KOREIT - Fundamentally Stable And Possible Event Driven Opportunity

A. Company Description

KOREIT (034830 KS) is Korea Real Estate Investment Trust Company operates real estate trust business. Unlike real estate development companies, KOREIT has distinctive business model which has 'medium risk and medium return' compare to a real estate developer and a construction company.

[Risk - Return Profile]

Normally KOREIT takes land from land owner for it's real estate development, and obligated to lend money to the development project, usually SPC. However, the reason KOREIT has mitigated risk is because land value collateralized and 20 ~ 30% construction fee also paid by share of development project. And when project is finished, KOREIT also takes around 20% shares of project.

When summarize KOREIT's business profit / loss, the result are as follows.

Section	Key Factors	Note
Profit	Trust Fee(4%) Interest Income (10%) Project profit sharing
Loss	Interest Expense(6%) Loan Loss Provision

In short, KOREIT's key profit source is interest spread and trust fee.

B. Fundamental Reason to Buy

When take a look at IS factor, you will surprised with strong earning engine of the firm.

[Equity & Asset Trend, KRW in million]

[OI & NI Trend, KRW in million]

*you can use model that I linked with my profile for FS data

KOREIT records average of KRW 12 billion quarterly net income for 10 consecutive quarters, and according to research report net income of 2013.2Q will be KRW 13.9 billion.

The main reason of KOREIT's strong income power are a dominant market power in real estate (Korea No.1) and low bond interest rate(' however, lending interest rate has not been lowered since KOREIT has market power)

[PER multiple box]

C. Event Driven Reason to Buy

Originally KOREIT was government owned company and it has been privatized and Istum Partners (PEF) took majority in 2007. However, Istum failed to sell KOREIT and to extend their fund maturity. And their shares are on the process of selling.

Shareholder Information (2013.1Q)

Name	Ratio
Istum Partners	35.37
LH (GOV)	31.29

However, quite interesting event is happening right now. Before 2013.6.7 it was obvious who is major share holder of KOREIT. Surprisingly, 3.39% of Istum Partners related shares go to MK investment and MK group is trying to take KOREIT's controlling power with Leading PEF, bought shares from LH.

Shareholder Information (Current)

Since both party has enough capital to take over KOREIT, no one knows how it goes and it's natural to think both party aggressively gather shares from market which will cause interesting opportunity for investors.

D. Investment Duration

I recommend 5 months duration from July 2013. As I mentioned earlier, KOREIT has unique P&L structure, however, it also has risk of loan loss provision. The early stage of construction project, there will be low risk of LLP('loan loss provision'), however, when construction is done, each real estate project will be evaluated strictly by actual selling amount. Although pure risk of KOREIT is lower than any other parties, projecting Korea real estate market would be not recommendable.

This is the reason why I chose to invest until public notice of 2013.3Q result . KOREIT's net income of 2013.3Q will be earning surprise due to low interest rate.

E. Target Price

First target price of KOREIT is 1,745 won(prior top) and second target price is over 2,000 (controlling conflict)

[Stock Price Chart]

KOREIT's Current price , 1365 won, is PBR 1.03, PER 7.3 which is fundamentally undervalued and also have event driven potential.

Bests,

HongKeun Oh

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: 034830 KS Equity Long Idea