First Week of February 2021

2021.02.01.

□ Major global real-economy indicators are due to be released in sequence this week … eurozone GDP growth (2nd), China’s manufacturing PMI and U.S. nonfarm payrolls (4th), and the U.S. unemployment rate (5th).
▶ Although the KOSPI recovered the 3,000 line today, as I noted on the blog this is still an extreme overheating phase, with the highest P/E on the KOSPI at 2,000 and on the KOSDAQ at 40,483, so a correction could come at any time. Volatility is likely to become very severe. Holding a certain portion in safe assets is essential.

□ Xiaomi of China files suit to overturn its designation on the U.S. government blacklist … White House Press Secretary Jen Psaki says, “We are focused on approaching the U.S.-China relationship from a position of strength, which means coordinating and communicating with allies and partners on how the United States and China should cooperate."
▶ In other words, Beijing is being told not to act like East Asia’s hegemon or reach for America’s core interests―Korea, Japan, and the rest―and instead to remain within those bounds.

□ U.S. GameStop, despite posting net operating losses for a second straight year, sees its share price rise 1,729% in just sixteen days … even as retail investors organized around the six-million-member website WallStreetBets piled in, new hedge funds also entered the trade, and the reduction in short interest amounted to only USD 5 million.
▶ Judging by the Goldstein crisis-diagnostic indicator and the financial stress index, the likelihood that domestic indices fall because of hedge-fund short covering appears low.

□ Chung Eui-jung, head of the Korea Stock Investors Association, argues for extending the short-selling ban by one year … “If the tilted playing field is not fixed within a year, we will move to collective shareholder action centered on Celltrion and HLB, where short selling is heavy."
▶ How long does the Korea Stock Investors Association plan to keep holding Celltrion? Even after the retail buyers willing to provide liquidity have already come in?

□ The Indian government is moving to ban the circulation of private cryptocurrencies such as Bitcoin over money-laundering concerns.
▶ The central government’s strongest weapons are taxing power and currency-issuance power. Major economies that already enjoy reserve-currency status can treat Bitcoin and other cryptocurrencies as something like digital gold, but that is much harder for developing countries whose currencies themselves are weak.

□ Panasonic, which had ranked third in the world solar market through 2009, decides to exit the business after years of losses … because solar-panel prices have fallen to one-third of their 2012 level, and Japan’s program under which the government purchased household solar power has been phased out since November 2019.

□ Pat Gelsinger, Intel’s youngest-ever CTO in his thirties, leaves VMware—where he roughly tripled revenue over eight years—and returns as CEO … declaring, “It is a tremendous honor to return home as CEO at a time of innovation. We will manufacture most of our semiconductor products in-house by 2023."
▶ It is expected that Intel will also review ways to increase its use of external foundries. Beneficiary: Samsung Electronics.

□ As the financial authorities move to tighten regulation on unsecured credit loans, the number of overdraft accounts jumps by 43,000 in January alone.
▶ A bank official says, “The policy stance of suppressing credit loans is spreading from ordinary banks to internet-only banks, and from ordinary credit loans to overdraft accounts. The obsession with controlling the real-estate market risks distorting the financial market and creating innocent victims."

□ The Financial Supervisory Service recommends even to insurers, whose net profit rose 6.1% YoY, that they “not exceed the average dividend payout ratio of the past three years." It adds, “Excessive dividends can significantly weaken crisis-response capacity. We are not directly controlling insurers’ dividends."

□ Naver, continuing its string of large-scale acquisitions, moves to issue bonds on a large scale for the first time in five years and two months … it is preparing to issue KRW 700 billion in corporate bonds. Lead managers: KB Securities and NH Investment & Securities.
▶ Depending on the yield, they may be worth including as part of portfolio diversification.

□ In the first three quarters of the previous year, Korea’s exports of battery EVs reached USD 3.9 billion (YoY +65.9%), surpassing hybrid-car exports of USD 2.5 billion for the first time … by export value, Korea ranked fourth in the world after Germany, the United States, and Belgium; for eco-friendly vehicles as a whole, it ranked fifth.
▶ Total exports of eco-friendly vehicles reached USD 7.1 billion. Of that, the largest share was also battery EVs (54.7%).

