Fifth Week of January 2021

2021.01.25.

□ Global cumulative COVID-19 cases are approaching 100 million … in Korea, the fatality rate among elderly confirmed cases is 20%, while the number of deaths among those in their 20s is zero.
□ The U.S. Centers for Disease Control and Prevention and an Italian research team say, “When infants and young children contract COVID-19, they tend to show much milder symptoms than adults."
□ Jennie Lavine, professor at Emory University, says, “If contracted in childhood, COVID-19 will remain as an endemic disease that confers a certain level of immunity." … meaning that eradication of COVID-19 will be difficult.
□ Anthony Fauci, head of the U.S. National Institute of Allergy and Infectious Diseases, says, “Herd immunity will form only when 90% of the population is vaccinated." … a level similar to that of highly contagious measles. Since measles vaccination is required in childhood, COVID-19 may also eventually be included among essential infant vaccinations.
□ Moderna CEO Stéphane Bancel says, “We will have to live with the virus forever."
▶ Since the fatality rate is especially low among younger people, the trend seems to be toward treating the working-age population (i.e. the economically active population, age 15 and older) as less materially constrained by COVID (i.e. treating it as less of an economic issue). As the stock market has already shown since March, there is now a very high probability that renewed outbreaks of COVID―whether through variants or otherwise―will no longer be priced as a negative.
▶ It remains dangerous for elderly people and for patients with diabetes or obesity.
▶ Even among the young, however, side effects may include loss of smell, an IQ decline of up to 8.5 points (with the brain aging by up to ten years relative to uninfected people even after recovery), and hair loss.

□ Fifteen treatments have received clinical approval from the Ministry of Food and Drug Safety … the only approved treatment so far is Gilead’s remdesivir. Celltrion’s “Regkirona”, the first domestically developed treatment, is currently awaiting approval.
▶ Since prescriptions still vary depending on the patient’s symptoms, no single drug has yet secured leadership.

□ Is short selling really the main culprit behind “Boxpi”? … among major countries, only Korea and Indonesia still ban short selling.
▶ Short selling itself has little to do with a falling stock market. In theory as well, it serves useful functions such as reducing bubbles.
▶ The real problem is the “tilted playing field”: foreign investors and institutions can easily access a stock-borrow market worth KRW 67 trillion, while individuals can use only a very small stock-lending market funded by credit-loan collateral. Another issue is the lack of proper tools to regulate unfair institutional trading, as seen in Goldman Sachs’s large-scale naked short selling in 2018.

□ On reports that Samsung Electronics may invest KRW 20 trillion in a semiconductor plant in the United States, the company says, “Nothing has been decided regarding investment."
▶ Samsung Electronics is already building Pyeongtaek Plant 2 and Pyeongtaek Plant 3 in Gyeonggi, with investments of KRW 10 trillion and KRW 30 trillion respectively. It also expanded its Texas foundry in 2012 at a cost of about KRW 4.3 trillion, but later ran into difficulty when Apple, then its main customer, switched foundry suppliers to TSMC.
▶ As of 3Q20, 25.9% of Samsung Electronics’ revenue came from China. It also operates many of its latest semiconductor production facilities in places such as Xi’an, so amid continuing U.S.-China tensions, being branded a “pro-U.S. company” is also a burden.
▶ When anti-Japanese sentiment rose in China, it went beyond boycotting Japanese goods to include attacks on Japanese factories and arson against Japanese cars parked on the street. The resemblance to Korea’s “anti-Uniqlo vigilantes” is hard to miss.

□ Prices of automotive semiconductors are rising … NXP and STM are demanding price increases of 10-20%.
▶ A 10% rise in automotive-chip prices is estimated to reduce automakers’ operating profit by 1%.
▶ See the 2021.1.22. news clipping.

□ In semiconductor operating profit last year, Samsung ranked third behind Intel in the United States (KRW 26.2 trillion) and TSMC in Taiwan (KRW 22.4 trillion), at KRW 14 trillion … operating margins also showed a wide gap, at 42.3%, 30.4%, and 26% (Samsung Electronics).
▶ The explanation is that while DRAM operating margins are around 40%, system semiconductors remain relatively weak at around 10%. With the memory-semiconductor supercycle expected, Samsung’s ranking is projected to rise this year (2021 expected operating profit: more than KRW 25 trillion).

