Third Week of February 2021

2021.02.15.

□ The U.S. Congressional Budget Office estimates that the Democratic bill to raise the federal minimum wage from the current USD 7.25 to USD 15 by 2025 would have the following effect: “900,000 Americans would be lifted out of poverty, while 1.4 million jobs would disappear."

□ BNY Mellon, the oldest bank in the United States, formally incorporates cryptocurrency as an asset … Morgan Stanley, which had maintained a negative stance on Bitcoin, is also reviewing whether to invest in it.

□ Toyota and Nissan will launch connected cars within the year (i.e. vehicles whose autonomous-driving functions can be updated solely through over-the-air software patches).

□ At four of the five major commercial banks, an interest-rate inversion has emerged, with loan rates for professionals and high-income borrowers now higher than those for salaried workers and lower-credit borrowers … the statutory maximum interest rate is also scheduled to be cut to 20% from the end of the year.
▶ See the 2021.01.26. news clipping.

□ The Financial Services Commission will introduce within this year 40-year ultra-long-term mortgage loans for young people with annual income below KRW 70 million, or newly married couples with combined annual income below KRW 85 million … limited to properties priced at KRW 600 million or less based on valuations by KB Real Estate or the Korea Real Estate Board.

□ Beginning in the second half, the Financial Services Commission will provide various benefits—such as easier funding access, lighter business regulation, and softer sanctions—to large consumer-finance companies with assets of KRW 10 billion or more and no record of FSS sanctions … a measure intended to offset the contraction in credit available to lower-income borrowers following the cut in the statutory maximum interest rate.
▶ Under the Moon administration, consumer lending through mainstream banks is being constrained while incentives are being extended even to large private lenders, effectively expanding the private-lending market.

□ The number of self-employed business locations fell 9.57% last year (from 2,671,953 in 1Q20 to 2,416,252 in 4Q20).

□ Coupang, Korea’s largest e-commerce company, will list directly on the New York Stock Exchange rather than going through Nasdaq … its estimated corporate value is about KRW 55 trillion, roughly seven times the combined market capitalization of Shinsegae Group’s retail affiliates (about KRW 8.2 trillion).
▶ The largest shareholder is SoftBank SB with a 37% stake. Chairman Masayoshi Son’s expected capital gain is about KRW 17 trillion.
▶ Additional synergies are also expected from the appointment of Uber’s former CTO and from autonomous-driving firms already held in SoftBank’s portfolio.

□ Under the impact of COVID-19, the “one industry, one company” structure is accelerating … LG Electronics’ exit from smartphones, Korean Air’s acquisition of Asiana, and Hyundai Heavy Industries’ acquisition of Doosan Infracore.
▶ See page 122 of my book.

□ LG Energy Solution wins the EV-battery litigation … SK Innovation is banned from producing and importing lithium-ion batteries in the United States for ten years.
▶ Georgia, where SK Innovation’s battery plant is to be located, has formally requested that President Biden exercise his veto over the ITC ruling.
▶ Ford and Volkswagen are also pressing LG and SK to settle, worried about disruptions to vehicle production.
▶ A settlement remains possible given domestic and international pressure. However, because LG and SK remain far apart on the amount―KRW 2.5-3.0 trillion vs. no more than KRW 1 trillion―it does not look easy.

□ S-Oil returns to quarterly operating profit in 4Q20, with large gains from petrochemicals and base oils offsetting losses in refining.


2021.02.16.

□ On the White House’s declaration that it would “resolve the shortage of non-memory semiconductors," and with the Philadelphia Semiconductor Index jumping 8%, semiconductor stocks rose across the board.

□ Japan’s economy contracts for the first time in eleven years under the impact of COVID-19 … the Tokyo stock market, helped by 4Q20 economic growth far exceeding expectations, recovers the 30,000 level for the first time in thirty years since the collapse of the bubble economy.
▶ The economy contracted for the first time in eleven years, yet equities are booming because the growth figure was better than expected. In other words, is this being treated as bullish simply because the economy deteriorated less than feared?

□ Last year the National Health Insurance fiscal balance posted a KRW 353.1 billion deficit, marking a third consecutive year of deficits … reserves also fell by KRW 3.3 trillion to KRW 17.4 trillion.