□ Samsung, holding KRW 110 trillion in cash, is pursuing large-scale M&A in automotive semiconductors … potential targets include Texas Instruments in the United States (market cap KRW 173.7 trillion), NXP in the Netherlands (KRW 51.2 trillion), and Renesas in Japan (KRW 22.3 trillion).
▶ M&A usually acts as a positive catalyst, though not always, so comparable cases should be examined.

□ Hyundai Motor and Samsung Display (cf. parent company Samsung Electronics) begin cooperating again after ten years … OLED is the format best suited for EV displays.
▶ A comeback for undervalued OLED? Suppliers to Samsung Display: Wonik IPS, SFA Semiconductor, Duk San Neolux, AP Systems, YEST, etc.
▶ The entertainment business inside cars also deserves attention. What could result from the combination of mobility, interior space, and entertainment?

□ MCNEX, which holds an 80% share of Korea’s automotive camera-module market, is set to expand its fourth Vietnam plant after completing its third plant in 2019 … it is a first-tier vendor to Samsung Electronics and supplies 100% of the in-vehicle cameras for Hyundai’s Genesis brand.
▶ Major customers in automotive electronics components are Hyundai Motor, Kia, Volvo (U.S.), and Geely (China).
▶ Smartphone camera modules account for 88% of total revenue. In other words, even at the upper bound, revenue from automotive electronics is only 12%. If it holds 80% of the domestic market and that segment is still just 12% of sales, there may well be a reason similar to the current shortage in automotive semiconductors—lower margins than smartphone semiconductors leading to lower production priority. The exact revenue and margins would need to be checked in the filings. When analyzing a company, one has to look at the numbers.


2021.02.02.

□ The U.S. government sets up a USD 500 million (about KRW 560 billion) 5G development fund … with participation from the UK, Canada, Australia, and New Zealand, the other members of the “Five Eyes”, as well as Japan.
▶ Huawei currently ranks first in the telecom base-station market. U.S. pressure on China also aligns with Japan’s interests. They frame it in terms of “Japan’s wireless-communication technology," but Fujitsu has only 0.6% of the base-station market, while Samsung has 8.9%. With global liquidity exploding and even the U.S. administration having changed, it is frustrating to watch the Moon administration remain this slow to adjust.

□ The Wall Street Journal reports that ExxonMobil and Chevron, the two pillars of the U.S. oil industry, have discussed a merger … talks that had been halted last year when oil prices fell because of COVID-19 are now said to have resumed. The stance of the Biden administration, which is strengthening the green policy line, remains a variable.

□ Deputy Prime Minister Hong Nam-ki says, “In line with the expansion of EV adoption, we will install 3,000 additional fast EV chargers this year." … the Ministry of Environment says, “This year we will open the era of 300,000 cumulative EVs and hydrogen vehicles. We will install 30,000 EV chargers and more than 100 hydrogen stations."

□ At the fourth “BIG3 Promotion Meeting," Hong Nam-ki says, “We will invest KRW 240 billion in system-semiconductor R&D."
▶ The private advisory members in attendance were Lee Seok-woo (CEO of Penta Security Systems), Choi Chang-sik (Vice Chairman of DB HiTek), Mook Hyun-sang (Head of the Korea Drug Development Fund), and Lee Young-min (President of Korea Venture Investment).

□ As the “Green New Deal” expands, the number of affiliates belonging to 64 major Korean conglomerates rises by 44 in just three months … SK records the largest increase, adding 22 new companies.

□ Export value rises by double digits YoY for a second straight month … twelve of Korea’s fifteen major export items are now showing export growth.
▶ The twelve items are semiconductors, automobiles, petrochemicals, steel, ships, automotive electronics components, wireless-communication devices, displays, home appliances, computers, bio, and secondary batteries.

