GL Entech (1)
A few days after GL Entech went public, the announcement of the Nextrogen-Yuseong ES deal broke.
For GL Entech, it was bad news on two fronts. First, a major client had been taken away by Yuseong ES. Second, if hydrogen vehicles took off quickly, the market for automotive batteries could shrink.
The latter concern was especially serious.
In an exclusive interview with WST, CEO Daly said, “Nextrogen plans to build two additional factories, one in the United States and one in Saudi Arabia, and launch hydrogen trucks in cooperation with GM and Ford. We’re also working with Hwan Energy in the charging sector. Hydrogen trucks are far more economical than existing diesel trucks. In the future, hydrogen vehicles will become the mainstay of the commercial vehicle market.”
With bad news hitting immediately after the listing, selling volume for GL Entech surged.
Retail investors who had received allocations sold to lock in profits, while hedge funds jumped in on the short side, chasing quick gains.
It had already been a strained listing to begin with.
If the share price fell on top of that, criticism from investors could come crashing down.
GL Entech did everything it could to support the stock, releasing future investment plans and expected sales figures.
Whether it worked or not, the stock that had been sliding began to creep upward again.
* * *
Senior Dong-ho muttered as he looked at the chart for GL Entech.
“Foreign investors are scooping up GL Entech again today.”
The dip below the offering price had lasted only a little while. A week later, the stock was back up to 130,000 won. Its market cap had passed 100 trillion won, overtaking LK Nix and putting it in second place on the KOSPI.
“Does it make any sense for a company with quarterly sales of 4 trillion won and operating profit of only 50 billion won to be priced like that?”
“Its growth potential is huge.”
“Even so. If I had that money, I’d rather buy Yuseong ES and use the leftovers for a steaming bowl of gukbap.”
A gukbap addict?
“In that case, should we have gukbap for lunch?”
“Sounds good. I’ll take hanwoo gomtang. But who the hell is buying this thing so aggressively?”
Since he seemed curious, I answered him.
“Us.”
“Huh?”
“We’re the ones buying it.”
My answer made Dong-ho senior and Kim Beom-seok both stare at me in shock.
“What? Seriously?”
“Yes. We’re pouring in the money we made from GL Chemical.”
“No, wait. Why are we buying GL Entech?”
“To make money.”
They still looked as if they didn’t understand a word of it.
“The outlook looks pretty rough. Can we really make a profit buying that?”
“Senior, would you buy it now or not?”
“Of course not. Who in their right mind would buy at that price?”
I let out a long sigh.
“Then you can’t make money. If you think like that, you can’t make money.”
“No, seriously, how are you supposed to think if you want to make money?”
“Like this.”
I picked up a marker and wrote on the whiteboard as I explained.
“If you look at GL Entech’s current ownership structure, it’s like this. GL Chemical is the majority shareholder with exactly 80.3 percent. The remaining 19.7 percent was floated in the IPO. Of that, institutions hold 10.1 percent and individuals 9.6 percent. Because sentiment soured right before the listing, retail subscription volume fell a bit and institutional subscription volume increased.”
They already knew all that.
I went on when I saw the two of them nodding.
“Now this is the important part, so listen closely. GL Chemical’s 80.3 percent stake is locked up under a three-year lockup. The 10.1 percent from institutional subscriptions is also locked up, ranging from one year at the shortest to two years at the longest. None of that can hit the market until the lockups expire. So what’s actually tradable right now is the 9.6 percent that retail investors received. With roughly 1 trillion won, you could sweep up half of that.”
“Uh...”
Their mouths were starting to fall open.
I kept going.
“What happens if you keep buying stock when there’s no supply in the market?”
“I-it goes up.”
“And if the stock price rises above the company’s intrinsic value?”
“Uh, short selling would increase?”
“Correct.”
Stock wasn’t rice or gasoline. If it was expensive, you could just not buy it. But there were times when you had no choice but to buy, even when the price was high.
“Soon, GL Entech will be automatically included in the KOSPI 200. Since it’s an index constituent, index funds will have to buy a set amount automatically. But what happens if the stock price of a company that’s already ranked second by market cap keeps rising?”
This time Kim Beom-seok answered.
“Its weight in the KOSPI will grow, and then passive funds will have to buy even more.”
They both understood perfectly.
I nodded.
“You remember the Volkswagen incident from 2008, right?”
“......”
“......”
Judging by their expressions, they definitely did.
Stock prices reflect corporate value.
But sometimes they move for reasons that have nothing to do with fundamentals at all, purely because of supply and demand.
The most famous example was the 2008 Volkswagen short squeeze.
These days, IT companies occupied the top spots in market cap rankings, but in the past the undisputed number one had been oil giant ExxonMobil.
For a brief moment, though, that global top spot was taken by Volkswagen of Germany.
This was how it happened.
At the time, Volkswagen was locked in a battle for control with Porsche.
The financial crisis that swept across the world had slashed sales and revenue, but Volkswagen’s stock had doubled in a short span, soaring from 200 euros to 400 euros on the back of M&A speculation.
