AI Analysis

AI Analysis
Combined market cap of Mando and Halla
Holdings likely to grow after split
Mando to split into a holding company and an operating company
AI Report
August 25, 2014
Co.,
Daewoo Securities C
o., Ltd.
[Derivatives]
Youngsung Kim
+822-768-4120
[email protected]
The auto parts manufacturer Mando will split into a holding company (Halla Holdings:
surviving entity) and an operating company (Mando, which will be re-listed), in a plan
that was approved during Mando’s shareholder meeting on July 28th. Trading will be
suspended from Aug. 28th to Oct 2nd. Halla Holdings will remain in the KOSPI 200 index
(K200).
Table 1. Details of Mando’s spinspin-off
Surviving entity
Newly listed entity
Period of trading suspension
Halla Holdings
Mando
Aug. 28th - Oct. 2nd
Date of listing change/re-listing
Asset split ratio (surviving: new)
Oct. 6th
0.4782394 : 0.5217606
Source: Dart, KDB Daewoo Securities Research
Spin-offs offer excess returns
Among K200 constituents, nine out of the 10 most recent cases of company splits
resulted in a combined market cap of the surviving and new entities—based on the
closing prices on the date of trading resumption—that exceeded the pre-split market
cap on the day prior to the trading suspension. The only exception was Chong Kun Dang.
Therefore, for index funds that seek alpha (excess returns), it is generally more
advantageous to hold shares of a company undergoing a split until the trading
resumption date and then sell only the shares of the newly listed entity (which will be
excluded from the K200), rather than to sell just before trading suspension and then buy
shares of the surviving entity (which will remain in the K200) on the resumption date.
Looking again at recent cases, in addition to the combined market cap increasing on the
trading resumption date compared to the day prior to trading suspension, the combined
market cap growth rate also exceeded the returns on the K200 during the same period.
As such, for investors who do not hold shares of Mando, we recommend buying shares
and selling K200 futures just before the trading suspension. Instead of selling K200
futures, another option would be to sell K200 ETF or buy K200 Inverse ETF. In that case,
investors should close out of this position on the trading resumption date.
It should be noted that, if excessive expectations for a company split send the shares
surging even before the split, as occurred with Chong Kun Dang, the combined market
cap may shrink after the split. In this case, investors should exercise caution in adopting
this strategy.
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the
the U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
AI Analysis
August 25, 2014
Table 2. SpinSpin-off cases among K200 stocks
Before split
Surviving/
new entity
Last trading day
before trading suspension
Trading resumption date
% of free-float
Before
mkt. cap of
surviving entity After
(rank in K200)
Before
Market cap
After
(Wtr)
Return (A, %)
Closing price
of K200 (p)
Last day before
trading
suspension
Resumption date
Index return (B, %)
Return relative
relative to K200 (A(A-B, %)
LG Chem Shinsegae
Hankook
Tire
DongDong-A
Pharm.
LG Chem/ Shinsegae/
Emart
LG Hausys
Hankook
Tire
Worldwide
/Hankook
Tire
Dong-A
Socio
Holdings
/Dong-A
Pharm.
