Last Week in Event SPACE – Kakao, Hopewell, Lotte, Hyosung

Last week, cryptocurrency fever undermined the Kakao Corp (035720 KS) GDR arb; Hopewell Holdings Ltd (54 HK) will be cashed up after exiting Hopewell Highway Infrastructure Ltd (737 HK); collapsing the circularity of Lotte Holdings (004990 KS)'s affiliates is a precursor to IPO'ing Hotel Lotte; and Hyosung Corporation (004800 KS) joins the Korean Holdco restructuring club.

Events

Kakao Corp (035720 KS) (Mkt Cap: $9.9bn; Liquidity: $128mn)

The trading situation surrounding Kakao Corp (035720 KS)'s GDR issuance is in disarray after media reports that Kakao was the second largest shareholder (25.85% stake) of Dunamu. Kakao's share price is up 24% since the Dec 26th media leak.

• Dunamu? It is a Korean fintech startup which operates Kakao stock apps for securities trading. But the big news is that it operates UPbit, one of Korea's largest cryptocurrency exchanges. UPbit's daily trading amount is now ₩7tn (exceeding KOSDAQ's total daily trading amount) and generates about ₩3.5bn in profits a day through transaction fees.
• It was known back in 2015 that Kakao had a position in Dunamu – just that the actual % stake held was unclear. The absorption of the forthcoming GDR issuance was viewed as an overhang. Making public Kakao is the second largest shareholder of Korea's hottest cryptocurrency exchange operator just removed that overhang. Given the unpredictable nature of the cryptocurrency euphoria, Sanghyun Park suggests staying out of the GDR arb trade for now. The roadshow/bookbuilding for the GDR commences today.

(link to Sanghyun's insight: Kakao’s Sudden Rise as a Cryptocurrency Stock & GDR Arb Trade Event)

Hopewell Holdings Ltd (54 HK) (Mkt Cap: $3.5bn; Liquidity: $2.3mn)

Pranav Rao discussed the sale of Hopewell Holdings Ltd ("HHL")'s 66.69% stake in Hopewell Highway Infrastructure Ltd (737 HK; "HHI") to Shenzhen Investment Holdings Co. (“SIHC”), a vehicle under the Shenzhen Municipal Government, at HK$4.80/share. Upon completion, SIHC will make an unconditional MGO for the remaining shares in HHI.

• Pricing for HHI looks reasonable on PER/PBR metrics compared to expressway peers (Shenzhen Expressway Co H (548 HK), Anhui Expressway Co Ltd H (995 HK) & Sichuan Expressway Co H (107 HK)). Apart from the leg down in earnings in 2013 after Guangzhou’s toll rate unification, the public holiday toll-free policy, and potential traffic diversion, HHI's profit has been nothing if not consistent. The commissioning of the two phases of the Western Delta Route (WDR) in 2011 & 2013 was responsible for the recent pick up in the bottom line in FY16 and FY17 (HHI has a June year-end). WDR, which turned profitable in FY16, accounts for ~16% of HHI's earnings.
• In any event, the SPA has been agreed upon by both the buyer & seller, HHL has the votes to push through the simple majority vote at the EGM, and assuming no hiccups on the PRC regulatory front, this sale should complete quickly. Pranav would be a buyer at HK$4.81-4.82 for the HK$4.80 put.
• HHL looks interesting at 0.58x book and 0.49x P/RNAV, with a net cash per share of HK$13.28 – or around 40% of its market cap. The current discount to NAV is ~46%. HHL is up 10% on the SPA news and may get another leg up as the SPA completes, and a special dividend is announced, as per para 2, page 6 of the announcement.

(link to Pranav's insight: Hopewell Highway Infra / Shenzhen Investment: Diverging Roads)

Lotte Holdings (004990 KS) (Mkt Cap: $4.8bn; Liquidity: $39.6mn)

Lotte Holdings (004990 KS) said it would merge with six of its unlisted affiliates to remove all of the remaining circular shareholding links. This merger decision will be put to a vote at Lotte Holdings and the six affiliates on Feb 27. The appraisal rights exercise period is Feb 27-Mar 19 and the merger should be completed by Apr 1.

• Sans the circular shareholding links, Lotte Group would proceed to the second phase of its restructuring, including the Hotel Lotte IPO. This will strengthen Shin Dong-bin’s control of the Lotte Group.
• This “strengthening” impact is complicated, and a follow-up note from Sanghyun will provide a more detailed explanation. In short, Dong-bin’s brother, Dong-yu, controls Lotte Japan, which is the largest shareholder in Hotel Lotte. For Dong-bin to re-take Hotel Lotte, the most effective way to dilute Lotte Japan’s stake is to IPO Hotel Lotte.

(link to Sanghyun's insight: Summary of Lotte Holdings Merger Involving 6 Unlisted Affiliates)

Bank Tabungan Pensiunan Nasional Tbk Pt (BTPN IJ) (Mkt Cap: $2.7bn; Liquidity: $7.3mn)

Subsequent to MUFG's announced acquisition of Temasek's stake in Bank Danamon Indonesia Tbk (BDMN IJ), SMFG's CEO said it wants to raise its 40% stake in BTPN to a majority.

• As Pranav discussed in Bank Danamon: Takeover Redux, the issues faced by DBS in its acquisition of Danamon in 2012 may have eased somewhat. Pranav also indicated that Japan's relationship with Indonesia on the financial services front was positive, while also noting SMFG's "commitment to Indonesia".
• Who would sell? Summit Global, a pseudo related-party to SMFG given it is a subsidiary of Sumitomo Corp (8053 JP), holds 20%.
• Whether the foreign investment threshold is raised or not, BTPN is a quality lender trading at 0.85x book, with peers trading at a median multiple of 2.0x, while the median for precedent transactions taking place at 2.3x.

(link to Pranav's insight: Bank Tabungan Pensiunan Nasional: Majority Report)

Stubs

Hyosung Corporation (004800 KS) (Mkt Cap: $4.7bn; Liquidity: $24.6mn)

Hyosung Corporation (004800 KS) announced it will transform into a Holdco and spin-off four business units, including textile, heavy industries, industrial materials, and chemical. The Holdco will own a 39.3% stake in the new entity while the four subsidiaries will hold a combined 60.7% stake in the new entity.

• Douglas Kim believes the restructuring is positive for Hyosung as it will enable greater corporate transparency, especially for the core businesses such as advanced materials and textile.
• A further boost to Hyosung is the potential sale of its subsidiaries, which would bolster its balance sheet and further simplify its organisational structure. Subsidiaries to be sold may include Hyosungitx Co Ltd (094280 KS)( Hyosung has a 27.99% stake); Chin Hung International (002780 KS) (48.2% stake) and Shinwha Intertek Corp (056700 KS) (15.3% stake). Combined, these stakes total ~4% of Hyosung's market cap.

(link to Douglas' insight: Hyosung’s Transformation into a Holdco + Four Subsidiaries (Part 1))