□ According to the BIS, Korea’s real effective exchange rate rose 0.29% MoM to 109.97, the highest in twenty months … while this could negatively affect exports, there is also criticism that the exchange rate no longer affects exports as strongly as it once did.
▶ Hyundai Research Institute says, “If the won appreciates 10%, operating margins by sector will fall by 2-4% (e.g. transport equipment such as shipbuilding, –3.8 percentage points; general machinery, –2.5 percentage points; precision equipment, –2.4 percentage points)."
▶ See the 2021.1.21. weekly trends.

□ In 4Q of last year, roughly KRW 200 trillion flowed net into emerging-market financial markets … the Financial Times says, “Even in the new year, emerging-market financial markets are continuing to absorb capital," while 62% of Bank of America fund managers say, “We increased our holdings of emerging-market equities this month."
▶ According to Korea Financial Investment Association data, foreign investment in the KOSPI rose from KRW 560 trillion to KRW 723 trillion between 2020.9.1 and 2020.12.31, an increase of about 29%.

□ China, the world’s largest producer and consumer of plastic, will ban the use of disposable plastic products nationwide by 2026 as part of its eco-friendly policy.
▶ LG Chem, which succeeded in developing the world’s first single-material biodegradable plastic, is proceeding with technology development with commercial launch targeted for 2025. Lotte Chemical, which succeeded in developing Korea’s first plant-based bio-PET raw material, increased annual sales of bio-PET from 101 tons in 2017 to an estimated 2,000 tons in 2020.
▶ Other related companies: SKC, CJ CheilJedang, Samyang Innochem, Hanwha Solutions.

□ HMM, Korea’s largest ocean-shipping company, ranks only eighth in global container-ship capacity … about one-sixth the size of Maersk of Denmark, the global No. 1.
▶ See the 2021.1.21. news clipping.

□ SK Corp. is reorganizing around four future core investment businesses: advanced materials, green, bio, and digital.
▶ See the 2021.1.21. news clipping.


2021.01.26.

□ China’s foreign direct investment (FDI) rose to USD 163 billion (YoY +15.4%), surpassing FDI into the United States (USD 134 billion, YoY -45.6%) for the first time … the cause is widely seen as the Trump administration’s failure in pandemic response.
□ Of total FDI last year, FDI into advanced economies fell YoY -69%, while FDI into emerging economies fell YoY -12% … India’s FDI also rose YoY +13%.

□ U.S. asset manager WisdomTree (assets under management: USD 69 billion) says, “Over the past decade the U.S. stock market outpaced global markets, but signs of reversal are now emerging … this year emerging markets will enjoy the strongest momentum."
▶ The tailwinds are the globally weaker dollar and the launch of the Biden administration, which is friendlier to international trade.

□ Luxury goods sell better in downturns … Bain & Company, one of the world’s three largest consulting firms, says, “In 2022, the global luxury-goods market will recover to its 2019 level of EUR 1.3 trillion (about KRW 1,744 trillion)."
▶ LVMH shares are up 19.7% from three months ago (EUR 504.9). They are up 62.2% from last year’s low (2020.3.18., EUR 311.25). Luxury consumption also rose during the GFC.
▶ Kim Hak-kyun, head of research at Shin Young Securities, says, “From January to October 2020, U.S. household savings totaled USD 5.4 trillion, roughly five times the annual average since 2015. If that savings is converted into consumption, the earnings and stock prices of consumer companies will rise far more strongly than current forecasts suggest."
▶ Interpretation 1: YOLO driven by compensation psychology or escapism.
▶ Interpretation 2: the rich get richer while the poor get poorer.
▶ See the 2021.1.23. weekly trends. The S&P consumer discretionary sector is up YoY +36.41%, roughly on par with IT (YoY +36.74%), the strongest sector. How much has already been priced in?
▶ Indirect products available for investment in Korea: Global Luxury S&P ETF (NH-Amundi), Luxury Lifestyle Fund (IBK), Global Brand Power Fund (Korea Investment Trust Management).

