1

June quant strategy: 3 niche ideas relating to shareholders value

Undervalued preferred stocks Preferred stocks heavily discounted vs.
common stocks with same corporate governance rating
Undervalued holding companies Holding companies undervalued vs.
business concentration
June dividend stocks Stocks that paid dividends in June of previous year
(outperforming the KOSPI since 2004)

3 niche ideas relating to shareholders value
Samsung Groups corporate governance restructuring has been a hot topic
recently. In investment strategy, the increase in the shareholders value will be
the issue. We suggest three niche ideas relating to the shareholders value in our
June quant strategy: 1) undervalued preferred stock, 2) undervalued holding
companies, and 3) stocks paying dividends in June.
1. Undervalued preferred stocks
Preferred stocks have come in focus again after February with the emergence of
Samsung Groups corporate governance restructuring issue. Attention on the
preferred stocks of Samsung Group affiliates seems to be spreading to those of
other companies. The 32 preferred stocks that meet the requirements of market
capitalization (over W10bn) and trading value (daily average of over W100mn for
six months) advanced 8.3% on average in May alone, outperforming the KOSPIs
1.7% gain by 6.6%p.
Figure 1. Equal weighted index of 32 preferred stocks
Preferred stocks in the spotlight again

Source: QuantiWise, Shinhan Investment Corp.
Note: Equal weighted index of 32 preferred stocks with market cap. of over W10bn and daily average trading value of over W100mn for 6 months
SPOT ISSUE
June 3, 2014

QUANT STRATEGY
3 niche ideas relating to shareholders value



Quantitative JuHyung Ryu
Analyst (82-2) 3772-3161
ulrich@shinhan.com

3 niche ideas:
1) Undervalued preferred stocks
2) Undervalued holding companies
3) June dividend stocks
Preferred stocks in focus again
amid Samsungs corporate
governance restructuring issue
50
100
150
200
01/13 04/13 07/13 10/13 01/14 04/14
(End 2012=100)
32 preferred stocks with market cap.
of over W10bn and daily average trading value of over
W100mn for 6 months gained 90.6% on average since end-2010


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QUANT STRATEGY
3 niche ideas relating to shareholders value

The strength of preferred stocks is backed by movement of fund money. The Germany-
based Weiss Korea Opportunity Fund (WKOF), known to be investing in Korean preferred
stocks intensively, went public on the London Stock Exchange. Money is also flowing
steadily into Koreas major dividend funds.
There has been much controversy over overheating because preferred stocks have gained
strength repeatedly since last year. It is not easy to decide whether they are overheated
or not. The price ratio of preferred stocks to common stocks is determined by voting
premium, which is difficult to quantify.
However, it is a fact that strong corporate governance reduces the possibility of
shareholders value deterioration, and thus lowers voting premium. The corporate
governance assessment conducted by Korea Corporate Governance Service (KCGS) is a
good reference. The corporate governance of each company is assessed on five categories:
protection of shareholders right, board of directors, disclosure, audit committee, and
sharing of management performance. A rating is given based on the results.
It is interesting to note that the average price ratio of preferred stocks to common
stocks differed based on the corporate governance rating. The ratio was low for lower
ratings, which implies the voting premium has risen.
We can incorporate this in selecting undervalued preferred stocks. We picked preferred
stocks that were heavily discounted compared to common stocks (excessive voting
premium for common stocks). Our preferred stocks also have dividend yield gap of more
than 1% with common stocks (dividend estimates based on common stocks).
Figure 2. Balance of dividend and equity funds
- Capital outflow from equity funds vs. capital inflow to dividend funds

Source: QuantiWise, Shinhan Investment Corp.

Table 1. KCGS criteria for corporate governance rating
Broad category Middle category
Protection of
shareholders rights
Protection of shareholders rights, convenience in exercising rights, ownership
structure, transaction with special interests
Board of directors Organization, management, evaluation and remuneration of the board of directors
Disclosure General matters of disclosure, disclosure on website
Audit committee General matters of audit committee
Sharing of management
performance
General matters of sharing of management performance
Source: Korea Corporate Governance Service, Shinhan Investment Corp.
Undervalued preferred
stocks selected based on
corporate governance
rating and dividend
yield gap

Our 8 preferred stocks:
LG Household & Health
Care, Doosan, LG, Korea
Investment Holdings,
Kumho Petrochemical,
SEMCO, LG Hausys, Kolon
Industries

80
85
90
95
100
8,000
10,000
12,000
14,000
16,000
01/13 04/13 07/13 10/13 01/14 04/14
Balance of dividend funds (LHS)
Balance of equity funds (RHS)
(100mn KRW) (tr KRW)
Capital outflow from equity funds
vs.
Capital inflow to dividend funds


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QUANT STRATEGY
3 niche ideas relating to shareholders value

Figure 3. Price ratio of preferred stocks vs. common stocks by rating
- Voting premium is higher in lower ratings

Source: Korea Corporate Governance Service, QuantiWise, Shinhan Investment Corp.

