The greatest performance would be continued for NH Investment & Securities

2018.8.12
NH Investment & Securities
Closed at \12,200 (-2.40%) Target to \10,000 (-18.03%)
Indices
KRX Securities 636.54 (-1.49%)
KOSPI200 293.64 (-1.27%)
G 10y 2.490% (-0.031%)
G 3y 2.040% (-0.010%)
USDKRW 1,128.9 (+1.05%)
1. NH Investment & Securities’ performances during 2Q18 was great, matching consensus for the markets. The most prominent securities servicer met the consensus KRW1,19bn with net profits KRW1,17bn during 2Q18. Revenue, operating income and net profits raised 57.1%, 12.4% and 9.1% individually in year on year. We don’t see results from each part yet, but local analysts think that revenue from Brokerage and Investment Banking had increased against 1Q18 and those from ELS and Proprietary Trading had decreased. The great performance would be continued during left 2018, considering the high possibility of proceeding volatility in the markets. I believe that regional Fixed Income market will also be going through the volatility during latter half of the year, considering signals of outflow of foreigners from the market. Investment Banking would be also very good. Government is pushing ‘Chaebol’ to investing their free cash to new business, and they are answering to it positively. For example, Samsung Group and SK Hynix announced investment-plans of $160bn and $13bn individually. The number would be exaggerated, but real investments of several billion dollars will follow the plans. Office for president Moon has 4 years to push the groups. Some of the investments would be M&A, and accompany issuances of securities. Reputation of NH Investment & Securities as expert in area of Investment Banking is much higher than those of Mirea asset Daewoo or Samsung securities, so the company would get enough pieces of the pie.
2. The problem is that share-price will be following the volatility too. As we all know, share-price follows performance in long-term. It’s the reason why Warren Buffet has had a company during forty years. But in short-term, they could go to the opposite directions. Usually, dry-spell comes up after emergence of the highest volatility. And stock reflects the expectation. The market participants are thinking about post-2018. Many global banks are expecting hard-landing of US real economy, which is one-man-showing in global stage now, between 2019 and 2020, and this would be connected to hard-landing of the whole world. The situation will lead to dry-spell of global securities trading volumes including those of South Korea. The concern over the situation will be continued during latter half of this year. South Korea has had not enough immunity about the concerns. KOSPI200 has been one of the weakest. It’s wield for the country which has best economic fundamental. Plunge of KOSPI200 is being reflected to Securities sector too, with KRX Securities -10.66% since early this year.
3. I believe that there is enough possibility of abrupt skyrocket of market yield. Looks like that Korean Government Bonds already solidify its status as one of the safest assets in the world. Unlike regional stock market is crawling, the bonds are winning US T-Notes. Foreigners keep buying the securities. Since August 1, the foreigners have bought about $1.5bn of Korean Government Bonds and Money Market Securities. But I believe the situation could be reversed anytime. My ground for this is shrinking swap basis. August 10 Swap basis July 2 Swap basis 3Y -0.648 3Y -0.765 5Y -0.63 5Y -0.808 10Y -0.5 10Y -0.628 In their place, yields from Korean bonds are “yields of bonds – Swap basis.” As you see above, swap basis is decreasing fast, and this means the benefit of investing on Korean Bond is decreasing for the foreigners. The high level of swap basis is the reason why foreigners are choosing Korean Government bond over US T-Note. If pace of increase in numbers of the basis is proceeding like this, the huge outflow could happen in some point. It will bring one-time huge revenues of fee to the brokers, but fast-rising interest rate by huge sell will be harming the business. Firstly, the firm has tons of securities connected to interest rates. The securities could bring estimated loss to income statement in that time. Secondly, the clients would not need additional deal to release cost of interest because their existent-burden would be already the lightest. Lastly, it’s the firm’s own loss. Unlike the regulators are banning the brokers from taking Proprietary Trading in United States, Korean authorities are allowing their brokers to take the trading which accompanies huge risk. The bearish momentum could be affected as adverse to the firm’s prop traders. Actually, I don’t think those hardships would be huge burden to the sectors’ performance at least during left 2018, but the factors are making participants, who see futures for 2019-2020, nervous.
4. My first target for the stock is \10,000 The performance would be excellent, but it’s not enough. The markets’ movement don’t help to change stances of the participants at all. And this will be obstacle to share-price. I suggest that there is another 20% downside.
Mr. Banker, http://markety.tistory.com

NH Investment & Securities (Aug 12, 2018).pdf