□ Credit loans, which had risen by around KRW 1.6 trillion last month, are losing momentum because of higher rates and lending restrictions … so far they are down KRW 444.0 billion.
□ The Ministry of Environment finalizes allowable greenhouse-gas emission standards for automobiles … these must be reduced by 28% by 2030.
▶ Only seven of the nineteen domestic and foreign automakers currently meet the standard. It is like asking companies that can barely crawl to start running.

□ Google accounts for 25.9% of domestic internet traffic, 14.4 times Naver’s 1.8% and 18.5 times Kakao’s 1.4% … Naver and Kakao have long paid more than KRW 100 billion a year in network usage fees, while Google and Netflix have not paid a won.
▶ Netflix does in fact pay usage fees in the United States to major internet providers such as Comcast, Verizon, and AT&T.

□ Rental and home-appliance company SK Magic surpasses 2 million cumulative accounts last year, the highest in its history, and records KRW 1.2 trillion in revenue (YoY +12.1%).
▶ Expansion of the sharing economy.

□ Celltrion’s COVID-19 treatment “Regkirona” will from the 17th be purchased directly by the disease-control authorities and supplied to medical institutions. It will be provided to patients free of charge.

□ The Ministry of Agriculture narrows the culling radius for avian influenza from “within 3 km” to “within 1 km” … egg prices, which had already exploded, have still not stabilized even after U.S. egg imports began on 2021.1.28.

□ Corrugated-board stocks surge again on the continuing “box shortage”, further boosted by Coupang’s listing.

□ Korea Investment & Securities says, “This year’s fair KOSPI value is 3,440 under the dividend discount model. Applying a 16x P/E multiple, 3,600 is possible." … the highest forecast among major Korean brokerages.
▶ We’ll see.

□ Hanwha Solutions is preparing a KRW 1.4 trillion rights offering … LG Chem is issuing KRW 1.2 trillion in corporate bonds.

□ Korea’s 20 major securities firms, buoyed by the “Donghak Ant” boom, record combined net profit of KRW 6 trillion (YoY +25.1%) for the first time ever … Mirae Asset Daewoo ranks first in net profit, and eBEST ranks first in profit growth.


2021.02.17.

□ Bank of America says, “The global recovery in demand is raising shipping costs and the prices of food and energy in sequence, creating inflation risk in emerging markets … buy the Chinese yuan, Korean won, Brazilian real, and Czech koruna, where central banks are hawkish or external balances are sound."

□ Demand for electronics, mobile devices, and precious metals is surging on revenge consumption, while unusually severe cold weather in the United States is lifting energy demand, sending a wide range of raw materials sharply higher … copper (broad industrial use), nickel and cobalt (EVs), platinum (hydrogen energy), and crude oil all rise sharply.

□ China is considering restricting exports of rare earths, which are key inputs for fighter jets and EVs … clearly intended to check the United States amid its continuing “pressure campaign against China."
▶ Since the U.S. Department of Defense is building a rare-earth processing facility in Texas, this could also backfire if handled poorly. See the 2021.02.03. news clipping.

□ Rice prices have risen 20% over the past year … the result of the government policy introduced in 2018, under which national subsidies were paid to induce farmers to plant crops other than rice in order to prevent oversupply.
▶ National subsidy budget: KRW 170.0 billion in 2018, KRW 0 this year.

□ Loan maturities on KRW 130 trillion of lending to small merchants and SMEs are extended again through September … deferred interest repayments also amount to KRW 157.0 billion.

□ Democratic Party lawmaker Hong Ik-pyo says, “The ratio of national debt to GDP is projected to rise to 52-53% this year." … it had already risen from KRW 626.9 trillion (36% of GDP) in 2016 to KRW 846.9 trillion (44.2% of GDP) in 2020. A 52-53% ratio implies roughly KRW 1,041-1,061 trillion.

□ The Ministry of Land, Infrastructure and Transport states that it will proceed with the February 4 housing policy package in its original form, despite controversy that the provision “homes included in public-led redevelopment target areas will be compensated in cash at appraised value” infringes property rights.
▶ The underlying logic is that private land ownership can be subordinated to a public concept of land, a theory Cho Kuk had been advocating since his time as senior presidential secretary for civil affairs.