□ A report by the World Wide Fund for Nature, an international environmental NGO, says, “The ESG management scores of Korea’s five major commercial banks are only around the average level of Southeast Asian countries." … major Korean banks also say, “In loan and investment reviews, the weight placed on financial statements will be reduced, while the weight of ESG indicators will rise."
□ In Korea, 89% of ESG bonds are social bonds … in the Financial Services Commission’s “2021 Green Finance Promotion Plan," it says, “We will expand the share of support going to green sectors from the current 6.5% to 13% by 2030."
▶ KDB, IBK, and Eximbank are set to launch “special green loans," while Korea Credit Guarantee Fund will launch “preferential guarantees for green companies."
▶ What is the essence of a company? (See Chapter 3-7 of my book.)

□ Elon Musk’s SpaceX successfully places 143 small satellites into orbit 500 km above Earth using a “Falcon 9” rocket … the mission, code-named “Transporter-1," is a satellite rideshare business that regularly sends small satellites into space.
▶ In the United States, the landmass is so vast and infrastructure such as communications networks is so underdeveloped that 5G development has lagged. Low-earth-orbit small satellites are essential for 5G commercialization.
▶ For satellites weighing under 200 kg, transport costs are only about USD 1 million. If SpaceX becomes the Uber of space routes, that will create opportunities for tech firms that have 5G and IoT technologies but lacked the money to launch satellites.

□ Gyeonggi Governor Lee Jae-myung says, “We will develop Pyeongtaek Port into an international port." … the Ministry of Oceans and Fisheries, in the “Fourth Basic Port Plan," says, “By 2030, we plan to invest a total of KRW 2.3 trillion in developing Pyeongtaek Port … opening an international passenger terminal, expanding berths, constructing rail sidings, and developing waterfront facilities."

□ Exports of seafood products from South Chungcheong Province reached a record USD 117 million … the top export items were processed seafood (USD 89.22 million) and laver (USD 22.25 million); the largest export destinations were China (USD 37.85 million) and the United States (USD 27.68 million); and the regions posting the largest export values were Hongseong (USD 69.80 million) and Boryeong (USD 16.94 million).
▶ Chungcheong seems to have been a standout export region last year. See the 2021.1.21. news clipping.

□ Hanwha continues expanding the large-scale investment and M&A push that began late last year … Hanwha Solutions plans to invest about KRW 2.8 trillion over the next five years in renewable-energy businesses such as solar power and green hydrogen.
▶ In December last year, Hanwha Solutions acquired a 100% stake in Cimarron, a U.S. company supplying high-pressure tanks used in SpaceX rockets, while Hanwha Aerospace acquired a 20% stake on the 13th of this month in Satrec Initiative, Korea’s first dedicated satellite company (with plans to secure a total 30% stake).

□ Among reopening stocks, the recovery in share prices is showing increasing divergence … now it is no longer the industry, but the company.
▶ The “sorting of wheat from chaff after the initial COVID shock," which I had been talking about since January last year, is now getting fully under way.
▶ See the blog post “First Trade of 2020” and the 2021.1.21. news clipping.

□ As the statutory maximum interest rate is lowered from 24% to 20% starting in August, card-loan rates are also becoming more polarized … part of a strategy to seize the medium-rate-loan market expected to expand as commercial banks scale back unsecured lending.
▶ Card-loan rates: for credit grades 1-2, down into the 6-12% range; for grades 7-8, maintained in the 20% range; for grades 9-10, lending halted.
▶ See the 2021.1.18. and 2021.1.20. news clippings.
▶ Card issuers with annualized rates below 10%: Woori Card (6.64%), Samsung Card (8.19%), Hyundai Card (9.2%).

□ Hyundai Heavy Industries’ “virtual sea-trial solution for LNG carriers” receives basic approval from Lloyd’s Register in the UK.
▶ Trial costs for LNG carriers can reportedly be reduced by as much as 30%. Operating-margin improvement?

□ Not only IT companies such as Naver, but all major Korean conglomerates are making large-scale investments in AI … including SK, LG, Hyundai Motor, and E-Mart.
▶ KT CEO Ku Hyeon-mo, who has recruited world-class experts in each field, is showing a strong willingness to transform KT into the leading company in the “ABC” industry (AI, Big Data, Cloud).
▶ Not only KT, but also telecom leader SKT and LGU+, which has continued trying various initiatives (including the acquisition and merger of CJ Hello in December 2019), have decent fundamentals, yet their share prices have remained stagnant for years because of the mature nature of the telecom industry. All three even have charts that look the same.
▶ LGU+ in particular posted record operating profit in 3Q20, and its 2020 operating-profit forecast is YoY +33.37%—vs. SKT +15.3% and KT +6.0%—yet it still has not recovered even its early-2020 share price (KT has not either; SKT has recovered to about mid-2019 levels). I am personally watching with interest to see whether each firm’s new-technology development can become a new share-price catalyst.

