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

The Week That Was in NorthAsia@Smartkarma: Oct 1 Beware Daniel Hellberg's Sarcastic Dog

The Week That Was in NorthAsia@Smartkarma: Sep24

The Week That Was in NorthAsia@Smartkarma: Theatre of the Absurd, AxE, and Mount Paektu

Thematic (Sector/Industry)

Japan Consumer staples / Thematic (Sector/Industry)

Below is the full list of Japan/Korea related reports published last week on Smartkarma.DateInsight providerInsight titleJapan1-OctNoriaki Hirakata, CFASUBARU Company Visit Takeaways: Weaker Sales than the Plan with Windfall from FX1-OctScott FosterNikon (7731 JP): FPD Lithography &amp; Restructuring2-OctToh Zhen ZhouInvincible Investment Corp Placement - Adding More Quality Assets to Hotel Portfolio2-OctMorningstar DistributionInitiating Coverage of Nabtesco With JPY 3,900 FVE and Wide Moat Rating2-OctNicholasTannerRelia (4708) Buy This Call Centre.2-OctFederico D'IncaFANUC 6954 JT - 26,000 Exit Target3-OctPelham SmithersAsatsu (9747) - Bain Offers ¥3,660/Shr, WPP Objects3-OctMorningstar DistributionInitiating Coverage of Resona Holdings With FVE of JPY 590; Shares Slightly Undervalued3-OctNicholasTannerIchigo (2337) Happy to Buy This Real Estate Here3-OctNew Street Research InsightsJapan Telco Review: On Track to Meet 2017/18 Guidance. Rising Shareholder Returns a Key Attraction.3-OctMio Kato, CFAStanley Electric: Lighting Honda’s Way Forward3-OctThomas SchroederGearing up in Japan - Buy SMFG3-OctNew Street Research InsightsUpgrade to Softbank Target Price Driven by Alibaba. Holdco Discount Looks Extreme3-OctMio Kato, CFAAsatsu DK: Chance of an Offer Hike Towards JPY4,000-4,100 Nearing 2006-2007 Highs4-OctPelham SmithersBoJ Tankan Suggests Goldilocks Scenario Still in Place... For Now4-OctTravis LundyAsatsu DK: Bain Capital Bids, WPP Complains, Arbitragers Bet on a Bump, But...4-OctMio Kato, CFAJDI: The Spring Has Sprung...33% in 10 Trading Days4-OctNoriaki Hirakata, CFASeptember 2017 US Automotive Sales SAAR Hit 18.57 Million: Is It Harvey Rally or Incentive Drive?4-OctMio Kato, CFAWill India Be the Next Big Thing for Isuzu?5-OctPatrick HansenPopular and Unpopular Names in Japan in September....5-OctTravis LundyBain’s Bid for ADK: Silchester and WPP Both Say “Undervalued” But Not Clear Why5-OctThomas SchroederJapan Display Measuring the Gap for Upside Drive5-OctMio Kato, CFANissan: Downside Optionality of Potential Quality Control Scandal Creates Asymmetric Risk5-OctMio Kato, CFASubaru: Margin Pressure Is Key Despite Strong Revenue Growth6-OctPelham SmithersSony (6758) - Positive Readthrough from the John Kodera Appointment6-OctPelham SmithersAsatsu (9747) - Are Chances of a Counter Bid Being Underplayed?6-OctMio Kato, CFAIf You Like Robotics but Find Current Conditions Frothy, Nabtesco Is a Great, Not Good, Compromise6-OctMio Kato, CFADenso: Centrepiece of Toyota’s ADAS/AD/EV Mantel Is a Conviction BuyKorea29-SepSanghyun ParkSKT &amp; SK Telink Share Swap Deal - Summary &amp; Ramifications29-SepDouglas KimMarket Analysis of Golf Course Industry in Korea: Implications for MBK &amp; Golfzon Newdin JV2-OctMorningstar DistributionReinitiating on Posco With No-Moat, Stable Trend Ratings and FVE of KRW 324,000; Stock Fairly Valued2-OctSanghyun ParkTissueGene IPO Part 2 - Facts About Cartilage Regeneration &amp; US Clinical Trial2-OctSanghyun ParkHyundai E&amp;E &amp; Hyundai CE Rights Offerings - Robotics’ Oversubscription Plan3-OctJason TanSouth Korea: Domestic Economy Remains Restrained3-OctDouglas KimCTK Cosmetics IPO Preview (Part 1)3-OctSanghyun ParkLotte Group Restructuring Part 8 - Lotte Holdco NAV Estimation4-OctKemp Dolliver, CFABiosimilar Battlefield: U.S. Humira Pushed to 20234-OctSanghyun ParkSunic System Update - Clarification of Current Situation4-OctDouglas KimT’way Airlines IPO Preview (Part 1) - A Deep Value Play on T’way