Korea’s battery stocks surge as short sale demand rises

EcoPro Co. headquarters in Cheongju, North Chungcheong Province [Courtesy of EcoPro]

South Korean chemical company Kumyang Co., a battery themed stock, has surged 109.6 percent this month and short covering has been blamed for pushing up the stock price as short sellers bought shares to cut losses by paying back borrowed shares.

Kumyang was newly added to the Kospi 200 in June 9, making it eligible for short selling. Previously, the market had raised the issue of the stock’s overvaluation, which has yet to show results in the battery business. However, the company‘s stock price reached a new high, and short sellers suffered heavy losses. Kumyang’s short interest dropped 60 percent to 640,000 shares on July 14 from 1.58 million shares at the end of last month.

Recently, some of such heavily shorted stocks have seen a spike on rising demand for short covering, including EcoPro Co. and Kumyang, which are battery theme stocks.

According to the Korea Exchange on Wednesday, the ratio of EcoPro‘s short interest to its market cap stood at 4.95 percent as of July 14, down sharply from the 6.94 percent at the end of last month. The number of shares outstanding fell to 1.32 million from 1.67 million, driven by a large number of short selling liquidations. In the meantime, EcoPro shares have surged 48 percent this month in a short squeeze where a sharp rise in stock is triggered by surging short covering demand.

Shares of EcoPro’s subsidiary EcoPro BM Co. are also up 45 percent this month. EcoPro BM’s short interest was 5.3 percent as of July 14. Analysts suggest that large-scale short covering took place as foreign investors net bought nearly 500 billion won ($394.6 million) in EcoPro BM shares between Tuesday and Wednesday, when the stock price surged.

The short covering is known to be led by domestic and foreign institutional investors. Foreign institutions such as Morgan Stanley & Co., Goldman Sachs Group, Inc, and Merrill Lynch & Co. are among those with large short interest in Ecopro.

This trend is not limited to the battery theme.

Shares of semiconductor equipment maker Joo Sung Engineering, Inc. for example, surged 13 percent on Monday alone. The company’s short interest ratio stood at 8.24 percent as of July 14, the highest among secondary Kosdaq stocks. SK networks Co. and Lotte Energy Materials Corp. were also up 11.4 percent and 15.9 percent, respectively, this month. The stocks also have high a short interest ratio in the 4 percent range each.

The theme stocks are expected to become more volatile as retail investors continue to net purchase them while short sellers are not backing down. The outstanding loan balance for EcoPro BM reached 4.95 trillion won as of Tuesday, the third largest after Samsung Electronics Co. at 9.76 trillion won, LG Energy Solution Ltd. at 5.48 trillion won, and EcoPro at 4.84 trillion won. As a loan transaction is required to make a short sale, a high loan balance signals a rise in short selling.