Invetment Portfolio

by Donghun Han
2018 -2019
 Investment Plan Donghun Tommy Han

Stock Market Investment

Porfolio
Setemper 2017 - Present
Starting Fund: 15,184,009 South Korean WON
Market: Korean (KOSPI, KOSDAQ), International Funds
Market Outlook:
Korean Market
GDP Growth Rate falls in 2018

Main Reasons for falling GDP growth:

- Growth of world economy slows down

- Slow growth in semiconductor industry as DRAM prices fall
- Pressure as interest rates are forecasted to rise
- Housing market
- Fewer / Softer expansions in manufacturing and services

2018 GDP Predicted Growth

S.Korea  3.1% (± 0.2%)
World Economy  3.8%
World (blue) vs. S.Korea (black) GDP %Change
Future Economic Outlook: Cloudy

Ratio (%) Ranking among

G20
GDP to household debt 92.8% 2
GDP to company debt 99.4% 8

Interest Rates of S.Korea

The economy has fallen to a trap of low-interest rates & low growth. Theoretically
speaking, low interest rates are supposed to foster growth and spending of firms and
consumers, respectively. GDP to household/firm ratio has jumped to 92.8% & 99.4%
(growth rate is ranked 3 in the world), when most developed countries’ debt
decreased.

Spain (-20.4%), Denmark (-10.4%), UK (-6.8%), Germany (-6.6%), Japan (-1.3%)

As household debts reached nearly $1,493 trillion, 142% increase since the housing
crisis, is due to the government’s policy. The South Korean government promoted
borrowing as a main driver of economic growth, but that has been showing its limits.

CCSI Index of S.Korea

 Investment Plan Donghun Tommy Han

However, as household debts increase, spending doesn’t, as CCSI index falls

continuously. The CPI index reached the biggest gap in percentage increase from last
year, of 1.9%. Price of basic crops along with oil prices (10.7%) grew this past quarter.
Inflation, rising house prices, combined with less spending even though interest rates
are low shows the vicious cycle that the Korean economy is stuck in. The government
must implement policies that encourage investment in firms and improve output &
jobs.
For the past two years, minimum wages increased in double digit rates. This was our
government’s intent to encourage spending and foster the growth of the economy. As
it did not actually increase spending, it only resulted in profit cuts for the firms.
Government’s policy on regulating the price of the housing market was also not
effective, and people are borrowing more to buy houses due to the low interest rate at
this time.

FOMC Raises Interest Rates to 1.75%

FOMC announced another interest hike up to 1.75%. US 10-year treasury yield reached
3.2%. In 10 years, the U.S. inflation rate has become higher than the inflation rate of
S.Korea. The FED has warned a few more interest rake hikes for the next 3~4 meetings.

Impact on the Korean Market:

- If interest rakes continue to hike, it could drain money (dollars) out of the
Korean market
- Must pay close attention to stocks with high foreign ownership
- Bank of Korea is planning an increase in interest rate between May and July
o Korea is not in the best situation to increase interest rates since
household debts increased significantly, and if interest rates on
mortgages rise it can pressure everyday workers. Also, it can
discourage investment in companies.

KOSPI Index

-
 KOSDAQ Index

- Just over the past few days after the FOMC meeting, The KOSPI index crashed
significantly dropping to a low 2,250.99 points, a 4.4% decrease from last
week. The KOSDAQ index marked a decrease of 7.7%, a low 769.29 points.
This could be a proof of foreign investment leakage, but a longer &
sophisticated observation would be required to ascertain if foreign fund
leakages are happening.

Cumulative Buy/Sell from Oct.1 to Oct.5

Individuals Foreigners Investment Firms
KOSPI 12,167 -11,593 -1,211
KOSDAQ 3,963 -2,135 -1,764

