutical) starting August 31st.

Mirae Asset Tiger Health Care ETF (143860 KS)

Ildong Pharmaceutical Spin-Off: A Special Situations Gem