Hedge funds then rushed in to short Volkswagen stock all at once.
A full 12 percent of the company’s shares were dumped into the short side, and Volkswagen’s stock fell back to 200 euros, making the hedge fund attack look like a success.
And then...
Porsche suddenly disclosed that it had raised its stake in Volkswagen from 35.1 percent to 42.6 percent and stated that, through call options, it could increase that stake to 74.1 percent in the future.
The German market exploded.
The state of Lower Saxony, where Volkswagen’s headquarters was located, already held 20.1 percent of the company. Add Porsche’s potential 74.1 percent to that, and the total came to 94.2 percent.
Only 5.8 percent of the stock was actually in the market, while hedge funds had shorted more than double that amount at 12 percent!
Short sellers have to buy the shares back to cover their positions.
Since the market had fewer shares than the amount shorted, any hedge fund that couldn’t buy back quickly enough was doomed to collapse.
The moment that became public, hedge funds scrambled to buy back the Volkswagen shares they had dumped in order to close their positions, and the resulting short squeeze sent the stock up 70 percent in a single day. The following day, it surged another 150 percent.
That wasn’t the end of it.
Because of the spike, Volkswagen was added to the DAX 30, and passive funds and program trading joined in, driving the price up yet again; as the stock rose, fresh buying piled in behind it.
Within just a few days, Volkswagen’s share price had quintupled, breaking above 1,000 euros, and its market cap climbed to roughly 300 billion euros, overtaking ExxonMobil to become the most valuable company in the world.
The situation finally calmed down when Porsche sold off the shares it had accumulated, and Volkswagen’s stock returned to where it had been.
Even in the middle of a financial crisis, Porsche walked away with record net profit and made a killing, while the hedge funds that had shorted the stock went bankrupt one after another.
A similar incident had happened in Korea a few years earlier.
On the KOSDAQ, there was a company called Cordier Close.
It had once been a fairly successful fast-fashion company, but after suffering four straight years of losses it had fallen into capital impairment and wound up under court receivership.
When the founder tried to sell the company, he carried out a reverse stock split and a paid-in capital increase, locking up 99.4 percent of the shares under a six-month restriction.
That left only 0.6 percent of the stock available for trading.
There were so few shares floating around that even a small amount of trading sent the price to the daily upper limit again and again.
Whether the company had gone bankrupt and been sold, or whether its chances of recovery were uncertain, meant nothing to investors.
The only thing that mattered was one simple fact.
The stock price was going up.
Then, because of the price explosion, Cordier Close was added to the FTSE index, and foreign institutional buying followed.
In the end, Cordier Close reached a market cap of 7 trillion won and vaulted all the way to second place on the KOSDAQ.
So what happened after that?
Exactly what everyone expected.
The moment the lockup expired, selling came flooding in, and the stock hit the daily lower limit day after day. Its market cap collapsed to 100 billion won, one-seventy-third of its peak.
The lesson from these two cases was simple.
“Supply and demand come before everything else.”
Financial statements, fundamentals, all of it can go straight out the window.
If there aren’t many shares trading, the stock price will go up no matter what.
* * *
Lee Dong-ho and Kim Beom-seok did the math carefully.
The more stock they bought, the thinner the supply in the market would get and the higher the price would climb, so buying all 9.6 percent was impossible.
“Accounting for the rise in price, we could probably buy about 5 percent.”
Even that alone would cut the number of tradable shares to less than half.
Calling it 1 trillion won made it sound almost ordinary, but in reality that was the market cap of a KOSPI 40 company. They were pouring that kind of money into a single stock.
Dong-ho asked, “What happens if this works?”
Kim Beom-seok thought for a moment, then said, “Wouldn’t the Korean market turn into a complete mess?”
The Cordier Close case had happened on the KOSDAQ, at least. But this was the KOSPI’s second-largest company.
Since inclusion in the KOSPI 200 was already certain, depending on how things played out, even the derivatives market could be affected.
“No, wait. How is this even possible?”
At Dong-ho’s words, Kim Beom-seok seemed to realize something.
“Did you get Congressman Namgung Seok moving from the very beginning with this plan in mind?”
“Come on, no way...”
Either way, once they’d heard this much, they couldn’t just sit still.
Dong-ho placed a hand on Kim Beom-seok’s shoulder and said, “Let’s buy too.”
Kim Beom-seok nodded.
“Yeah, okay.”
With Han Miru’s approval, the two of them had already set up a paper company in a U.S. tax haven. They had invested through it and made money.
They had made a solid haul during the LD Studio play, and again with GL Chemical.
The amounts were nothing like a salary.
Both of them thought the same thing.
This is why working at Continue Capital is fun.
Money gets duplicated here.
* * *
As expected, GL Entech was added to the KOSPI 200 index.
The stock price doubled from the offering price, and its market capitalization broke through 160 trillion won.
Thanks to GL Entech’s rally, GL Chemical’s stock price also began to follow. But GL Chemical’s shareholders could not hide their frustration.