4/27/11
8/29/12
2/26/13
3/27/09
Chong
Kun Dang
Cosmax
Woori
Financial
Group
Hanil
E-Hwa
Chong Kun
NAVER
Dang
/NHN Korean Air
Holdings
Entertain- /Hanjin KAL
/Chong Kun
ment
Dang
Cosmax
BTI
/Cosmax
WFG
/KJB FG
/KNB FG
Seoyeon
/Hanil EHwa
10/30/13
2/26/14
4/28/14
6/26/14
NHN Korean Air
7/29/13
7/29/13
4/20/09
6/10/11
10/04/12
4/08/13
8/29/13
9/16/13
12/06/13
4/07/14
5/22/14
8/08/14
1.28 (20)
1.07 (27)
0.61 (35)
0.18 (87)
1.99 (11)
0.23 (79)
0.12 (102) 0.10 (110)
0.63 (31)
0.06 (133)
1.49 (17)
0.40 (55)
0.05 (137)
0.07 (126)
2.20 (8)
0.22 (81)
0.02 (188) 0.03 (170)
0.56 (37)
0.01 (198)
6.77
9.41
10.18
10.24
6.33
6.55
1.38
1.47
14.13
17.76
2.05
2.49
1.04
0.85
0.82
0.85
9.39
10.18
0.83
0.88
38.95
0.56
3.52
6.59
25.70
21.30
-18.06
3.66
8.37
5.23
161.66
292.08
254.22
264.68
246.53
246.53
271.44
257.31
256.80
258.78
172.30
269.04
261.92
252.39
248.86
263.86
260.71
259.89
263.33
262.02
6.58
-7.89
3.03
-4.64
0.95
7.03
-3.95
1.00
2.54
1.25
32.37
8.45
0.49
11.23
24.75
14.27
-14.11
2.66
7.63
3.98
Note: All data based on closing prices
Source: Quantiwise, KDB Daewoo Securities Research
Domestic index funds to keep Halla Holdings even after split
Whether index funds maintain or exclude Halla Holdings after the split will likely have a
significant impact on supply and demand conditions for the stock on the day prior to the trading
suspension and the day of trading resumption. We expect domestic index funds to keep Halla
Holdings after the split.
Based on the closing price on August 22nd, Mando accounted for 0.243% of the K200’s total free
float market cap (74th out of 200 companies). Factoring in the split ratio, the proportion of Halla
Holdings’ free floats is projected to fall to 0.116% (105th).
After a company is split into a holding company and an operating company, the holding company
tends to see a discount to its theoretical market value. Thus, we need to factor in potential
undervaluation after the split, as well as the split ratio, in forecasting the post-split market cap of
Halla Holdings.
When Cosmax converted to a holding company structure via a spin-off, Cosmax BTI (the holding
company) saw the slightest undervaluation (12.67% vs. theoretical market cap) among K200
constituents that had recently undergone spin-offs. Meanwhile, Hankook Tire Worldwide, a
holding company after Hankook Tire’s spin-off, suffered the steepest undervaluation (54.68%).
Factoring in the extent of undervaluation for Cosmax BTI, Halla Holdings is expected to see its
proportion in K200’s total free float market cap to slide to 0.101%, with its rank falling to 109th.
Even if Halla Holdings is undervalued by as much as Hankook Tire Worldwide was after its spinoff, the stock is still anticipated to rank 141st, with a 0.053% proportion. Index funds usually tend
to hold about 170 stocks.
Accordingly, even in the worst-case scenario, domestic index funds are not expected to exclude
Halla Holdings after the spin-off.
KDB Daewoo Securities Research
2
AI Analysis
August 25, 2014
Table 3. Cases of spin
spinpin-offs
offs into holding and operating
operating companies
Company
before spinspin-off
Hankook Tire DongDong-A Pharm.
Holding/operating
company after spin-off
Last trading day before
trading suspension
Resumption of trading
after spin-off
Dong-A Socio
Hankook Tire
Holdings (S)
Worldwide
(S)/Hankook /Dong-A Pharm.