Table 2. Undervalued preferred stocks based on governance structure rating and dividend yield
Ticker


Company


Governance
structure rating

Preferred
stock price
(A, KRW)
Common
stock price
(B, KRW)
Ratio

(A/B, %)
Dividend
yield
(%)
Market cap.

(bn KRW)
A051905 Preferred stocks of LG Household & Health Care B+ 225,000 510,000 44.1 2.6 472.4
A000155 Preferred stocks of Doosan A+ 68,700 127,500 53.9 5.1 303.0
A003555 Preferred stocks of LG A 36,650 60,700 60.4 2.8 121.5
A071055 Preferred stocks of Korea Investment Holdings A 20,550 38,700 53.1 2.6 120.4
A011785 Preferred stocks of Kumho Petrochemical B+ 33,000 81,200 40.6 4.7 99.8
A009155 Preferred stocks of Samsung Electro-Mechanics A 32,550 62,900 51.7 2.5 94.6
A108675 Preferred stocks of LG Hausys B+ 84,000 191,500 43.9 2.0 86.7
A120115 Preferred stocks of Kolon Industries B+ 29,900 69,500 43.0 2.7 82.8
Source: Korea Corporate Governance Service, QuantiWise, Shinhan Investment Corp.

2. Undervalued holding companies
In our May 30 report, we mentioned a forced portfolio structure is the main reason
behind discounts on holding company shares. Investors buying shares of holding
companies are forced to make investments in business areas they do not want to.
In other words, there is no reason for a discount if the holding company has a business
portfolio concentrating on specific areas. We selected holding companies that are
grossly discounted vs. business concentration, based on concentration of business
portfolio and 12-month forward PER.
The value of holding companies should be based on net asset value (NAV), but the
inclusion of non-listed subsidiaries may leave room for subjectivity. Therefore, we
measured business concentration based on sales data of each business area presented in
2013 consolidated audit reports. The Herfindahl Hirschman Index (HHI) was used to
calculate concentration of business portfolio. The sales share of each business area is
added up.
Amore G has the highest business concentration among the 17 holding companies with
relevant data available. Cosmetics sales account for 92.1% of total sales, which results
in business concentration of 8,520 based on the above calculation method. Cosmax BTI
and Iljin Holdings have high business concentration of 8,410 and 7,961, respectively. LG
and LS have the lowest concentration level.
Forced portfolio
structure is reason for
discounts; focus on
holding companies with
concentrated portfolios
40
50
60
70
A+ A B+ B C
(%)
Average is
insignificant as
only Doosan' s
preferred stocks
have A+ rating
Price ratio of preferred stocks vs.
common stocks is lower in lower ratings,
which means higher voting premium


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QUANT STRATEGY
3 niche ideas relating to shareholders value

When it comes to 12-month forward PER, SK is at the bottom at 7.8x. Shares of Iljin
Holdings, GS and Hanwha are trading at a discount vs. the market at a P/E of 7.9x, 8.8x
and 8.9x, respectively. On the other hand, a premium is applied on the shares of Amore
G 27.9x, Sung Chang Enterprise 26.1x and CJ 19.0x.
Figure 4 shows the dispersion of holding companies based on business concentration
and 12-month forward PER. The baseline is the median estimate of business
concentration and 12-month forward PER of 17 holding companies. Stocks in the bottom
right of the dispersion diagram are undervalued vs. their business concentration, namely
SK, Youngone Holdings and Iljin Holdings.
Figure 4. Business concentration and 12-month forward PER
SK, Youngone Holdings and Iljin Holdings are undervalued

Source: Company data, QuantiWise, Shinhan Investment Corp.

Table 3. Holding companies undervalued vs. business concentration
Ticker


Company


2014F sales

(bn KRW)
2014F OP

(bn KRW)
2014 NP

(bn KRW)
Business
concentration

12-month
forward PER
(x)
Market cap.

(bn KRW)
003600 SK 115,015.2 4,792.0 1,051.5 4,411.2 7.8 8,641.0
009970
Youngone
Holdings
1,723.0 272.0 98.0 4,913.3 9.7 1,063.6
015860 Iljin Holdings 1,144.6 64.8 35.5 7,961.3 7.9 317.8
Source: Company data, QuantiWise, Shinhan Investment Corp.

3. Stocks paying dividends in June
In June, companies closing their books in June will be paying end-term dividends and
companies with accounting period ending in December will be paying interim dividends.
Around 40 listed companies pay dividends in June. An interesting fact about companies
paying dividends in June is that their average gross return (share price return + dividend
return) has topped the KOSPI every year since 2004. When purchasing such stocks in late
May and selling them in late June (weighting remains the same), the returns have
exceeded the KOSPI by an average 3.9%p over the last decade.
It is an interesting phenomenon which cannot be implemented in actual investment
decisions. It is impossible to know in advance which stocks will pay dividends in June.
The best strategy is purchasing stocks that paid dividends in June in the previous year.
This strategy is the best option because since 2004, an average 83.3% of companies that
paid dividends in June of a given year did so again in the next year.
Returns of stocks paying
dividends in June higher
than KOSPI for past 10
years; impossible to
know which stocks will
pay dividends in advance
SK, Youngone Holdings
and Iljin Holdings are
undervalued
CJ
AK Holdings
Amore G
Hanjin KAL
Iljin Holdings
Cosmax BTI
Harim Holdings
LS
Youngone Holdings LG
SBS Media Holdings
SK
Hanwha
GS
Doosan
Sungchang Enterprise
Holdings
KC Green Holdings
0
10
20
30
0 2,000 4,000 6,000 8,000 10,000
(Business concentration)
(12MF PER, x)