□ The GTX-D line connecting the western Seoul metropolitan area with central Seoul will be unveiled in June this year.

□ The FSS is pursuing a plan to introduce bank-level soundness regulation for large securities firms with equity capital of KRW 3 trillion or more … the targets are the eight comprehensive financial investment businesses: Mirae Asset Daewoo, NH Investment & Securities, Korea Investment & Securities, Samsung Securities, KB Securities, Shinhan Investment, Meritz Securities, and Hana Financial Investment.
▶ The FSS surely knows it makes no sense to impose BIS-style rules on securities firms. A hedge signal?

□ Hyundai Motor Group and POSCO Group sign an MOU on “cooperation in the hydrogen business” … exploring joint development of green-hydrogen production technology and joint promotion of hydrogen fuel-cell power-generation projects.

□ As e-commerce expands, logistics REITs are also growing in scale … e-commerce is expected to keep growing even after COVID-19 risk subsides.
▶ Korean logistics REIT-related stock: ESR Kendall Square REIT (cf. major tenant: Coupang).

□ LG Electronics’ home-appliance division pays performance bonuses of 600-750% of base salary.

□ Hancom posts record annual revenue of KRW 401.3 billion … an effect of continued M&A.

□ PHA, the eco-friendly plastic material CJ CheilJedang plans to produce, receives international “TÜV biodegradability certification” … PHA is the only material that is 100% biodegradable in seawater, and CJ CheilJedang plans to produce 5,000 tons a year from next year at its plant in Indonesia.


2021.02.18.

□ Expectations of economic recovery rise as large-scale stimulus and vaccine supply expand, sending U.S. 10-year, 20-year, and 30-year Treasury yields all up by around 10bp … a U.S. investment bank says, “The worst-case scenario for equities is a simultaneous surge in Treasury yields and dollar strength."
▶ Treasury yields are the benchmark for market rates (i.e. household and corporate lending rates). Concerns over policy distortion caused by the “Chung Sye-kyun tantrum” are part of the same story. See the 2021.01.25. news clipping.
▶ The S&P 500 and the 10-year Treasury yield show a very strong negative correlation. This is being cited today as the cause of the drop in the domestic equity market.
▶ The January 26-27 FOMC minutes released on the 17th state, “The economy remains far short of long-run goals … the accommodative stance of monetary policy will be maintained."

□ New York, once regarded as the epicenter of COVID-19 and having seen net outflows of around 70,000 people, records a surge in Manhattan lease transactions in January (YoY +57.6%, MoM +14.6%) and a decline in vacancy (from 5.52% to 5.33%) … money is flowing into real estate on the perception that “property prices have bottomed” and on expectations of normalization as vaccine supply expands.

□ A once-in-120-years cold wave covering 73% of the U.S. mainland forces suspensions at automobile, refining, and semiconductor plants operated by GM, Ford, ExxonMobil, Royal Dutch Shell, Total, Samsung Electronics, NXP, and others … 500 Walmart stores are temporarily closed, 2,600 flights are canceled, and distribution of agricultural products produced in the southern United States is disrupted.
▶ It is expected to become the first weather disaster of the year with losses of at least USD 1 billion (about KRW 1.1 trillion).
▶ Could domestic agricultural prices, which had only just begun to stabilize, rise again? There has still been little change in U.S. corn futures so far.

□ An earthquake in northeastern Japan temporarily halts operations at Renesas and Shin-Etsu plants, while a fire at a Taiwan Unimicron factory is expected to cause production disruption for more than six months.
▶ The semiconductor shortage therefore appears likely to worsen. Short-term negative, medium- to long-term positive?

□ Bank of Korea, “December 2020 Money and Liquidity”: “M2 in December 2020 was about KRW 3,200 trillion, up KRW 286.2 trillion from the end of the previous year … the annual money-growth rate of 9.82% was the highest since 9.88% in 2009, right after the global financial crisis."
▶ Bank household lending stood at KRW 988.8 trillion, up KRW 100.5 trillion (YoY +11.3%).
▶ Bank corporate lending stood at KRW 976.4 trillion, up KRW 107.4 trillion (YoY +12.4%).
▶ Signs of overheating in asset markets: the market-cap-to-money-supply ratio rose to 61.8%, up 11.2 percentage points from a year earlier. But this is still below the 2010 (68.7%) and 2012 (62.8%) levels.
▶ The KOSPI fell 10.98% in 2011 (with a trough decline of 19.84%), and then fell again in both 2013 and 2014, for a combined decline of 4.87% (with a trough decline of 11.34%).