□ With low interest rates and a booming stock market, bank deposits fall by KRW 16 trillion in January alone … the increase in lending is smaller than at year-end last year because of the recently strengthened loan regulations.
▶ At the five major banks: deposits and savings were down KRW 6.2 trillion. Household lending was up KRW 4.2 trillion (credit loans +KRW 1.6 trillion and mortgage loans +KRW 2.6 trillion).

□ The spread of the short-selling war into Korea and the government’s announcement of its future-vehicle development plan turn foreign and institutional investors back into net buyers … autos, batteries, pharmaceuticals, and cyclical sectors such as steel, chemicals, and finance all rebound in sequence.

□ Hyundai Motor Group and Korea Development Bank establish the KRW 74.5 billion “Zero One Fund II” … with a focus on cultivating mobility startups in future mobility, eco-friendly vehicles, AI, and connected cars.

□ Nexon Chairman Kim Jung-ju decides to raise pay for all employees across the board by KRW 8 million … saying, “A salary increase is the best encouragement."
▶ Nexon―listed on the Tokyo Stock Exchange―is up roughly twofold from the start of the year, to JPY 3,290.

□ Ahead of the Lunar New Year, a government meeting on the “parcel-box shortage” is scheduled for the 4th with the Prime Minister’s Office, the Ministry of Trade, Industry and Energy, the Fair Trade Commission, the Ministry of SMEs and Startups, and representatives from the paper and boxboard industries … “The problem is that boxboard base-paper companies supply mainly to their own affiliates."
▶ I learned only this time that vertical integration was apparently being treated as a problem.

□ The large-cap-led market continues, and the top ten companies now account for more than 40% of total market cap for the first time in fifteen years … Samsung Securities recommends the already leading trio of autos, chemicals, and electronics.
▶ One cause being cited is that, as market volatility rises, retail investors are concentrating their investments in large-cap stocks.


2021.02.03.

□ China, in response to repeated U.S. warnings of sanctions, hints at retaliatory restrictions on rare-earth exports to the United States … the U.S. Department of Defense is making additional investment in domestic rare-earth production and processing facilities.
▶ Once the Texas rare-earth processing facility is completed, it could produce 25% of global rare-earth demand.

□ ExxonMobil, under investor pressure to pay attention to ESG, decides to invest USD 3 billion through 2025 in carbon-emissions-reduction technology … Bloomberg says, “USD 3 billion amounts to only 3-4% of ExxonMobil’s CAPEX and is not meaningful."

□ On expectations of a flood of long-term Treasury issuance to fund spending, the long-short spread (i.e. the 10-3 spread) widens to 0.809 percentage points, the largest since 0.810 percentage points on 2011.03.24.
▶ The Bank of Korea has cut the base rate to a record low of 0.5% and also purchased KRW 11 trillion in government bonds, yet long-term government-bond yields have risen sharply and market rates are climbing instead. See the 2021.1.25. news clipping.

□ Autos, chemicals, and electronics are riding the ESG wave … parts companies are shifting from internal-combustion manufacturing into EV and hydrogen-vehicle electronics.
▶ The Ministry of Trade, Industry and Energy and the Korea Automobile Research Institute began the “Auto-Parts Company Innovation Support Program” last year, and will recruit second-round support recipients from March this year. Support includes prototype-production costs and equipment-investment financing through KOTEC and KIBO loans.

□ KakaoBank surpasses KRW 26.5 trillion in total assets and KRW 110 billion in net profit just three and a half years after launch … its strategy this year is “to reduce loans to salaried workers and expand medium-rate loans and lending to medium- and lower-credit borrowers."
▶ See the 2021.1.18. and 2021.1.20. news clippings.

□ Even amid the economic downturn, disposable income has risen sharply … while shortages on the supply side are not keeping up with the recovery in consumption.
▶ In a recovery, themes and cyclicals tend to move first, and within each sector the leaders move first.

□ LG Energy Solution’s operating margin is 3%, while SK Innovation and Samsung SDI are still in the red … attention should be paid less to EVs themselves than to the companies making EV materials, parts, and equipment.
▶ Ecopro BM, Cheonbo, Cosmo Advanced Materials, L&F, etc.
▶ The Levi’s example from the gold rush—making a fortune by selling jeans to the miners rather than digging for gold—still applies.

