29 April 2008 ? 24 pages
Korea Kimchi Discovery #22
Potential Short Squeeze
? KOSPI Hurdle — We estimate that foreign investors have been shorting Korean
stocks between 1650 and 1850 on the KOSPI. If the KOSPI exceeds the 1870
level, we expect the start of a short squeeze.
? Magnitude of Foreign Shorting — On our calculations, foreigners have
cumulatively shorted about W8.7tr YTD, accounting for 63% of foreign net
selling. Total outstanding short balance is W26tr, or 14% of foreign ownership.
? Shorted Sectors — As a proportion of foreign holdings, the outstanding short
balance is the highest for the securities sector, followed by autos, shipping,
shipbuilding, industrials, and construction. We see very little short balance for
the telco, refinery, insurance, utility, consumer, and tech sectors. Hence, if the
market continues to rally, industrial sectors such as shipbuilding and
construction and the securities sector may outperform on a short squeeze.
? Potential Gainers in Unwinding of Shorts— Valuations are low, earnings
outlooks are positive, and near-term catalysts are visible for the following
heavily shorted stocks: Kia Motors, Doosan Construction, Hyundai Mipo,
Hyundai Motor, Taihan Electric Wire, and Hyundai Heavy.
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