□ FSC Chairman Eun Sung-soo says, “We view the rise in household debt very seriously. Early next month we will announce stronger DSR measures to limit debt in line with income and reduce household debt. That said, because it is difficult to identify the use of loans precisely, we may have to let things slide for this year as well and, from a longer-term perspective, move annual household-debt growth down from the recent 8% level to the 5% range (where it was before COVID-19) … as for SsangYong Motor, if it can be saved, it would be better to save it."
▶ Official word from the FSC chairman: “We will let household-debt growth slide through this year."

□ The Ministry of Trade, Industry and Energy, in its “2021 Work Plan," will provide KRW 167 trillion in trade finance to promote exports and KRW 1.7 trillion in R&D support for parts, materials, and equipment.

□ Deputy Prime Minister Hong Nam-ki says, “We will begin announcing candidate sites for 263,000 units of new public housing land from late February to early March, and disclose them all within the second quarter."

□ Corporate bonds with coupon rates in the 2-4% range are selling one after another … personal demand is flooding in as the low-rate environment is prolonged.

□ The Financial Services Commission signals the introduction in the second half of a “Premier League for consumer finance," under which certain large consumer-finance firms will receive incentives such as access to ordinary-bank funding channels that had been limited to second-tier financial institutions … among roughly 2,700 consumer-finance firms, only about 100 are expected to qualify.
▶ During the 1997 currency crisis and the 2008 financial crisis, a substantial portion of the domestic private-lending market was absorbed by Japanese capital. As of end-2018, Japanese-affiliated consumer-finance companies accounted for just 19 out of 8,310 firms (about 0.2%), but KRW 6.7 trillion out of KRW 17.4 trillion in lending (about 38.5%). In savings banks as well, they accounted for just 4 out of 79 institutions (about 5%), but KRW 10.7 trillion out of KRW 59.2 trillion in lending (about 18.1%). As of June 2020, three of the top four lenders by loan volume—out of a total 8,455 consumer-finance firms—were all Japanese except Leadcorp. Even SBI, the No. 1 savings bank by lending volume, is Japanese.
▶ Look closely and it is exactly the kind of move one would expect from a ruling party whose actual posture toward Japanese capital is far softer than its rhetoric suggests.

□ In the U.S. equity market, thematic ETFs tied to the Fourth Industrial Revolution—BLQK for blockchain, ARKQ for robotics, ARKF for fintech, SOCL for social media, EDOC for telemedicine, and PBE for biotech—have all surged.
▶ Korean brokerage products tracking Ark Invest ETFs, which triggered the “Cathie Wood syndrome," are also being launched one after another: Korea Investment & Securities has launched the “Global Innovation ETF Wrap," and NH is also preparing to list ETNs tracking Ark.

□ Warren Buffett is realizing gains in Apple and bank stocks while increasing purchases of telecom, refining, pharmaceutical, and retail-distribution names.

□ The KOSPI falls on foreign and institutional selling, but individuals counter with KRW 1.81 trillion in buying … with the large-cap rally losing momentum, a market led by small- and mid-cap stocks is expected.
▶ In most cases, an upcycle begins with the leaders (i.e. large blue chips) and then moves on to the second-tier names and the small- and mid-caps. That is not always the case, though. This year, while Shindaeyang Paper is up 13.64% (peak +38.09%), Daeyoung Packaging is up 69.18% (peak +142.6%).
□ Samsung Electronics develops the world’s first AI memory semiconductor, “HBM (high-bandwidth memory)-PIM (processor in memory)," which reduces the CPU burden by mounting an AI processor on memory chips … a related paper is published at ISSCC, the most authoritative conference in semiconductors.
▶ CPU-only systems had limitations in handling big-data computation for AI, which is why people had been bringing in GPUs. At present, the only companies in the world capable of designing and mass-producing HBM are Samsung Electronics and SK Hynix.

