1. Moreover, this strategy is potentially attractive forvery different investors, namely High Yield/Income and Momentum investors – normallytwo very heterogeneous groups.

- Weighted average lease term maintained at5.6 years

    2Q interim dividends to rise y-y: the value of interim dividends paid out in 2Qshould increase y-y thanks to: 1) an increase in the number of Kospi 200constituentspaying interim dividends; 2) and an increase in Samsung Electronics’ 2Q payout. Basedon our house’s coverage and consensus for firms we do not cover, we have constituentspaying out combined interim dividends in excess of KRW1.3t at end-June based on freefloat ratios.The KRX’s theoretical price for September index futures stands at +0.95pts, which webelieve is overvalued. Why? Because the KRX’s calculation reflects a dividend index basedon 2Q16interim dividends (just KRW0.7t), and not projected 2Q17dividends (KRW1.3t).We believe the theoretical price would be +0.63pts if projected 2Q17dividends were usedin the calculation.Given the likelihood of 2Q dividends rising y-y, we believe the June-September spread isslightly overvalued. Spread volatility is likely to increase when the market’s projections for2Q17dividends become clearer.Market impact on June expiration date to prove less seismic than expected:

the IRR investment rule

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compute IRR (Internal rate of return)

the IRR investment rule: take any investment opportunity where the IRR exceeds the opportunity cost of capital; turn down any opportunity where IRR is less than the opportunity cost of capital.

only guaranteed to work for a stand-alone project if all of the project's negative cash flows precede its positive cash flows.

Pitfall #1: Delayed investments

Pitfall #2: multiple IRRs

Pitfall #3: nonexistent IRR

    Taken as a whole, our clients agreed with our view that the sector’s structural growthprospects are clouded by HMC/Kia’s 1) vague market positioning in the US andChina; 2) pricing strategy and 3) EV roadmap. While some believed that in the shortterm a potential sales recovery in China could be a positive, valuations seem to bethe only bright spot for HMC and Kia.

A strategy for Income investors to navigate a momentum-driven environment

- Annualised rent review increase of 2.8%

Interim dividends at end-June

Limitations of the dividend-discount model: 

There is a tremendous amount of uncertainty associated with forecasting a firm’s dividend growth rate and future dividends

Small changes in the assumed dividend growth rate can lead to large changes in the estimated stock price

Can not accurately estimate the stock price if the firm also do shares repurchase

    Lack of structural drivers and weak market positioning: Most investors agreedwith our view that new models under the current product cycle are unlikely to helprestore either volume or profitability for Korean OEMs given: 1) no significantimprovement in powertrain until the next product cycle in 2019; and 2) dwindlingpricing competitiveness (value for money). Despite rising incentive levels in keymarkets, we highlighted their structural issues such as 1) in China, both HMC and Kiahave been losing market shares to local players, and the pricing difference remainsquite high with lack of diverse model line-ups; 2) in the US, weaker brand value andabsence of value for money models continue to depress residual value and profitability;and 3) in Korea, higher GPM (Korea plants) is at risk due to potentially stronger wagehike demands by labour union and declining sales of Grandeur.

    Given its defensive exposure, successful dividend investing is a really challenging task ina late-stage, story-driven bull market, which is increasingly boosted by positive economicdata and by investors’ declining risk aversion. In the Global Dividend Investor reports inMay 2017and August 2017we addressed this challenge by highlighting a momentumdrivenincome strategy that focuses on dividend plays with positive upside surprises interms of future dividend payments. These stocks have outperformed the MSCI World ACHigh Yield by 21.2% since 8May

Net distributable income declined 9.8% to3.23 cents per share from 3.58 cents per share in the prior period.

    Korea Post’s arbitrage strategy involved repeatedly establishing and clearing positionsusing ETFs. Since end-April, it has established KRW1.3t worth of arbitrage sellingpositions, but its arbitrage balance remains small because it has cleared most of thosepositions after ETF buying. This suggests its arbitrage trading on the June expiration datewill have little impact on the market.Stock-basket rebalancing burden should be high on the June expiration date due to theregular reconstitution of the Kospi 200, special inclusions, and free-float-ratioadjustments. To minimize trading costs, investors will feel tempted to roll over indexfutures buying positions.

Other Non-cash Items 

E.g. Amortization

We met 30 clients during our recent marketing trip in Hong Kong and Singapore.

Argosy Chief Executive officer Peter Mencesaid "Against the backdrop of a stable economy, we are pleased to havedelivered a solid result for the first half of the 2018 financial year. Duringthe period, we continued to concentrate on improving portfolio quality anddelivering quality and sustainable earnings for investors. The management teamalso maintained its focus on divesting non-Core assets whilst working closelywith our existing tenants to develop and add value organically within theportfolio.

NPV and stand-alone projects

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compute net present value

NPV investment rule: when making an investment decision, take the alternative with the highest NPV, Choosing this alternative is equivalent to receiving its NPV in cash today.

NPV profile: a graph of the project's NPV over a range of discount rates.

the difference between the cost of capital and the IRR is the maximum estimation error in the cost of capital that can exist without altering the original decision.

    Mixed view on valuation: Investors, however, had a mixed view on Hyundai’svaluation. Some argued that HMC’s stock price has troughed based on PB (0.5x) andSOTP (including its cash positions and affiliates value); however, we think that lowerproduction and inventory are likely to result in a weaker cash balance as well as freecash flows, raising the risk of dividend cuts in 2017. Powertrain replacements expectedin 2019 could create mid-term momentum for the stock, but under the current productcycle and EV roadmap, we believe investors should wait on valuation re-rating on HMCand Kia.

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Valuing Stocks

    Maintain Hold on HMC and Kia: We maintain Hold ratings on both HMC and Kiawith unchanged target prices of KRW139,000 and KRW36,000, respectively. Wecontinue to believe their fundamentals are not likely to improve meaningfully undercurrent product cycle with no major powertrain upgrades and weak productcompetitiveness.

On the back of this work, Argosy'sportfolio metrics remain in great shape. Our occupancy remains high at 98.1%and our Weighted Average Lease Term (WALT) has been maintained at 5.6years."

Tax Carryforwards

Tax loss carryforwards and carrybacks: allow corporations to take losses during its current year and offset them against gains in nearby years

ARG Analysis

Fundamentals of capital budgeting

This information was extracted for the halfyear report provided by Argosy Property Limited released on 21 November 2017:

total payout and free cash flow valuation models


Analyzing the Project