(N)
Tire (N)
K200 stocks
Chong Kun
Korean Air
Dang
Chong Kun
Dang Holdings
Hanjin KAL (N)
(S)
/Korean Air (S)
/Chong Kun
Dang (N)
NonNon-K200 stocks
Hanil E-Hwa AK Petrochemical
Korea
Kolmar
AK Holdings (S)
Cosmax BTI (S)
Seoyeon (S)
/AK Petrochemical
/Cosmax (N) /Hanil E-Hwa (N)
(N)
Korea Kolmar
Holdings (S)
/Korea
Kolmar (N)
Cosmax
8/29/12
2/26/13
7/29/13
10/30/13
2/26/14
6/26/14
8/29/12
9/26/12
10/04/12
4/08/13
9/16/13
12/06/13
4/07/14
8/08/14
9/17/12
10/19/12
0.186 : 0.814
0.371 : 0.629
0.195 : 0.805
0.279 : 0.721
0.338 : 0.662
0.314 : 0.686
0.640 : 0.360
Mkt. cap HC (theoretical)
1.18
0.51
0.40
before OC (theoretical)
5.15
0.87
1.65
spin-off
Total
6.33
1.38
2.05
(Wtr)
HC, actual
Mkt. cap (vs. theoretical) 0.53 (-54.7%) 0.43 (-15.7%) 0.34 (-13.6%)
after spin-OC, actual
6.02 (+16.9%) 1.04 (+19.8%) 2.15 (+30.1%)
off
(vs. theoretical)
(Wtr)
Total
6.55
1.47
2.49
0.29
0.75
0.28
0.54
0.26
0.57
0.21
0.12
0.325 :
0.675
0.14
0.29
1.04
0.82
0.83
0.32
0.43
0.17 (-39.8%)
0.24 (-12.7%)
0.15 (-41.1%)
0.13 (-35.8%)
0.68 (-9.7%) 0.60 (+12.0%) 0.72 (+26.5%)
0.17 (+46.3%)
Spin-off ratio (HC:OC)
0.85
0.85
0.08
(-40.6%)
0.48
(+65.5%)
0.56
0.30
0.88
Note: All data based on closing prices on respective days
Source: Quantiwise, KDB Daewoo Securities Research
Figure 1. Estimated weight and rank of Halla Holdings in K200 after spinspin-off
(Estimated % of free float market cap)
0.12
(Free float rank in K200)
150
Cosmax
Korean Air
Dong-A Pharm
0.10
Free float rank of Halla Holdings in K200
to be above 170 even under the worst-case scenario
140
Hankook Tire
Hanil E-hwa
130
AK Petrochemical
Chong Kun Dang
Korea Kolmar
Hanil E-hwa
0.08
0.06
Korea Kolmar
Chong Kun Dang
120
Hankook Tire
AK Petrochemical
Cosmax
110
Dong-A Pharm.
Korean Air
(Discount rate of holding companies after spin-off, %)
(Discount rate of holding companies after spin-off, %)
0.04
100
0
10
20
30
40
50
60
0
10
20
30
40
50
60
Note: Estimated free-float proportion and rank for Halla Holdings after spin-off factoring in the extent of undervaluation and spin-off ratios for the K-200 constituents
that had already undergone spin-offs
Source: Quantiwise, KDB Daewoo Securities Research
KDB Daewoo Securities Research
3
AI Analysis
August 25, 2014
Supply and demand outlook around the trading suspension day
We expect index funds’ selling of Mando to outweigh buying near market closing time on the day
prior to the trading suspension. On the day of trading resumption, however, index funds’ buying
of Halla Holdings is forecast to outweigh selling near market closing time. While domestic index
funds (ex. ETFs) tend to display limited selling around the day of trading suspension, ETFs and
foreign index funds are expected to sell Mando before trading is suspended and buy Halla
Holdings after trading is resumed.
We believe that domestic index funds (except for ETFs) will not sell the stock until after the spinoff, because the combined market cap of the parent company and the spun-off company tends to
be greater than the pre-spin off market cap.
Following the spin-off, Halla Holdings is forecast to rank around 170th among the K200
constituents in terms of market cap, because most domestic index funds are anticipated to hold
the stock even after the spin-off. Thus, we expect limited stock trading among domestic index
funds related to the spin-off.
Meanwhile, domestic ETFs and foreign index funds, which tend to trade stocks to reduce tracking
error, will likely sell off Mando before the spin-off and then buy Halla Holdings shares on the day
trading resumes, at roughly the closing price.
Halla Holdings shares likely to decline on the trading resumption date
On the day trading resumes, Halla Holdings is anticipated to trade below its closing price before
the suspension date, given that holding company stocks tend to suffer visible valuation discounts
post spin-off. In Halla Holdings’ case, however, such a discount would likely be relatively small.
According to market analysts and media reports, risks associated with the company’s additional
financial support for Halla Corporation have eased following Halla Holdings’ revision to its articles
of incorporation. Moreover, Halla Holdings is expected to have a healthier financial position than
Mando following the spin-off.
The current case seems similar to the split-off of Hanjin KAL. When it was split off from Korean
Air, it was in healthy financial condition, and was thus one of the least undervalued among
holding companies.
