[Into the Stock]'Short Selling Target' Lotte Tour Development, Misunderstandings and Truths

'Post-Corona' Beneficiaries
Loan Balance Reflects Overseas CB Hedge Short Selling
Jeju Dream Tower to Begin Full Operations This Year... Earnings Expected to Rebound

[Asia Economy Reporter Ji Yeon-jin] Lotte Tour Development has encountered a short-selling obstacle in the 'COVID-19 tunnel.' The company's long-awaited project, Jeju Dream Tower, opened in December last year, and with the casino set to open next month, post-COVID benefits are expected. However, the stock price is instead retreating. This is interpreted as the corporate value being hampered not only by the slower-than-expected end of the pandemic but also by the short-selling issue resuming next month.

◆Short-selling risk, in fact= According to the Korea Exchange on the 21st, Lotte Tour Development's stock price has fallen 3.89% so far this month. Compared to this year's peak (February 26), it has dropped by 14.71%. With the start of COVID-19 vaccinations in the U.S. in December last year, expectations for the end of the pandemic were reflected, and the stock price, which was 15,000 KRW at the end of last year, began to surge from the beginning of this year. The stock price soared to 22,150 KRW during February trading but has since followed a downward curve.

According to the Financial Investment Association's disclosure as of the previous day, Lotte Tour Development's loan transaction balance was 5,695,532 shares, accounting for 8.2% of the listed shares (69,275,662 shares). According to FnGuide, among the KOSPI 200 stocks subject to partial short-selling resumption on the 3rd of next month, Doosan Infracore has the highest loan balance ratio at 9.28%, with Lotte Tour Development ranking second. This level is higher than Celltrion (7.07%), which individual investors have complained about short-selling damage.

Loan transactions involve borrowers paying a certain fee and collateral to institutional investors, borrowing shares, and later returning the same shares to the lender. Since loaned shares can also be used for short-selling, the loan balance is recognized as a leading indicator of short-selling. A high loan balance ratio implies that the stock price is likely to fall due to concentrated short-selling attacks in the future, as it is perceived as short-selling standby funds.

However, the loan balance also includes shares sold short but not yet repaid. As of the 16th, Lotte Tour Development's short-selling balance was 4,619,623 shares. The short-selling balance ratio is 6.67%, ranking first among KOSPI stocks. This is why it is seen as a short-selling target.

But there is a story behind this short-selling balance. In 2019, Lotte Tour Development issued convertible bonds (CB) worth 60 million USD (71 billion KRW) to two overseas investment companies. The CB underwriters, including Goldman Sachs, borrowed 4.6 million shares of Lotte Tour Development held by Donghwa Investment Development as a condition. Goldman Sachs and others immediately short-sold 4.3 million of these shares. The conversion price of the CB was 13,500 KRW, and Goldman Sachs, participating as a prime broker (hedge specialist intermediary), short-sold as a hedging method in case Lotte Tour Development's stock price fell below the conversion price. Short-selling is a transaction where shares are borrowed and sold first, and if the stock price falls, the shares are bought back to repay, allowing profit from the price drop.

Excluding Goldman Sachs' short-selling balance, Lotte Tour Development's loan balance is 1.39 million shares, about 2%. Also, if these overseas CBs are converted into shares, Goldman Sachs and others must buy back the 4.3 million shares they short-sold to repay Donghwa Investment Development. The CB that could affect the stock market is about 1 million shares (1%). However, Lotte Tour Development issued 37 billion KRW worth of privately placed convertible bonds (4-year maturity) in January this year.

◆Will Jeju Dream Tower become a future growth engine? = Lotte Tour Development's sales plummeted 81% to 16.8 billion KRW in 2020 due to the COVID-19 impact, down from 88.4 billion KRW in 2019. Operating losses reached 71.4 billion KRW. It is analyzed that losses increased due to initial costs of the Jeju Dream Tower complex resort, which opened in December last year, and financial expenses.

Jeju Dream Tower is the largest urban complex resort in Jeju Island, with an investment of 1.6 trillion KRW in project costs. It features 1,600 hotel rooms, a fashion mall, and an observatory. The Grand Hyatt Hotel operates the hotel rooms and food and beverage facilities under consignment. The foreigner-only casino is being expanded and relocated by acquiring the casino operated by Paradise Group at Jeju Lotte Hotel. On the 8th, Lotte Tour Development's affiliate LT Casino also received final approval for relocation and area changes. The foreigner-only casino is scheduled to open next month. Due to COVID-19, foreign entry is currently difficult, so the casino opening cannot immediately boost Lotte Tour Development's performance.

However, the hotel is expected to benefit from a special boom in Jeju tourism as overseas travel has been halted due to COVID-19. The Grand Hyatt Hotel within Jeju Dream Tower sold out all 10,000 rooms through its first home shopping broadcast in February and continued the sell-out streak. As of May reservations, the room occupancy rate is understood to have exceeded 90%. SK Securities analyst Na Seung-du said, "If all idle hotel rooms and facilities are operated in line with the casino reopening, sales of ancillary facilities such as food and beverage will grow proportionally with hotel rooms, raising expectations for a performance rebound." He added, "Even excluding the casino's impact, since COVID-19 has not been completely eradicated, if the current trend continues in the hotel and ancillary facilities sectors, a turnaround is quite possible."