□ LG Hausys’s automotive-materials division is being acquired by Hyundai BNG Steel for KRW 340 billion.
▶ Companies included in the target set for separation under LG Group adviser Koo Bon-joon: LG Hausys, LG International, Silicon Works, LG MMA, and Pantos.


2021.01.27.

□ U.S. President Biden signs a “Buy American” executive order requiring that U.S.-made products be purchased first in federal-government procurement … all federal vehicles are to be replaced with U.S.-made EVs, and U.S.-flagged ships are to be used for transport between American ports.
▶ The same Buy American principle is to be applied to the pledge to invest USD 300 billion in 5G, AI, EVs, and the like. It may also be applied to the USD 2 trillion infrastructure and green-energy investment pledge.
▶ The possibility is increasing that foreign companies will be excluded from the annual USD 600 billion (about KRW 660 trillion) U.S. federal procurement market. That said, this could conflict with the WTO Government Procurement Agreement clause that “all bidders shall enjoy equal eligibility in government tenders."
▶ Direct investment in U.S. equities, or investing in Korean conglomerates that have invested in U.S.-listed companies, may be an effective approach.

□ Korea’s 2020 GDP came in at KRW 1,830.6 trillion (YoY -1.0%), the lowest growth rate since the 1998 foreign-exchange crisis (YoY -5.1%) … though still the highest growth rate among OECD member states.
▶ Compared with the previous year: household consumption –KRW 44.3 trillion, equipment investment +KRW 10.4 trillion, government spending +KRW 15.1 trillion.
▶ Government spending (KRW 319.9 trillion, YoY +5.0%) and corporate equipment investment (KRW 164.3 trillion, YoY +6.8%) provided the main support. Household consumption saw its biggest decline since the foreign-exchange crisis (KRW 812.5 trillion, YoY -5.2%).
▶ Because the contraction was smaller than in other countries, Korea rose to 10th in GDP ranking. This year’s growth forecast stands at +2.5% to +3.2% YoY. The key variable is the pace of vaccine rollout.

□ The Ministry of Economy and Finance decides to invest KRW 2.6 trillion this year in five specialized “parts, materials, and equipment clusters” nationwide … “To stabilize supply in the 100 core items with high dependence on Japanese trade, we will also strengthen linkages with the Korean New Deal, BIG3 (future vehicles, bio-health, system semiconductors), and DNA (data science, network, AI)."
▶ Nationwide specialized clusters: Yongin, Gyeonggi (semiconductors); Changwon, South Gyeongsang (precision machinery); Jeonju, North Jeolla (carbon materials); Ochang, South Chungcheong (displays); and Cheongju-Osong, North Chungcheong (secondary batteries).

□ At the Ministry of Science and ICT’s “Fourth 5G+ Strategy Committee," the telecom-carrier monopoly over enterprise 5G networks is abolished … Naver, Samsung Electronics, Hyundai Motor, Samsung SDS, and SK C&C have shown interest in using specialized 5G networks.
▶ One moat for the telecom carriers disappears. Could that still become a share-price catalyst?

□ The KOSDAQ, which benefited from rotational buying as the KOSPI lost momentum, broke through 1,000 for the first time in twenty years … IBK Investment & Securities says, “The KOSPI has entered a correction phase, but after a short-term adjustment it will resume rising as the leading stocks maintain their upward trend," while Citibank says, “The large-tech-led market will continue."
▶ Hedging through cash, low-risk products, asset stocks, and the like seems necessary. Going against the market is dangerous.

□ As expectations for economic recovery rise with vaccine development and the like, investment sentiment is rapidly recovering in corporate bonds centered on investment-grade names … corporate-bond subscription ratios are hitting record highs.
▶ Thanks to the growing amount of funds flowing into the stock market, companies are issuing fewer corporate bonds, so demand is exceeding supply. Another positive factor is that the rule granting an additional 5% allocation of IPO shares to investments in junk bonds (i.e. high-yield funds) has been extended through 2023.
▶ See the 2021.1.23. weekly trends for movements in junk-bond and investment-grade yields.