We believe that Halla Holdings will also receive a relatively low discount, although the stock
might fall below the pre-suspension closing price when trading resumes.
KDB Daewoo Securities Research
4
AI Analysis
August 25, 2014
Post-split Mando to perform more strongly than the pre-suspension closing price;
Index funds likely to unload Mando
We expect that following the split, shares of Mando (the operating entity) will exceed the closing
price on the day before trading suspension. Indeed, generally speaking, shares of operating
entities tend to perform more strongly than those of holding companies. On a positive note,
equity analysts are expecting Mando to be re-rated following the split.
Nevertheless, we expect that index funds will prefer the selling of Mando over buying. Indeed, as
the company will not be included in the K200, there should be no buying demand from foreign
index funds and ETFs. On the other hand, index funds that have yet to sell pre-split Mando shares
are likely to unload them.
However, considering the possible re-rating, and the fact that shares of operating entities tend to
be bullish on the trading resumption day, we advise investors to focus more on fundamentals
than on selling by index funds. In other words, we do not expect index funds’ selling to keep
Mando shares from falling below the pre-suspension closing price.
Weights of leading stocks in the K200 (by market cap) to increase
As post-split Mando will be off the K200, the weights of other stocks in the K200 will increase.
Specifically, the weights of SEC, Hyundai Motor, and SK Hynix will increase by 0.028%p, 0.007p,
and 0.005%p, respectively.
Table 4. Estimated changes to K200 stock weights:
weights: Weights of large cap stocks are likely to increase
Rank
Tickers
in K200
Company
060980 KS
Mando (Halla Holdings)
1
2
005930 KS
005380 KS
3
4
000660 KS
005490 KS
5
035420 KS
6
7
055550 KS
012330 KS
8
9
000270 KS
017670 KS
10
11
105560 KS
015760 KS
12
051910 KS
13
14
086790 KS
032830 KS
15
16
033780 KS
000810 KS
17
000830 KS
18
19
066570 KS
034220 KS
20
006400 KS
Samsung Electronics
Hyundai Motor
SK Hynix
POSCO
NAVER
Shinhan FG
Hyundai Mobis
Kia Motors
SK Telecom
KB FG
KEPCO
LG Chem
Hana FG
Samsung Life
KT&G
Samsung F&M
Samsung C&T
LG Electronics
LG Display
Samsung SDI
Closing
Spin--off ratio applied
FreeFree-float
Weight Spin
price Free
Free--float
Mkt.
mkt.
in K200
mkt. cap
(Aug. 22, ratio (%) cap (Wtr)
(Wtr) (Aug 22, %)
W)
Weight
Diff
(E, %)
(%p)
134,000
70
2.41
1.69
0.24
0.12 -0.1264
SpinSpin-off ratio and
discount rate of
holding companies
applied
Weight
Diff
(E, %)
(%p)
0.10 -0.1411
1,247,000
224,500
75
70
183.68
49.45
137.76
34.62
19.80
4.97
19.82
4.98
0.0251
0.0063
19.82
4.98
0.0280
0.0070
45,950
341,000
80
85
33.19
29.73
26.56
25.27
3.82
3.63
3.82
3.64
0.0048
0.0046
3.82
3.64
0.0054
0.0051
774,000
90
25.51
22.96
3.30
3.30
0.0042
3.30
0.0047
51,800
286,000
90
70
24.56
27.84
22.11
19.49
3.18
2.80
3.18
2.80
0.0040
0.0035
3.18
2.80
0.0045
0.0040
59,300
271,000
65
70
24.04
21.88
15.62
15.32
2.25
2.20
2.25
2.20
0.0028
0.0028
2.25
2.20
0.0032
0.0031
40,000
42,000
95
50
15.45
26.96
14.68
13.48
2.11
1.94
2.11
1.94
0.0027
0.0025
2.11
1.94
0.0030
0.0027
275,000
70
18.22
12.76
1.83
1.84
0.0023
1.84
0.0026
42,250
107,500
95
50
12.25
21.50
11.64
10.75
1.67
1.54
1.67
1.55
0.0021
0.0020
1.67
1.55
0.0024
0.0022
95,500
284,000
80
75
13.11
13.45
10.49
10.09
1.51
1.45
1.51
1.45
0.0019
0.0018
1.51
1.45
0.0021
0.0021
73,600
85
11.50
9.77
1.40
1.41
0.0018
1.41
0.0020
74,500
34,000
65
65
12.19
12.17
7.92
7.91
1.14
1.14
1.14
1.14
0.0014
0.0014
1.14
1.14
0.0016
0.0016
148,000
75
10.18
7.63
1.10
1.10
0.0014
1.10
0.0016
Notes: As of Aug.22; we applied a discount of12.67% to post-split holding companies (based on the rate for Cosmax)
Source: Quantiwise, KDB Daewoo Securities Research
KDB Daewoo Securities Research
5
August 25, 2014
AI Analysis
APPENDIX 1
Important Disclosures & Disclaimers
Analyst Certification
The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean
securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions
expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this
report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s
area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified
herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been
promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific
recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by
overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and
private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest
of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.