Holdings’ Stake of T’way Airlines5-OctDouglas KimIQOS’ Surging Market Share in Seoul - Stay Away from KT&amp;G6-OctSanghyun ParkForeign Investors Vs. Local Institutions in Korean Stock Market - Who Is Right?6-OctDouglas KimPOSCO ICT (Part 1) - Leading Company in EV Charging Infrastructure Market in KoreaAsatsu DK took the world by stormThis is arguably the most interesting and watched story put out on Smartkarma last week. Travis Lundy is on it, and Pelham Smithers and Mio Kato, CFA are also discussing it. First, let's look at Travis' beautifully written summary of what really happened.ADK officially effected the end of it's 19-year Capital and Business Alliance and a Cooperation and Alliance Agreement ("CAA") with global ad major (and 24.96% ADK shareholder) WPP PLC (WPP LN). This action is based on a difference in medium-to-long-term business strategy. This results in WPP needing to sell its shares in ADK.Morgan Stanley offered a 22.5mm share block of WPP shares (at GBp 1350/share) to hedge a derivative transaction ADK entered into to fix the profit available from an eventual sale of WPP shares held as a result of the above-mentioned CAA so as to enable a transparent fair value calculation of the tender offer price offered in point 3.ADK and Bain Capital announced Bain would launch a TENDER OFFER to purchase a minimum of 50.1% of shares outstanding of ADK, or 20,785,200 shares, at ¥3,660/share, but up to 100% of shares outstanding.ADK announced that it rather hoped WPP would accept the tender offer.WPP's board member voted against all the items on the agendas aiming at the above outcomes.WPP hinted it would not agree to the tender offer because as the FT reported, "people close to WPP said... [WPP] did not intend to sell its... stake in Asatsu-DK (ADK) at the ¥3,660 price offered by Bain, as the tender “severely undervalues” the Japanese firm."For those who are not really familiar with ADK's history with WPP, here is Pelham's excellent summary.In 1998, WPP (WPP LN), which had already made a fortune in Japan when it acquired J Walter Thompson and duly sold its Tokyo HQ for as much as it paid for the whole firm, bought 23% of Asatsu for ¥30bil. The fit made sense, Asatsu was the foreigner-friendly agency but was struggling at the time, whilst WPP was very much the ad agency on the rise, but was under-represented in Asia. Initially, the relationship went well. WPP helped Asatsu with marketing campaigns including getting Tiger Woods to market tinned coffee, and Asatsu's operating profits doubled over the next two years to ¥5.1bil and then, after a short pause, rising to ¥8.3bil in 2004. However, Asatsu never kicked on after that and by 2009 was losing money. The relationship with WPP became more distant and there were growing client conflicts between WPP and Asatsu. Asatsu's business recovered with Abenomics, but at the same time the business became more fluid with the growth of internet advertising, culminating in Bain's bid. The company was struggling to adapt to these new times, and this bid is a result of that struggle.Mio Kato, CFA examined ADK's current valuation.When comparing Asatsu's current multiple to the average of Dentsu and Hakuhodo (adjusted for Asatasu's WPP holdings and other investment holdings as well as Dentsu and Hakuhodo's investment holdings), multiples appear essentially in line. While an argument could justifiably be made that Asatsu deserves to trade at a discount to Hakuhodo and Dentsu in particular, Mio says he nevertheless feels a further hike in offer price to something in the region of JPY4,000-4,100 could be justified as well. JPY4,050 (8x adjusted EV/EBITDA or a 20% premium to the peer average) would represent a further 10.7% hike to the initial JPY3,660 offer. It would also be a 27.8% premium to the pre-tender close and a 33.7% premium to the 1-month average price prior