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QUANT STRATEGY
3 niche ideas relating to shareholders value

Stocks selected through this strategy have outperformed the KOSPI since 2004. The
returns of these stocks topped the KOSPI by an average 3.1%p. This strategy proved to
be successful in 2013. The 43 stocks that paid interim dividend in June 2012 were
bought in late May and sold in late June. The stocks recorded a gross return of -5.1%,
outperforming the KOSPIs -6.9% by 1.8%p.
Therefore, buying stocks that paid dividend in June 2013 is a viable strategy for June
2014.
Figure 5. Percentage of companies that paid dividends in June of
a given year and again in June of the next year Average 83.3%

Source: QuantiWise, Shinhan Investment Corp.

Figure 6. Excess return of stocks that paid dividends in June of previous year
Outperforming KOSPI by an average 3.1%p

Source: QuantiWise, Shinhan Investment Corp.






Alternative strategy is
purchasing stocks that
paid dividends in June
of the previous year

86.5
74.4
70.6
86.7
91.4
83.3
91.7
90.0
81.8
81.4
70
80
90
100
04 05 06 07 08 09 10 11 12 13
(%)
83.3% of companies that paid dividends
in June of a given year did so again in the next year
4.2
1.3
2.5 3.0
6.0
0.8
0.2
9.1
1.8
1.8
0
2
4
6
8
10
04 05 06 07 08 09 10 11 12 13
(%p)
Return of stocks paying dividends
in June of a given year tops KOSPI by an average
3.1%p in the next year


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QUANT STRATEGY
3 niche ideas relating to shareholders value

Table 4. Stocks that paid dividends in June 2013
Ticker

Company

Dividend paid in June 2013
(adjusted DPS, KRW)
Share price
(KRW)
YTD return
(%)
Market cap.
(bn KRW)
005930 Samsung Electronics 500 1,443,000 5.2 212,552.9
005490 POSCO 2,000 289,000 (11.5) 25,197.0
017670 SK Telecom 1,000 219,500 (4.6) 17,723.7
086790 Hana Financial Group 150 37,050 (15.6) 10,740.6
010950 S-Oil 450 55,100 (25.5) 6,203.3
002380 KCC 1,000 586,000 25.1 6,164.7
000150 Doosan 500 127,500 (8.6) 2,662.6
114090 GKL 130 41,150 1.9 2,545.4
039130 Hana Tour Service 500 64,700 0.0 751.6
002960 Hankook Shell Oil 2,000 458,500 (2.1) 596.1
019680 Daekyo 110 6,540 (10.4) 554.0
025540 Korea Electric Terminal 100 42,900 3.4 446.8
025000 KPX Chemical 500 62,500 (2.2) 302.5
021820 Sewon Precision Industry 100 27,200 4.0 272.0
012700 Leadcorp 50 10,100 36.5 270.2
011040 Kyungdong Pharm 100 20,150 48.7 267.5
092230 KPX Holdings 550 60,100 35.7 253.9
100250 Chinyang Holdings 35 3,250 65.4 181.7
086960 MDS Technology 110 20,250 38.2 177.3
049070 Intops 200 19,000 (2.6) 163.4
048770 TPC 25 10,250 51.4 132.2
067080 Daehwa Pharmaceutical 50 6,990 14.8 127.4
002100 Kyung Nong 75 5,820 64.2 126.3
083420 KPX Green Chemical 50 5,850 25.3 117.0
024070 WISCOM 100 5,300 7.6 79.6
032040 C&S Asset Management 66 4,200 40.9 78.8
097870 Hyosung ONB 200 13,500 96.8 78.3
004080 Shinhung 100 7,110 2.0 68.3
001080 Manho Rope & Wire 150 15,700 6.4 65.2
004450 Samhwa Crown & Clousure 450 30,200 21.3 65.1
111820 Cheoum & C 100 8,690 (12.0) 58.9
050860 Asia Technology 50 2,835 9.0 49.6
053050 GSE 40 1,770 6.6 48.2
051630 Chinyang Chemical 35 3,460 73.0 41.5
085910 Neo Technical System 100 4,290 (4.7) 40.1
003780 Chinyang Industry 50 2,690 19.6 35.0
093240 Elite Basic 125 2,810 10.0 34.8
030960 Yangjisa 50 2,025 14.7 32.4
010640 Chinyang Poly Urethane 25 2,295 13.6 23.0
033250 Chasys 20 1,305 (9.4) 21.7
Source: QuantiWise, Shinhan Investment Corp.


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have not received wrongful pressure to express such views: JuHyung Ryu.
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