Disclaimers
This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.
Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been
independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or
correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English
translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this
report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This
report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any
securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of
the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any
laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof.
Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or
form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,
employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a
purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or
agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment
banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to
in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to
future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Distribution
United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other
persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant
Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its
contents.
United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional
investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance
thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that
they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed
herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The
securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or
sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements.
Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong
Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for
distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws
of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person.
All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or
its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its
affiliates to any registration or licensing requirement within such jurisdiction.
KDB Daewoo Securities Research
6
AI Analysis
August 25, 2014
KDB Daewoo Securities International Network
Daewoo Securities Co. Ltd. (Seoul)
Head Office
34-3 Yeouido-dong, Yeongdeungpo-gu
Seoul 150-716
Korea
Tel: 82-2-768-3026
Daewoo Securities (Hong Kong) Ltd.
Two International Finance Centre
Suites 2005-2012
8 Finance Street, Central
Hong Kong, China
Tel: 85-2-2845-6332
Daewoo Securities (America) Inc.
320 Park Avenue
31st Floor
New York, NY 10022
United States
Tel: 1-212-407-1000
Daewoo Securities (Europe) Ltd.
41st Floor, Tower 42
25 Old Broad St.
London EC2N 1HQ
United Kingdom
Tel: 44-20-7982-8000
Daewoo Securities (Singapore) Pte. Ltd.
Six Battery Road #11-01
Singapore, 049909
Tel: 65-6671-9845
Tokyo Branch
7th Floor, Yusen Building
2-3-2 Marunouchi, Chiyoda-ku
Tokyo 100-0005
Japan
Tel: 81-3- 3211-5511
Beijing Representative Office
2401A, 24th Floor, East Tower, Twin Towers
B-12 Jianguomenwai Avenue
Chaoyang District, Beijing 100022
China
Tel: 86-10-6567-9299
Shanghai Representative Office
Room 38T31, 38F SWFC
100 Century Avenue
Pudong New Area, Shanghai 200120
China
Tel: 86-21-5013-6392
Ho Chi Minh Representative Office
Suite 2103, Saigon Trade Center
37 Ton Duc Thang St,
Dist. 1, Ho Chi Minh City,
Vietnam
Tel: 84-8-3910-6000
Daewoo Investment Advisory (Beijing) Co., Ltd.
Daewoo Securities (Mongolia) LLC
PT. Daewoo Securities Indonesia
2401B, 24th Floor, East Tower, Twin Towers
B-12 Jianguomenwai Avenue,
Chaoyang District, Beijing 100022
China
#406, Blue Sky Tower, Peace Avenue 17
1 Khoroo, Sukhbaatar District
Ulaanbaatar 14240
Mongolia
Equity Tower Building Lt.50
Sudirman Central Business District Jl.
Jendral Sudirman Kav. 52-53, Jakarta Selatan
Indonesia 12190
Tel: 86-10-6567-9699
Tel: 976-7011-0807
Tel: 62-21-515-1140
KDB Daewoo Securities Research
7

Download Report