□ Hyundai Mobis filed 2,100 domestic and overseas future-vehicle patent applications last year … with autonomous driving, connected cars, and electrification making up half.

□ POSCO, Hyundai Steel, Dongkuk Steel, KG Dongbu Steel, Seah Steel, and SIMPAC sign a joint declaration of “2050 carbon neutrality” at the launch ceremony of the Green Steel Committee … Industry Minister Sung Yun-mo says, “To support technological innovation and investment in industry, we will provide tax and financial support, package deliberation on permits and approvals, and regulatory special treatment, while pushing five core carbon-neutrality tasks intensively."
▶ The core of the five tasks: wider use of electricity and hydrogen, energy-efficiency gains using digital technology, carbon neutrality, a circular economy, and stronger carbon-absorption functions of nature and ecosystems.

□ Hanwha Techwin, in cooperation with Intel, launches Korea’s first CCTV product equipped with AI for facial recognition and analysis … the only Korean company to embed AI across the full video-security stack (CCTV, storage devices, and control programs).

□ As the “stay-at-home” era fuels the rise of food-related content, seven of last year’s top ten YouTube advertisements were food ads … Korea’s health-functional-food market has gradually expanded from KRW 5.3 trillion in 2017 to KRW 6.1 trillion in 2020.
▶ Related stocks: CJ CheilJedang, EDGC, E-Mart, etc.


2021.02.04.

□ UBS CIO Mark Haefele says, “Expected semiconductor earnings for this year are already reflected in share prices. Semiconductor weighting should be reduced and platform weighting increased."

□ ExxonMobil, the largest refiner in the United States, posts its first ever annual loss, while BP, Europe’s largest refiner, records its first loss in ten years … as the global green shift intensifies, even the major oil companies are moving to reduce the share of revenue derived from oil and natural gas and increase investment in clean energy.

□ McKinsey Korea Managing Partner Andre Andonian says, “The U.S. economy will recover to its pre-COVID level in Q2 this year, while Korea will do so in Q2 next year."

□ Short selling is to resume on 350 names in the KOSPI 200 and KOSDAQ 150 from May 3 … and, with KRW 2-3 trillion in stock-borrow inventory secured, the opportunity will also be opened to retail investors who complete prior education and mock-investing requirements.

□ As review standards for tech-special listings are strengthened, pharmaceutical and biotech firms are failing preliminary listing reviews one after another.
▶ Both D&D Pharmatech, a degenerative-brain-disease drug company backed by PayPal founder Peter Thiel, and Osang Healthcare, a diagnostic-kit maker currently drawing strong attention in the OTC market, failed their preliminary listing reviews.

□ The securities industry says, “This year too, as in last year, the market will remain one dominated by the leading names."

□ Hyundai Motor posts strong GV80 sales, with U.S. Genesis sales in January reaching 2,814 units (+101% YoY) … “This year we are targeting 1.36 million units in U.S. sales, centered on SUVs."

□ Amotech begins production of multilayer ceramic capacitors (MLCCs), following Samsung Electro-Mechanics and Samwha Capacitor.
▶ MLCCs are essential components for 5G, smartphones, EVs, and telecom equipment.

□ Samsung Electronics invests USD 50 million in Rescale, a U.S. cloud high-performance-computing platform company … existing investors include Microsoft, Nvidia, and Hitachi Ventures (also USD 50 million in total).
▶ Rescale has been cooperating with Samsung Electronics’ foundry division since 2020.

□ SKT and LGU+ both post record-high sales in 2020 … with operating profit up more than 20% YoY.
▶ The question is how far the share price will reflect it. LGU+ is already up 6.7% from its January 29 closing price. See the 2021.1.26. news clipping.

□ Cosmax Bio, the health-functional-food subsidiary of Cosmax, receives approval from the Ministry of Food and Drug Safety for “perilla extract” for improving eye fatigue, after ten years of development.

□ E-Mart sees orders for Korean beef gift sets ahead of Lunar New Year rise 10% from the previous year’s holiday season.

