DOWNUNDER DAILY : A GET-OUT-OF-JAIL-FREE CARD - GERARD MINACK
This time is not different - at least not in terms of the initial investor response to an unexpectedly aggressive Fed rate cut. But I'm not convinced that the Fed's move makes a material difference to the risk of recession, which is the decisive issue for medium-term investors. A few thoughts:
First, rate cuts are like tequila shots: You rarely have just one. Morgan Stanley US economist Richard Berner expects the FOMC to ease by a cumulative 100 basis points. The prospect is underlined by the second-round collapse in housing indicators. For example, Reality Trac reported overnight a substantial jump in housing foreclosures in August (Exhibit 1).
Second, equities usually perform well in the initial stages of a Fed easing cycle. Morgan Stanley European strategist Teun Draaisma has provided a nice summary of past equity performance around the first Fed cut (see Striking Statistics, 17 September). Teun notes that historically the first rate cut may only stabilize markets, while better returns follow the second easing. Rightly, however, Teun notes that it's not a stretch to argue that the discount rate cut was the first easing in this cycle.
Third, equities are a sell in extended Fed easing cycles. That's because extended easing cycles usually occur in recessions, and recessions are always bad for equities. But even within recession-driven bear markets, Fed rate cuts can provide a short-term boost for the market, particularly if they are unexpected. Amidst the TMT rout of 2000-03, the NASDAQ jumped 14% on the day of the first (surprise) Fed cut in 2001. Of course, in a bear market, it pays to sell such bounces.
With the daily run of economic data soft, but not providing compelling evidence of recession, my base case assumption is that the Fed easing will provide support for equities in the next quarter or so. For medium-term investors, however, the key issue remains simple: Is the US heading into recession?
HYUNDAI MARINE & FIRE: W25BN CAPITAL INJECTION; IN-LINE WITH EXPECTATION - JENNIFER HAN
Quick Comment: Hyundai M&F (HM&F) announced that it will inject an additional W25bn into its online auto insurance subsidiary, Hi-Car Direct. This is in-line with our expectation, and we expect an additional capital injection in the future if Hi-Car Direct continues to increase its market share.
What's New: Due to the nature of auto insurance business, it is inevitable that online auto insurers would require additional capital in their initial stages to maintain adequate capital levels and to help increase market share. Hi-Car Direct was established with initial capital of W20bn in Dec 2005 and since it began operations in Apr 2006, HM&F have injected additional W35bn in Sep 2006. Following today's announcement of W25bn, Hi-Car Direct's paid in capital will increase to W80bn and its solvency ratio will rise from 140% to 200% level.
Implications: Hi-Car Direct's market share is about 2% in total auto insurance market and 13.6% among online auto insurers closely catching up to no.2 player Daum Direct with about 15% market share. If Hi-Car Direct continues to increase it market share, we expect HM&F to inject an additional W20-30bn into Hi-Car Direct in the future.
Reiterate Overweight Rating: We believe recent share price weakness provides a good buying opportunity as we expect the company to continue to benefit from sector turnaround in auto insurance business and from its maturing high-yield guaranteed policies.
KOOKMIN BANK: 5.1% STAKE SALE (ING KOREA) TO INCREASE 07E EPS BY 4% - CHAN HWANG
Quick Comment: Kookmin Bank has decided to sell a 5.1% stake in ING Life Korea (20/80 JV with ING Group) to ING Group sometime next week, which will lower Kookmin Bank's ownership to 14.9%. This transaction between KB and the ING Group had long been scheduled to occur this year.
Transaction Details: Out of 1,400,000 shares held, Kookmin Bank will sell 357,000 shares for W193.9bn (or W543,000 per share). These were bought at W11.6bn (or W32,417 per share) back in 1999. Currently, 5.1% of ING Life is booked at W31.8bn, suggesting the potential gain from the stake sale could amount to W162.1bn.
Impacts on Kookmin Bank: Even though this is a one-off event, we believe that the impact on Kookmin Bank will be big enough to attract attention, increasing the bank's 3Q07E earnings by 15.5%. In addition, 07E EPS and 07E BV could be raised by 3.7% and 0.7%, respectively, based on our analysis.
Kookmin's Book Value Understated by 2%: Kookmin will not mark-to-market its remaining 14.9% stake in ING Life Korea, as it has been classified as equity-method applied stocks. If we use W543,000 per share value for remaining shares, Kookmin's 07E BV could increase by 2.2%.
SAMSUNG SDI: MID-3Q07 UPDATE - NO FUNDAMENTAL IMPROVEMENT - HENRY KIM
Another Disappointing Quarter Likely: Our channel checks indicate that, unlike other technology companies, Samsung SDI (SDI) is likely to report another weak result, even in seasonally strong 3Q07, on weaker volume growth and a higher start-up cost burden.
Maintain Underweight Rating: We expect the magnitude of the seasonal earnings recovery to be very disappointing due to competition with other display devices, such as TFT-LCD, the start-up cost burden from new production lines in PDP and AM OLED, and restructuring charges in CRT. We view anticipation of Samsung group's rescue plans for SDI, including possible business portfolio changes, as highly speculative in the near term. We maintain our Underweight rating on the stock.
·PDP (Better volume but no improvement in profitability): We now expect SDI's 3Q shipment volume to grow around 40% QoQ, higher than guidance for 30% sequential growth and our prior estimate of 30%. Our full-year shipment forecast of 3.2 million units is unchanged considering softer 4Q07 volume guidance. The company is guiding for mid-10% ASP erosion in 3Q07, on continuing pricing pressure from TV customers. We expect SDI to record a similar operating loss in 3Q on the initial ramp-up cost burden from the new P4 line and pricing pressure despite stronger volume growth.
·Mobile Display (Worse Mix): We expect overall volume shipment to meet the guidance of mid-10% sequential growth but actual revenue growth to remain flattish on a worse product mix (less TFT-LCD) and continuing pricing pressure. We expect the operating margin to remain at the mid-single-digit level in 3Q07.