(100,000,000 Won)
As seen in the cumulative trade records, foreign investment firms and individuals
continuously sold off Korean stock, as individual traders took on the sold stocks.
Impact was not only on Korea, but also the global stock market:

th
Oct 5 International Stock Markets

Most European and the Hong Kong indexes dropped for mostly the same reasons as
the South Korean market did.
 Investment Plan Donghun Tommy Han

st
1 Drop (6/12 to 07/05): -212 Points
 Fear of tariffs imposed on South Korean goods by the U.S.
 Predictions of FOMC increasing interest rates 4 times in a row

nd
2 Drop (08/09~08/16): -68 Points
 Global currency risk rises
st
1 Increase (08/17~08/30): +81 Points
 US-Mexico Trade Negotiations
 Jackson Hole Meeting turns out positive

nd
2 Increase (09/11~09/28): +69 Points
 Bio-Related stocks rise
 Semiconductor industry’s value increase
 FOMC takes relaxed stance

rd
3 Drop (09/27~10/05): -86 Points
 Trade War risk increase
 China-Related stocks dip
 Semiconductor industry goes through a reactionary fall
 FOMC announce interest rate hike

Trade War Continues

- Investors are more cautious as the tension of the trade war continues. The
Trump administration has been applying more tax on Korean products 
exports would decrease.
- Continuous negotiations are being made on the tariffs Trump would apply on
S.Korean cars and steel. This would greatly impact the exports & profit of
Hyundai Automotive, Posco, and Hyundai Steel.
U.S. 10 year treasury reaches 3.2% (7-year high)  does it signal the peak of growth
of the US economy?

As Treasury rates increase, it increases mortgage rates, credit card bills, and costs for
companies that want to issue debt. Therefore, this shows how strong the U.S.
economy currently is, and along with interest rate increases, the FED is controlling the
sharp growth as one of the key macroeconomic goal is rather having a steady growth.

ISM non-manufacturing index jumped to 61.6 highest since the housing crisis.
Employment at an all time low, almost close to full employment. Amazon’s $15-hour
wage increase might put pressure on other firms to follow doing so – this could mean
more cuts on companies’ profits but more spending.

But as the American economy reaches its peak, people are also much worried on when
it will soon fall. Jeff Gundlach, CEO of investment firm Doubleline Capital, worried that
the continued interest in the 10-year and the 30-year treasury yield could boost the
dollar currency and hurt oversea profits by major companies such as Apple, Boeing,
GM, and Ford.

Industry/Company Analysis:

**Main Industries:
Semiconductor Industry:
The demand for DRAM is expected to increase more and more due to its important
role in In-Memory computing. As more technology benefits from machine learning,
where in-memory computing is crucial, DRAM will encounter more demand as it
outperforms other type of data-storage types by the thousands.
 Investment Plan Donghun Tommy Han

DRAM is used also in almost every part of the emerging technology these days, such as
servers, data centers, 5G telecom services. Even though demand for DRAM in U.S.
cloud companies are decreasing (such as Microsoft), there still exists a robust need for
DRAM as Chinese companies such as Baidu, Alibaba, and Tencent are expanding their
data centers. Telecommunication companies are scaling up their data centers as they
prepare for 5G service launches.

Company Focus

Samsung Electronics (SEC) (005930):

Samsung electronics had a fantastic quarter, achieving a record 17.5 billion won
operating profit. This was much higher than what most investment firms predicted.
The high profit was due to the high demand of semiconductors, and the rather decent
profit made by OLED displays. Apple’s new iPhone XS and XS Max still uses the OLED
display made by Samsung since Samsung is the only company who can produce curved
OLED displays. The new Galaxy Note 9 has been performing well as it released earlier
than the iPhone XS, and took over the European market.

Remains Strong as the Market Leader:

Though the market constantly reflects the fear of the prices of DRAM falling, SEC,
which has a market share over 50% in the semiconductor market, has the potential to
control the pricing of DRAM to defend chip prices at off-peak seasons. Supply-demand
balance will seem stable in the upcoming year.

Few Risks:

- NAND demand falls

- The stock prices does not reflect its growth
- Consumer Electronics (CE) revenue is forecasted to fall
Financial Analysis:

Past, Current, and Predicted Revenue

- Revenue increase seems relatively continuous until the last quarter of 2018.
- 1Q2019 is set to be lower due to seasonal sales of CE, displays, and DRAM
prices fall
 Investment Plan Donghun Tommy Han

Steady increase in revenue and profit margins since 2016, shows the low volatility and
profitability of SEC. As new factories open up in China, profit margins and supply-
demand balance is forecasted to increase
Net profit margins are forecasted to increase up to 18.9% as well as EBITDA margins up
to 34.8%, and since DRAM takes up nearly 70% of revenue of SEC, DRAM demand
increase is a plausible situation. ROE and ROA is about to increase 0.5% and 0.3%
respectively.
*Even though growth, higher profit margins, and efficiency ratios show how well the
company is doing, the stock prices do not reflect such growth. Price-to-Book ratio is
got lower to 1.3 compared to 1.5 two years ago. The P/E ratio is currently 8.25,
compared to 15 in 2016. Personally, I think that this stock is undervalued even though
their performance is strong.