□ The Seoul city government is actively reviewing easing redevelopment standards in 700 of 2,204 districts across its 25 boroughs.
▶ All candidates in the April Seoul mayoral election are campaigning on easing redevelopment regulations.

□ Foreigners, who are not subject to rules such as LTV caps and financing-plan disclosure requirements, made 21,048 real-estate transactions in Korea last year … about 79%, or 16,592 cases, involved properties in Seoul and the capital region, and a National Tax Service investigation found that 32.7% of the homes were never occupied even once by their owners.
▶ In August last year, one case investigated involved an American in his forties purchasing forty-two apartments through gap investment.


2021.01.28.

□ Gina Raimondo, nominee for U.S. Commerce Secretary, says, “We will use every tool to the fullest extent to respond aggressively to China’s unfair methods of competition." … the White House adds, “President Biden will respond firmly to Russia’s behavior in order to protect U.S. national interests."

□ Under the European Union’s “European Battery Innovation Project," EUR 2.9 billion (about KRW 3.9 trillion) will be invested to support EV-battery production at forty-two companies including Tesla and BMW.

□ Major U.S. companies such as Microsoft, Amazon, GE, AMD, Starbucks, and 3M are expanding investment in preparation for the post-COVID era.

□ Component supply shortages have become so broad across the LCD-panel and semiconductor industries that companies are outsourcing production even to competitors … Silicon Works, an LG-affiliated fabless company, surpassed KRW 1 trillion in revenue for the first time since its founding and decided to pay a performance bonus equal to 600% of base salary.

□ Naver becomes the second-largest shareholder of Big Hit subsidiary BNX by investing KRW 411.9 billion … forming an alliance of Naver (IT support such as data analysis), Big Hit (overall management of the integrated service business), and YG (content provision).

□ Venture investment last year reached a record KRW 4.3 trillion … shifting from a manufacturing-centered structure (2010) to one centered on bio and services.
▶ This is one reason domestic and overseas investors, like Howard Marks—who recently argued that “the era of Buffett-style value investing is over”—are now rethinking the definition of value investing. The key is to focus on buying low and selling high.

□ Seven out of ten securities firms suspend mortgage lending … because the balance of credit extensions has exceeded lending limits.
▶ See the 2021.1.23. weekly trends.

□ Local governments are announcing investment plans one after another.
▶ South Jeolla Province: total renewable-energy investment of KRW 48 trillion by 2030, including KRW 46 trillion in private capital.
▶ Gwangju Metropolitan City: intensive investment of KRW 1.2433 trillion in healthcare AI by 2025, using the Gwangju Free Economic Zone opened in June last year.
▶ Daejeon Metropolitan City: development of a biotech valley through KRW 544.3 billion in investment by 2030, using the infrastructure of Daedeok Research Complex.
▶ South Chungcheong Province: KRW 120 billion to be invested by 2026 to establish a seafood-food cluster (e.g. IoT logistics warehouses, seafood-food R&D, etc.).


2021.01.29.

□ U.S. President Biden signs an executive order halting new oil and gas drilling on federally owned land and coastal waters and reducing fossil-fuel subsidies.
▶ Personally, I am curious what the S&P energy sector’s YTD will look like next week.

□ Fed Chair Jerome Powell says, “COVID-19 remains a significant economic threat … it is far too early at this stage to talk about tapering. The outlook for the economy depends on vaccine distribution."

□ Ant Group, the fintech affiliate of Jack Ma’s Alibaba Group, decides under pressure from Chinese financial regulators to convert into a financial holding company instead of spinning off as a financial firm.
▶ The reason Kakao Pay did not receive MyData approval was Ant Group’s qualification issue. If Ant Group converts into a financial holding company, that issue may be resolved and Kakao Pay may receive approval for the MyData business. But if Kakao Pay’s second-largest shareholder becomes a financial holding company subject to much stronger pressure from Chinese financial regulators, I would probably use Toss or Naver Pay instead of letting Kakao Pay access my financial information.