□ Global EV battery market share: “Korea 52.9%, Japan 31.6%, China 6.5%."
▶ According to energy market research firm SNE Research: LG Energy Solution 33.1%, Samsung SDI 10.1%, SK Innovation 9.7%, Panasonic 31.6%, CATL 6.5%.

□ As the markets for autonomous vehicles and eco-friendly vehicles grow rapidly, smartphone component makers are also moving into automotive electronics parts production.
▶ Related stocks: Jahwa Electronics, Sekonix, MCNEX, and Partron.

□ Shinsegae Duty Free posts positive operating profit in 4Q20, its first profitable quarter since COVID-19 … driven by rent reductions that had already been front-loaded through impairment charges, together with 8.7% YoY sales growth among consumers in their 20s and 30s.
▶ Part of the “revenge consumption” story. Worth checking the apparel-retail sector. KOSPI textiles and apparel: MTD +18.23%, YTD +24.18%.
▶ Given the people who made large short-term gains in stocks and cryptocurrencies last year and early this year, this probably is not simply a case of debt-funded YOLO consumption.


2021.02.19.

□ U.S. consumption and production both show strength on the back of large-scale stimulus … retail sales (MoM +5.3%), producer prices (MoM +1.3%), and initial jobless claims (MoM -11.89%).
▶ The Atlanta Fed raises its 1Q21 U.S. growth forecast from 4.5% to 9.5%.
▶ Monetary policy will remain accommodative for the time being. Since June last year, the Fed has been buying USD 120 billion of Treasuries and MBS every month. See the 2021.02.18. news clipping.

□ Texas, which produces 41% of U.S. oil output, suffers a third straight day of massive blackouts because of record cold weather … wholesale electricity prices explode by 3,500%, crude production plunges, and disruptions in refined products are hitting manufacturing and agricultural distribution in sequence.
▶ One cause being pointed to is the higher share of eco-friendly energy such as solar and wind. About half the wind turbines froze and stopped operating. Korea, by contrast, has limited land and 72% of its territory is mountainous, so clearing forests to install solar panels is arguably the greater environmental problem. Yet the government is still shutting down nuclear plants while even manipulating economic-evaluation reports by ministerial instruction. At the same time, the president goes to the Czech Republic to sell Korean nuclear power.

□ Saudi Arabia, the world’s largest crude producer, withdraws plans for additional production cuts amid the recent oil price surge … “Even if output is increased, the current cut stance will be maintained through March."

□ Taiwan, which had been stuck in more than twenty years of low growth under pressure from China, is now benefiting from the U.S.-China conflict … Korea’s per-capita GNI, which had remained above Taiwan’s since 2003, has been seeing the gap narrow since 2016. Some are even raising the possibility that Taiwan’s GNI could surpass Korea’s in 2024.
▶ Some global large companies in the United States and Japan have moved production facilities out of China and into Taiwan, while AMD, Nvidia, and MediaTek have all sent semiconductor orders to TSMC.
▶ Taiwan’s population is also only about half of Korea’s (23.85 million), yet its foreign-exchange reserves, at USD 529.9 billion (6th in the world), exceed Korea’s USD 443.1 billion (9th). Taiwan’s relative position looks increasingly strong.

□ Consumption during China’s Spring Festival recovers to the pre-COVID 2019 level … the holiday effect is boosting China-exposed consumer stocks such as Amorepacific, Kolmar Korea, F&F, and Shinsegae International.

□ Singapore and Hong Kong, both highly dependent on trade with China, record GDP growth of -5.4% and -6.1% respectively … for Singapore, the worst result since independence in 1965; for Hong Kong, the worst since the 1998 currency crisis and the second consecutive year of negative growth.
▶ In Hong Kong’s case, the first cause was the 2019 implementation of China’s national security law and the protests against it. Another major factor was the loss of Hong Kong’s special status (e.g. tariff and visa privileges) after the United States responded to that law.

□ Deutsche Bank says, “If the U.S. 10-year reaches 1.75%, downside pressure on equities will intensify” … “The impact could be greater in the U.S. market than in Korea, because U.S. indices can sometimes fall by 4-6% at a time."
▶ Balance growth stocks with safe assets, or maintain cash reserves and add on weakness.