WHY not SK Hynix?

SK Hynix, another semi-conductor company of South Korea, is not as appealing as SEC.

- SEC has a more diverse portfolio of products

- Higher global market share
- SK Hynix still has much debt of foreign currencies  more pressure as
interest rates rose
- Not as easy to enter Chinese market as SEC even though demand is rising on
the Chinses side

Steel Industry:
Main Focus Points:

-
th
After the 4 N.-S.Korean summit, more expectations on North-South Korean
railroads. This could possibly mean much more sales for steel companies in
South Korea.
- Tariffs could be exempted as companies like Posco and Hyundai Steel
requested exceptions on some of their products such as the POSCO-AAPC.
- 80% of steel produced in South Korea is used in the shipping, automotive, and
construction industry. However, all three industries are performing poorly.
Exports got much harder from the trade war (25% tax on Korean Steel), the
steel safeguard of the EU, and the cheap steel produced by China.

Overall, the steel industry is likely to face a tough time for the next few, or even years.
However, one company stands out: POSCO
POSCO (005490): Only 50% of revenue is covered by steel

As seen in the graph, after reaching an all-time low in the latter year, it is starting to
bounce back up. 3Q2018 results were released and POSCO still showed strong growth
and performance. Out of the three main steel businesses in South Korea, it was the
only one to achieve growth when Hyundai Steel and Dong-guk Steel fell in revenue.
Steel sheets for POSCO is about to receive a decrease in tariffs from the US to nearly
4.51% when Hyundai Steel is just about to get a small decrease to 37.24%.
Also, since exports of POSCO to the US does not take up much of the revenue, rising
steel costs is expected to increase revenue of POSCO.
 Investment Plan Donghun Tommy Han

*Key Financial Information

(100,000,000 won)
POSCO has endured the pain of the tariffs well in the 2Q2018, still recording growth.
Slow but steady growth of POSCO and low debt 3,226,640,000,000 won compared to
assets of 7,993,530,000 proves the financial stability of this company. One risk to
consider is the selection of the new CEO of the company and the direction he will take.
POSCO is also doing well in efficiency, recording an ROA of 6.3% on average in 2017
compared to 3.9 in 2016. Debt to equity ratio fell continuously though revenue and
profit margins grew. P/E ratios decreased along with the P/B ratio, recording an
average of 0.5 in 2017.
The average Price-to-Book ratio of the S&P 500 is 3.46, and for the KOSPI 0.94. Even
though most Korean companies are traded less than book value as shown in the KOSPI
average PB ratio, 0.5 shows how undervalued this company is. This could mean
investors’ expectancy for POSCO is low, but future prospects and strong growth and
financial strength by no means should convey such a message.

Yuanta Investment Bank did not change its target price even though the market
dragged the stock down recently.

Automotive Industry:

Main car producers such as Hyundai, Kia, and SsangYong is facing their hardest times.
The triple decline of exports, domestic sales, and production is cutting revenue and
profits. Increased imports of foreign cars, exports decreasing from tariffs and the
declining market share in the Chinese market hurts the automotive industry
significantly. No investments will be made to the car producers.

Bio-Related Industry:

Bio-related companies are the main cause of different shocks of the current
Korean stock market. Companies that do not even make profit or have
different medicines and products under tests fluctuate extremely even just by
a simple rumor. The average PER of bio-related stocks of S.Korea is
approximately 60, about 15 times higher than the bio-stocks of the U.S.. For
instance, the company Green Cross Cell has a PER over 988, and its market
capital is over 705 million dollars when they make an annual revenue of
roughly 20 million. Silla Jen has never been a profit-making company, but its
PER is currently -102.4, and was higher in previous months. Though there a
serious bubble in the market negatively affects the market and investors, one
company is doing exceptionally well.