to the tender. Neither of these premiums seems egregious to us.Asatsu Now Trading at the Average of Dentsu and Hakuhodo's MultiplesDentsuHakuhodoDentsu-Hakuhodo AverageAsatsu DkEnterprise Value (JPYm)1,768,332466,483141,541Treasury Stock (JPYm)(32,160)(23,470)(2,430)LT Investment Holdings (JPYm)(383,740)(99,535)(88283)Adjusted EV (JPYm)1,352,432343,47850,828FY1 EBITDA (JPYm)182,65557,8017,536FY1 OP (JPYm)135,05350,9396,084EV/EBITDA (Adjusted; x)7.405.946.676.74EV/OP  (Adjusted; x)10.016.748.388.35Source: LightStream ResearchNow, let's come back to Travis. Below are his conclusions, which are interesting and make a lot of sense.While the premium vs previous trade on this deal is slight at only 15%, it is more impressive than it appears - i.e. closer to 25% because the premium should not apply to the financial assets - just the franchise value.WPP may think ADK is worth a lot more.It is not clear to me, from the documents available, that WPP has an ability to get out at a higher price without an external actor providing that exit.ADK is not a fabulous business historically.Furthermore, on a fundamental basis, this deal is better than it looksI think at Day 1 close of ¥3800, the risk on this is not a great one.The level of ¥3,660/share is NOT a "hard put" for arbitrageurs. If both WPP and Silchester decide not to tender, ADK needs 86+% of remaining shares to tender. If another large holder decides not to tender, this doesn't go through. That's a risk.iQOS is winning in Korea, stay away from KT&amp;G!Douglas Kim put out a follow-up report on Korea's iQOS fever. According to him, iQOS' market share in Seoul has been surging in the past several months since its launch in June 2017. Philip Morris and KT&amp;G Corporation (033780 KS) have been quiet about the market share gains of iQOS until recently when Philip Morris Korea announced that iQOS gained nearly 5% share in the tobacco market in Seoul as of end of August. To have gained nearly 5% market share in the tobacco market of a major city such as Seoul is a major accomplishment. iQOS became available in other major Korean cities such as Busan and Daegu in July. As a result, Douglas says he continues to be negative on KT&amp;G shares, and in fact, numerous sell-side analysts have been lowering their earnings estimates and price targets of KT&amp;G and he believes this trend will accelerate in the coming weeks.This is Doug's view on KT&amp;G valuation.KT&amp;G is currently trading at 13x P/E (2017E consensus earnings estimate) vs. Philip Morris International (PM US) which is trading at 25x P/E (2017E) and Japan Tobacco Inc (2914 JP), which is trading at 17x P/E (2017E). Although KT&amp;G has lower P/E ratio, the big problem with this stock is the enormous threat of market share loss from iQOS. Even after KT&amp;G releases its own heated tobacco product in a few weeks, it is likely that iQOS will continue to dominate the heated tobacco product category and take away market share from the traditional cigarette market which is likely to result in continued share price weakness for KT&amp;G. KT&amp;G Share Price (Source: Google Finance)Subaru's declining marginsNoriaki Hirakata, CFA talked about his recent visit to Subaru Corp (7270 JP). Following is the list of the key points he made from his visit.Sales performance is a bit weaker than the company plan but recent Yen weakness is likely to compensate for the sales shortfall.Sales performance in the US is weaker than the company planSales mix fiscal year to date is softening as Subaru had predicted. The new Impreza has been the growth driver for SUBARU brand so far and this is consistent with management’s plans.There is no discrepancy between planned incentives and actual payout.Inventory level at dealers became just appropriate, which implies slower production momentum.Below is his estimation of FY17-FY18 SUBARU financial performance.　