Korean Holdcos Vs Opcos Gap Trading Opportunities in 2Q 2024
In this insight, we highlight the recent pricing gap divergences of the major Korean holdcos and opcos which could provide trading opportunities in 2Q 2024.
Of the 38 pair trades, 26 of them involved holdcos outperforming opcos in the past six months, suggesting increased capital allocation to Korean holdcos relative to their opcos.
These pairs could generate trading opportunities in terms of their pricing gaps closing reversal. [CJ Corp vs CJ Cheiljedang & Hanjin KAL Corp vs Korean Air Lines].
In the section below, we separated the pair trades into two different sections. The first table involves major opcos outperforming holdcos (regular and quasi) in the past six months. Of the 38 pair trade strategies mentioned in this insight, section I (which includes opcos outperforming holdcos in the past six months) included 12 pairs (32% of total). Of the 38 pair trades, 26 of them involved holdcos outperforming opcos in the past six months, suggesting increased capital allocation to Korean holdcos relative to their opcos.
The section II (which includes holdcos outperforming the opcos in the past six months) involves 26 pairs (68% of total). We describe the holdcos as either regular or quasi. Hyundai Mobis and Samsung C&T would be examples of "quasi" holdcos whereas Orion Holdings would be an example of regular holdco.
Among the 38 holdcos/opcos, there have been several pairs that have resulted in significant price gap widening in the past six months which could provide trading opportunities in terms of their pricing gaps closing reversal.
CJ Corp (001040 KS) vs CJ Cheiljedang (097950 KS) - CJ Corp's shares are up 60.1% in the past six months, sharply outperforming CJ Cheiljedang which is up 6.1% in the same period. CJ Corp has benefited from the continued strong performance of its CJ Olive Young subsidiary which could complete its IPO in the next couple of years. Sephora has also recently announced it will exit the Korean market due to excessive competition.
Hanjin KAL Corp (180640 KS) vs Korean Air Lines (003490 KS) - Hanjin Kal's share price is up 52.8% in the past six months, outperforming Korean Air which is up 5% in the same period. The US FTC is expected announce its final decision on the merger approval of Korean Air and Asiana Airlines in the next several months. For further details, see our insight Another Brewing Fight for the Controlling Shareholding of Hanjin Kal?
HDC Holdings (012630 KS) vs HDC Hyundai Development Co-Engineering & Construction (294870 KS) - HDC Holdings' share price is up 36% in the past six months, underperforming HDC Hyundai Development which is up 74.9% in the same period.
Among the 38 pairs, this pair is the one where the opco has outperformed the most versus the holdco in the past six months. HDC Hyundai Development has been one of the best performing construction stocks in Korea in the past six months.
Remember, the National Assembly Election in Korea is only a few days away and there has historically been some outperformance of construction related stocks prior to the previous National Assembly Elections in the past two decades (for about 3-6 months prior to the election periods).
However, the major construction stocks in Korea usually tend to underperform the market after the National Assembly election for 3-6 months afterwards as some of the promises made by the politicians prior to the election are not met with regards to the housing/construction sector.
For further details, see our insight Back-Testing the Impact of National Assembly Elections on the Korean Stock Market.
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