□ Apple, which posted the highest quarterly revenue in its history, recorded USD 111.4 billion in revenue in 4Q20 alone (about KRW 124.7 trillion, YoY +21%) … with iPhone revenue alone at USD 65.6 billion (about KRW 73.4 trillion, YoY +17%).
▶ A combination of luxury positioning and brand faith. A company almost perfectly optimized for capitalism. See the 2021.1.26. news clipping.

□ U.S. GameStop rises 1,729% in sixteen days, from USD 19 to USD 347.51 per share … amid a frenzy of concentrated retail buying, hedge funds suffer USD 91 billion (about KRW 100 trillion) in short-selling losses in January alone.
▶ Richard Bernstein, author of Style Investing: Catch the Leading Stocks in a Rotational Market, says, “A classic form of bubble is emerging. The democratization of the market has contributed greatly to this excess euphoria. Naïveté may put amateur investors in a very difficult position."
□ Korean retail investors participating in the GameStop short-selling war (about KRW 51.3 billion purchased) also launch coordinated buying campaigns in the Korean market on names with the largest short-interest balances. Domestic asset managers are also rushing to cover shorts.
□ Prime Minister Chung Sye-kyun says, “Since all OECD member countries have short-selling systems, Korea alone cannot continue extending the short-selling ban."
▶ Top KOSDAQ short-interest names: ShillaJen (9.07%), KMW (7.21%), HLB (6.58%), Pearl Abyss (3.55%), and Kukil Paper (3.16%).

□ The USD/KRW exchange rate jumps 15.2 won in a single day … as risk-off sentiment triggered by the U.S. stock-market correction strengthens foreign selling.
▶ Negative factor 1 for the stock market: the view that U.S. hedge funds will dump other holdings in large quantities in order to cover losses from short selling.
▶ Negative factor 2 for the stock market: dollar strength (i.e. rising preference for safe assets) caused by concerns over a slowdown in recovery after the FOMC statement included the phrase “the pace of recovery in economic activity and employment has moderated."

□ The Financial Supervisory Service tells the vice presidents in charge of lending at seventeen banks, “Please manage well the household-loan plans you have already submitted." … loan volumes of all kinds are being cut sharply and rates are rising.
▶ The real economy has not yet recovered. For the time being, this is not the moment to worry about inflation; it is the moment to support economic activity through low interest rates. Even so, every government ministry is being pulled around by the ruling party and producing increasingly erratic policy responses, including the government-bond tantrum triggered by Prime Minister Chung Sye-kyun―the so-called “Chung Sye-kyun tantrum”―. See the 2021.01.25. news clipping.

□ Samsung Electronics, which recorded KRW 36 trillion in operating profit in 2020, says, “We will actively use retained resources to pursue large-scale M&A within the next three years … through 2023 we will pay KRW 9.8 trillion in annual dividends, and if residual resources remain, we will pay additional dividends within 50% of free cash flow (FCF)."
▶ It increasingly looks like the kind of company that could support a true American-style value-investing case.

□ POSCO is now in a position to aim for quarterly operating profit above KRW 1 trillion for the first time in five quarters since 3Q19 … the share of steel in total consolidated operating profit fell from 90% in 2016 to 47.2% in 2020, marking the first time since the company’s founding that the steel division’s contribution to operating profit fell below 50%.
▶ Its key future goals are to maintain a gap over latecomers by preempting future demand centered on mobility, construction materials, and eco-friendly energy steel; to strengthen the global infrastructure segment by expanding synergies within the group in LNG; to broaden the value chain in food; and to expand output of secondary-battery materials.
▶ A legacy industrial giant evolving in step with changes in industrial structure?

□ Driven by shopping, payments, and content, Naver posts record highs in both revenue and operating profit … Also worth watching is Shinsegae Vice Chairman Chung Yong-jin, who is putting serious effort into overseas expansion alongside the Naver-Big Hit-YG alliance.
▶ Overseas expansion in retail? I remain skeptical.

□ Of the retail investors who bought stocks in the new year, 70% have returns below average … out of 770 KOSPI names, only 274 have outperformed the index, showing a market centered on large caps.
▶ Last year, the KOSDAQ had outperformed the KOSPI. Even last week the articles were nothing but rosy outlooks, and then after just a day or two of correction, negative articles immediately began to appear. One has to look only at the facts and the numbers.