□ Orion updates its record-high operating profit just one year after the previous record, reaching KRW 375.6 billion, while maintaining three straight years of +15% YoY operating-profit growth … overseas sales in China, Russia, and Vietnam are also showing balanced growth.

□ The average house price of the top 20% nationwide rises from KRW 900 million to KRW 1 billion in just five months … over the past four years, the top 20% of homes in Seoul rose by KRW 800 million, while the bottom 20% nationwide fell by KRW 1.15 million.
▶ In both stocks and real estate, usually only the ones that are already going up tend to keep going, and the sector leaders move first and farther. See the explanation of P/E (pp.248-256 from my book).

□ Busan-based companies such as S&T Motiv, Hwaseung R&A, Geumyang, and Panasia (OTC) are accelerating development of automotive-electronics parts and hydrogen fuel cells.


2021.02.05.

□ U.S. President Biden says, “We can reduce the number of recipients for the USD 1,400 subsidy." … shifting from universal support toward selective support.
▶ The original budget would fall from USD 465 billion to USD 420 billion. Not a meaningful reduction.

□ Saudi Arabia, the largest oil producer in the Middle East, under Crown Prince Mohammed bin Salman, is targeting production of 650 tons of green hydrogen from 2025, enough to run 20,000 hydrogen buses … Abu Dhabi is also planning, through the Mubadala sovereign wealth fund with USD 231 billion under management, to establish a hydrogen-energy production base in the UAE.
▶ According to McKinsey and BloombergNEF, the share of hydrogen in energy consumption, currently below 5%, could expand to 25% by 2025, and by 2050 the global hydrogen economy is estimated at USD 2.5 trillion with 30 million cumulative jobs created.
▶ As noted several times, green energy currently requires state subsidies. The energy market is being reorganized from one centered on fossil fuels to one centered on clean fuels, so whichever country pours in more money now may reshape future energy hegemony. The oil-producing states and oil companies that currently hold that hegemony already sit on enormous accumulated wealth, and the calculation seems to be that they will use their existing production and distribution networks to take the alternative-energy market as well and thereby preserve that hegemony.

□ Toyota of Japan retakes the world No. 1 spot in auto sales from Germany’s Volkswagen for the first time in five years … with a 2021 production plan of 9.2 million vehicles (YoY +17%).
▶ At a time when broad supply cuts are expected across automakers because of the automotive semiconductor shortage, Toyota has decided to increase output. The straightforward reading is that the contraction in economic activity caused by COVID-19 has already been reversed in substance.

□ Demand for packaging materials and tissue paper driven by COVID-19, together with the green trend, sends wood-pulp prices sharply higher.
▶ Demand from China, which accounts for one-third of global pulp demand, has surged. Prices of bleached hardwood pulp, used in premium tissue, napkins, and paper cups, have risen 44% over the past three months.

□ CNBC reports, “Apple and Kia are in the final stage of talks to produce the Apple Car … production is scheduled from 2024, though the final launch timing could slip further."

□ Stocks tied to the “U.S. Georgia theme” hit limit-up on the idea that the factory would be built near Hyundai and Kia plants in the United States.
▶ Kuyoung Tech, KB AutoSys, NVH Korea, Hwashin, Dongwon Metal, Hwashin R&A, etc.

□ Beneficiaries of the COVID-driven “stay-at-home” trend … Lotte Hi-Mart, DoubleUGames, Nongshim, etc.
▶ See the 2021.1.21. news clipping.

□ The Ministry of Trade, Industry and Energy puts the “Hydrogen Act” into effect from the 5th, creating the legal basis for administrative and financial support for specialized hydrogen companies.

□ K Bank, offering a one-year time-deposit rate of 1.3%, higher than commercial banks, draws in KRW 750 billion in deposits and savings over the past month, in contrast with the KRW 16 trillion decline in deposits and savings at the five major banks over the same period … it plans to strengthen medium-rate loan products in the 5-10% range substantially.

