Description

Business Description

STX Pan Ocean is a leading Korean shipping company.  As of September 30, 2007, the company operates a fleet of 61 owned vessels which consists of 37 handysize/handymax, 3 panamax and 7 capesize dry bulk carriers, 4 container vessels, 2 car carrier vessels and 8 tanker vessels.  Additionally, the company typically has 280-290 chartered-in vessels at any given time.

Trade Recommendation

(Note – before reading this, it is worth checking to see if there is borrow on the Korean security as it is very tight)

STX had its IPO on the Singapore exchange in July 2005, and did an additional share listing on the South Korean market earlier this year (Sep 07).  STX’s listing on the Korean exchange represented the first example of a company that was listed on both the South Korean and Singapore markets.  Since selling shares into the Korean market, the Korea shares have appreciated roughly 75% while the Singapore shares have remained flat.  At the current trading values and exchange rates, the Korean security trades at a 60% premium to the Singapore security, creating a very compelling arbitrage opportunity. 

We recommend going long and short an equivalent number of shares of STX Singapore and STX South Korea, respectively (with appropriate FX hedges).  Share ownership on the Korean and Singapore exchanges represents the same economic and voting interest in the business.  Since this is the first example of a business that is co-listed on these two markets, share fungibility issues are still in process.  Management is currently seeking waivers for the various regulatory hurdles (primarily working with the Korea Financial Supervisory Commission), and has publicly stated its target of making the shares fully fungible by March of 2008.  Once that event occurs, investors would have to wait 10-12 business days to transfer stock between the exchanges.  With this imminent catalyst, we believe there is a strong likelihood that the prices converge towards parity in the next several months, creating a very high return investment. 

Catalyst