□ JPMorgan warns against Bitcoin, which hit another all-time high at USD 52,079.2 … “Bitcoin market cap has risen USD 700 billion since the end of September last year, but only USD 11 billion of institutional money has actually flowed in. If volatility does not subside, the current price will be difficult to sustain."
▶ The error begins with trying to infer a fair market cap from the composition of the investor base for a “virtual” asset whose valuation cannot be normalized in the first place. Aside from charts, I do not really understand the trading logic here. I plan to study it soon.

□ As retail buying weakens, average daily trading value shrinks to KRW 23.8 trillion (MoM -26.4%), while investor deposits fall to KRW 64.8 trillion (-13% from the record high on the 14th of last month).

□ Statistics Korea, “2020 4Q Household Trends Survey”: for the first time on record, earned income and business income both decline for three consecutive quarters … inequality worsens, with monthly income at KRW 1.64 million for the bottom 20% and KRW 10.03 million for the top 20%.
▶ Spending on food and non-alcoholic beverages rose the most (YoY +16.9%).
▶ Spending on meat, vegetables, alcohol, tobacco, and insurance also increased. Beneficiaries: HiteJinro, KT&G, Meritz Fire & Marine Insurance? They are usually classified simply as dividend names, but what if the market really shifts into a fully earnings-driven phase?

□ The Ministry of Science and ICT, in its “K-Cyber Quarantine Promotion Strategy," will invest KRW 670 billion through 2023 to build a “cybersecurity alliance” with major private companies … it also plans to develop intelligent security platforms such as smart CCTV, contactless authentication, and biometric recognition.
▶ Personally, the CCTV part is the most interesting. See the 2021.02.03. news clipping.

□ The Ministry of Science and ICT plans to build a dedicated launch site for solid-fuel launch vehicles at the Naro Space Center in Goheung, South Jeolla Province … raising expectations for private firms that could one day provide satellite-launch services like SpaceX.
▶ The “Space Pioneer” program, confirmed last April to localize key satellite components, begins this year. Total investment of KRW 211.5 billion is planned through 2030. Nuri, developed with domestic technology, is also scheduled for launch in October this year.
▶ Related stocks: Hanwha Aerospace, LIG Nex1, Satrec Initiative, Korea Aerospace Industries, Hyundai Heavy Industries, Vitzro Tech, EM Korea, AP Satellite, Hanyang ENG, and Hanyang Digitech.

□ Hyundai Motor signs an MOU on an “EV taxi battery leasing” scheme with the Ministry of Trade, Industry and Energy, Hyundai Glovis, LG Energy Solution, and KST Mobility … Hyundai will sell the EVs, Hyundai Glovis will lease the batteries, KST Mobility will pay only for the vehicle body price excluding the battery plus the battery usage fee, and LG Energy Solution will buy the batteries back after the lease period and resell them as ESS.

□ The “semiconductor shortage, earthquake in Japan, and cold wave in the United States” are hitting global automakers, with Ford and GM expected to incur large losses … “At present the only manufacturers able to operate normally are Hyundai, Kia, and BMW."
▶ With demand for new cars worldwide exceeding expectations, used-car prices in the United States are also hitting record highs.

□ Kakao Mobility raises KRW 220 billion from Carlyle at a valuation of KRW 3.4 trillion.

□ LG CNS (unlisted) becomes the first Korean company to obtain AWS security-engineering certification.

□ E-Mart posts a return to positive operating profit in 4Q20 (YoY +18.5%) as stores, Traders, and specialty shops all grow evenly … consolidated subsidiary SSG.com records annual revenue up 53.3% YoY and operating losses down 42.7% YoY.

□ LG Innotek spends KRW 547.8 billion in capital expenditures (YoY +94%) in preparation for iPhone supply … equal to 25% of its KRW 2.2 trillion in equity capital and about 80% of last year’s KRW 681.0 billion in operating profit.
▶ A strong tandem expansion in operating profit and CAPEX.

□ Genexine exports the technology for its immuno-oncology drug “GX-I7” to Indonesia in a KRW 1.2 trillion deal.
▶ I do not actually invest in biotech or pharma because of my broader skepticism toward the Korean biotech complex, but this was one of the very few names I had at least considered.