Celltrion: Market Capital of $34 billion (3rd in the KOSPI market)

 Investment Plan Donghun Tommy Han

Celltrion is a company that develops and sells biosimilars internationally, and

recorded high steady growths over the past couple of years.

Initial Investment Points

- Expectations for FDA approval of the biosimilar Truxima. Because

Truxima was very successful in the European market, entering the US
market would boost profits significantly.
- Problems regarding factories were resolved.
- The Mers virus was about to spread, and Celltrion has the patent for
testing and treating this virus which is highly contagious.

Was just aiming for the short-run, aiming to seek about 5~10% growth
regarding the high expectancy of the company. However, changed to invest in
the long run.

Reasons for change in the long-run:

- US biosimilar market seems very favorable. Even though Remisma

prices are falling, prices of Remisma are not going to decline more.
Even though Remisma profits decline, the sales of Truxima and
Herzuma has high demands.
- Truxima already has 27% market share in Europe, reaching over 50% in
the UK and Netherlands.
- Release of Truxmia in the US is set for 2019
- Pipeline and capacity issues will be solved with new factories in
Singapore and potentially Songdo, South Korea.
- Strong financials with a net profit margin of 42%, EBITDA margin of
55%. Cash flow seems very stable, with ending balances increasing in
2018.
Upcoming Earnings Season  Investment in the short run

This time is when companies report their 3Q2018 earnings, and companies
that made extreme growths in profit or made profit in a long time will increase
sharply in the short run. I have chosen 4 companies that grabbed many
investors’ attention from their recent performance.

Sangshin EDP

Sangshin EDP is a company that manufactures secondary cells for phones and
computers. It is the main supplier of Samsung SDI, and has the advantages of
economies of scale as its market share in suppling Samsung has increased over
the years. Also, Samsung is doing relatively well in the smartphone market as
market shares in Europe reached number one.
 Investment Plan Donghun Tommy Han

Sanshin EDP had a fantastic year, with revenues up 68.2%, and operating
profits reaching $16.8 million, a 174.7% increase.

The sharp increase in revenue and profits will cause an a short run increase as
soon as real 3Q earnings are released.

Jcontentree (036420)

- 3Q2018 is a turnover to making profits from the second quarter, as

dramas are selling off to China and movies such as MyungDang and
Your Marriage was successful.
- 1 Day buy during 3Q2018 release and then sell.
ISU Petasys Co., Ltd. (007660)
QoQ turnovers are expected to be near 9988%, reaching a yearly operating
profit of $7 million. As actual 5G investment cycle is kicking in, the demand for
products of ISU Petasys such as the Multi Layer Board PCB that can handle high
levels of traffic is at high demand. This company is South Korea’s only MLB
company, it is has the opportunity to grow as Korean markets also dive into
the 5G business. Also, it is the 2nd market leader with a market share of 17%,
so it has a relatively stable position in the market.

Asset Distribution:

From the 2nd week of October:

- Reduce capital invested to 30% as there is a need to be more cautious

about the rise in interest rates and the 10-year treasury yield. The
ripple effect has just begun, and should observe if foreign capital
leakages are actually happening.

- If market continues to fall, it is a buying point in the short run as the

market makes a rally.

Long run  60%

Short run  40%
 Investment Plan Donghun Tommy Han

Long-Run Portfolio

20

50

30

Celltrion Posco SEC

Short-Run Portfolio

25
30

45

Sangshin EDP ISU Petasys Jcontentree

My current asset will be split into a 6:4 ratio between stocks that I will go for
the long-run and the short-run. I am willing to take more risks at this time by
day trading stocks because I do not need to play safe for the long run. SEC took
a larger portion since it is the company with the least risk and steady growth.
ISU Petasys took a larger portion of the short run due to its massive increase in
profits over 9000%.

Company Name % of total Portfolio

SEC 30%
Posco 18%
Celltrion 12%
Sangshin EDP 12%
ISU Petasys 18%
Jcontentree 10%

Profitability Mark:
September 19th:

The initial short term investment of Celltrion brought more than 1,269,384
won of profit in just a week as Celltrion broke the 300,000 won mark due to
high expectations of the FDA approval of Truxima and resolving factory supply
issues.