FY16FY17eFY17CeFY18eRevenue3,326.03,504.93,420.03,572.1 (YoY)　5.4%2.8%1.9%Operating profit410.8425.9410.0422.0 (YoY)　3.7%-0.2%-0.9% (Margin)12.4%12.2%12.0%11.8%Recurring Profit394.3427.2410.0422.9 (YoY)　8.3%4.0%-1.0%Net Profit282.4303.5285.0300.5 (YoY)　7.5%0.9%-1.0%Source: HIRAKATA OFFICESo, from a valuation point of view,he takes his fair value as Yen 3.850 with 4.0 EV/EBITA multiple. SUBARU is currently trading at 4.3X of EV/EBITDA and 10.2X of P/E based on his FY17 estimates. Going forward, he expects SUBARU valuation will decline due to the US SAAR trend along with the slowing growth of SUBARU brand momentum.Mio also touched on Subaru's declining margins.Subaru has been generating the highest operating margins in the industry in recent history. However, margins are likely to decline towards 10% and perhaps even below that towards industry average levels, owing to increasing depreciation costs in US and overseas plants in line with their increasing capacity, coupled with a boost in vehicle incentives. Further, rising research and development costs for autonomous driving and electrification will increase pressure on the margins of the mid size firm, although its relationship with Toyota should help it disperse some of the cost burden.JDI's interesting proposalThis insight written by Mio is the most commented insight put out on Smartkarma last week. Mio beautifully summarized the news about JDI affiliate JOLED seeking JPY100bn in funding to help commercialise its printing method OLED panels.The following are the key points of Mio's summary:This particular method reduces manufacturing costs significantly compared to the traditional deposition methods and could become a significant competitive edge for manufacturers such as Sony and Panasonic who maintain stakes in JOLED.The Nikkei notes that the technology reduces costs by 30-40% and that JOLED is seeking stakes of JPY5-10bn from various Japanese companies. Mio feels that manufacturers like Sony should bite the bullet and invest significantly larger stakes in the technology to attempt to take back market leadership.JDI is also seeking about JPY200bn in funding to develop its OLED operations for smartphone panels. Potential investors mentioned included Boe Technology Group Co. Ltd (200725 CH) and China Star Optoelectronics.Now, this is Mio's thought on JDI's share price movement:"We, and SC Capital had flagged the large short interest in the stock and that certainly seems to be contributing to the violent squeeze today. 150m shares have already traded today compared to SC Capital's estimate that 80m shares had been borrowed. Certainly, the action does feel quite squeezy but given the size of the short interest there is a good chance that the squeeze is not quite over yet. We would expect an eventual pullback after this squeeze unless an investment by BOE or another company is announced in the meantime but we continue to believe that the LT story has legs here."Thomas Schroeder added his technical chart analysis based view on JDI.228 breakout and gap support is a key level to hold and used as a stop limit level just under 228. 315 is the primary upside pivot level where trend line, physical resistance, projection and retracement all come together (confluence).Clearing 315 would open the way strategically and could have a dramatic impact on the longer term cycle. Above 315 we have physical resistance at 340-50 then the major high just under 400. Surpassing and staying above 350 would imply we take out the 400 level to 427 which is a big macro hurdle.We like buying JD as close to the gap as possible with a stop just under 228 for a drive to clear 315, 350  and then 427. There are signs that this may be a turnaround story according to Mio Kato, CFA.

The Week That Was in NorthAsia@Smartkarma: Asatsu, IQOS, JDI, & Subaru