□ Korea Eximbank successfully issues KRW 1.7 trillion in bonds to overseas investors … the funds raised are to be used actively to support the “Korean New Deal."

□ Pension funds record net selling for 28 consecutive trading days, unloading a total of about KRW 10 trillion … the longest and largest streak on record.

□ Hyundai Motor Group signs an “MOU on investment cooperation for the New Deal in future vehicles and industrial digitalization” with the Ministry of Trade, Industry and Energy, the Financial Services Commission, and KDB … establishing a KRW 200 billion fund to foster future-vehicle parts suppliers.

□ Korean Air posts an earnings surprise on KRW 4.25 trillion in cargo revenue (YoY +66.2%) … operating profit holds up at KRW 238.3 billion (YoY -16.8%), making it the only major international airline still in the black.
▶ It plans to move in earnest on the Asiana acquisition. Funding is to be raised through a KRW 3.3 trillion rights offering.
▶ Eastar Jet, which fell into a bankruptcy crisis after its M&A with Jeju Air collapsed, has cleared the liquidation crisis and has now been allowed to begin corporate rehabilitation proceedings. A rehabilitation plan must be submitted by May 20.

□ BNX, the Naver-Big Hit joint venture, is pursuing the establishment of a joint venture with Universal Music Group, one of the world’s three largest record companies.
▶ See the 2021.1.28. news clipping.

□ The “2/4 Real-Estate Measures”—this administration’s twenty-fifth real-estate package—are announced, easing reconstruction and redevelopment restrictions in 222 previously undeveloped districts in Seoul … with plans to supply 836,000 homes nationwide, including 323,000 in Seoul, by 2025.
▶ Out of 108 canceled New Town zones and 303 Seoul redevelopment-promotion zones, 222 districts were selected as “priority zones for review under public participation."

□ Of the total 836,000 homes to be supplied nationwide, excluding the 263,000 units on as-yet undisclosed new land, about 60% of the remaining 573,000 units are public-led developments.
▶ “Urban public-housing complex projects” for station areas, semi-industrial zones, and low-rise residential areas: 196,000 units.
▶ If zoning is upgraded to quasi-residential, floor-area ratios can be raised to as high as 700%. However, if projects proceed as purely private developments, 50% of the additional floor-area ratio must be donated back.
▶ “Public direct-execution redevelopment and reconstruction projects”: 136,000 units.
▶ Public institutions such as LH and SH will directly execute reconstruction and redevelopment. The Ministry of Land and local governments will directly designate the target districts. By skipping the union general meeting and management-disposition approval procedures, the usual project period of more than thirteen years is to be shortened to under five.

□ Of the 263,000 homes on new housing land, 180,000 are to be supplied in the capital region, effectively amounting to a plan for a fourth-generation new town … with consideration being given to public-transport convenience and accessibility to Seoul, including GTX and subway lines. Outside the capital region, decisions will center on major metropolitan cities.
▶ Candidate sites expected by the industry: Maesong and Bibong in Hwaseong, Gongse-ri in Yongin, Hwajeon in Goyang, Gochon in Gimpo, Juwam in Gwacheon, Gwangmyeong-Siheung, and Gambuk in Hanam, all in Gyeonggi Province.
▶ In Sejong Special Self-Governing City, an additional 13,000 homes are also to be supplied through higher floor-area ratios and use of reserved land.

□ The share of special allocations in public-sale housing will be reduced, while lottery-based supply will be expanded … for public-sale housing of 85 $$m^2$$ or less, the share allocated to general supply will be raised from 15% to 50%.
▶ As a rule, priority allocation rights are based on “one household, one home." Within five years from the priority-allocation contract date, recipients may not apply either for housing supply in overheated-speculation districts or for redevelopment/reconstruction union-member allotments.
▶ General-supply units are structured to favor households that have remained without a home for three years or more and that have larger balances in subscription savings accounts.
▶ Under the current system, income and asset requirements apply to general-supply public-sale housing of 60 $$m^2$$ or less. But for the newly supplied units, even homes priced above KRW 900 million will be exempt from income requirements, thereby expanding subscription opportunities for the middle class.