Yuanta Securities Korea said on the 26th that the recent ad hoc change to the KOSPI 200 appears to need correction.
The Korea Exchange (KRX) on the 19th announced the removal of HD Hyundai Infracore from the KOSPI 200 and the substitute inclusion of HD Hyundai Marine Engine.
HD Hyundai Infracore will be delisted due to its merger with HD Hyundai Construction Equipment, and trading will be suspended starting on the 29th. Existing shareholders will receive 0.1621707 share of HD Hyundai Construction Equipment and will be able to trade the new shares starting on the 26th of next month.
Ko Gyeong-beom, an analyst at Yuanta Securities Korea, said, "This is a decision that contradicts the outlook for inclusion of the surviving entity, HD Hyundai Construction Equipment." Ko said it appears to reflect the rule to select a first-priority preliminary stock in ad hoc changes and precedents from KRX 100 ad hoc changes, but given the separate clause and notes on mergers and the KRX TMI index, the KOSPI 200 should be viewed as operating on the principle of succession inclusion of the existing constituent by the merged entity.
Ko said, "The MSCI, FTSE and S&P 500 indexes also prioritize the principle of including the entity that merges an existing constituent," explaining that "they operate under guidelines that can temper index volatility and strengthen representativeness as a market benchmark."
In the MSCI index, there are numerous cases of non-constituents being included, such as the inclusion of Meritz Financial Group at the time of the Meritz Fire & Marine merger in Jan. 2021. In domestic indexes, the only case is DANAWA being included in the KOSDAQ 150 index in Nov. 2022 due to Korea Center's absorption merger. Ko said, "At that time, the exchange's index operations committee also appears to have prioritized the rule of including the absorbing merged entity of an existing constituent."
The market capitalization of the merged entity of HD Hyundai Infracore and HD Hyundai Construction Equipment is 4.05 trillion won, exceeding the 3.16 trillion won of newly included HD Hyundai Marine Engine.
Ko said, "If only the incremental portion is reflected with the index maintained, there will be rebalancing demand that secures index representativeness," adding, "The unnecessary procedure will arise of fully liquidating HD Hyundai Infracore and having to buy the merged entity again in the regular change in June next year."
Ko also noted that the precedent of selecting a first-priority preliminary stock creates an irrational contradiction in which the stock would have to be removed if a large-scale merger on the level of HD Hyundai Heavy Industries–HD Hyundai Mipo occurs in the future.
Rebalancing demand from the ad hoc inclusion of HD Hyundai Marine Engine in the KOSPI 200 is estimated at 42.0 billion won. For HD Hyundai Infracore, 36.4 billion won of selling is needed for removal-related liquidation.
Ko said, "Considering pre-positioning by institutions and foreigners, it is necessary to pay attention to HD Hyundai Infracore's discount rate," adding, "On the occasion of the ad hoc change announcement, the premium of HD Hyundai Construction Equipment surged from a 5.38 percentage point average in December to as high as 9.84 percentage points."