Petra Capital, “In Search of ‘Hidden’ Champions in South Korea”

by Travis Johnson, Stock Gumshoe | April 4, 2014 3:30 pm

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Petra presented on South Korean stocks last year in Las Vegas as well, so it’s likely that these stocks are also ones that individual investors have trouble buying.

They’re going to suggest a position in Nexen Tire, note sure whether the common or preferred.

More on Korea — population is about California and NY combined … geographic size is about like Kentucky. It is one of the wealthiest dozen or so countries in the world, it’s not really an “emerging” market, it’s a long term powerhouse that may become the next Germany. It is overlooked because it’s between the two giants of Japan and China — people look to Japan for stability, China for growth.

They’ve gone through a rapid transformation from poverty to wealth in the last 50 years. Their credit rating is better than China or Japan, one of the most financially sound economies — and most of the companies have excess net cash positions.

How did they grow? Strong focus on education, 75% of young adults have College degrees, and it has one of the best infrastructures in the world, including the best high speed internet infrastructure in the world.

Korean companies have become global powers, including 14 on the Fortune 400 (LG, Hyundai, Posco, Samsung, all the biggest Shipbuilders)

Hidden champions in Korea include Neighbor (IM app called LINE, 300 million active users, similar to WhatsAPP but profitable), HJC Helmets, leading global brand, Amore Pacific cosmetic company does well all over Asia, SM Entertainment, their largest entertainment agency, and Orion confectionery. Several of these are brands that people think are Japanese but are actually Korean.

Korea largely exports partially finished goods to China, which are finished and then exported to the rest of the world.

Nexen Tire is a global tire manufacturer, about $1.6 billion in revenue and about $160 million in earnings. The stock has been weak over the past year, with stalled growth, but they think it has become cheap.

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Currently the third largest tire manufacturer in Korea, has been one of the fastest growers in their niche. They started as a manufacturer of cheap tires for passenger cars — still low priced, which fuels growth, but quality is substantially better. Get good quality ratings but are still cheaper than most competitors. They also sell some more expensive premium high-performance tires that boost profits. They sell everywhere, roughly 25% each to US, North America and Korea, they started late in China but are working to grow there. Production capacity at two Korean and one Chinese factory is increasing ~13% annually for the next few years — they’re going to build a factory in the Czech Republic, but their efficiency at using only three huge (highly automated, state-of-the-art) factories so far has led to great efficiency.

Customers include Hyundai and Kia, but also Chrysler, Mitsubishi and Volkswagen. Global market share is only about 1% (biggest companies are in the teens, like Bridgestone and Michelin). Their target price is about $15 at a low multiple of 12, close to 17,000 Won (looks like it trades around 13,500 Won right now).

They also say that Korea has many market efficiencies, including preferred stock. Korean preferreds are effectively the same, but have no voting power (and pay slightly higher dividends), the average preferred stock is trading at a discount of about 60% to the common equity. That’s true of Nexen tire, too, and they think the gap on preferreds in general will eventually narrow.

Petra is partnering with SC Fundamental and David Hurwitz, apparently on that new targeted hedge fund that Hurwitz mentioned in passing in his presentation[1]. This is really the domain of institutional or local (Korean) investors, it appears.

There are some closed-end funds open to retail investors, including at least one that invests specifically in Korean preferred stocks with a mind to capturing gains as that discount shrinks, so I may look into those a bit (Petra didn’t mention them, I’m just musing). There are also several huge companies that dominate the KOSPI index in Korea, particularly Samsung, so those may be worth a look, as may be the whole index — though there are undoubtedly bad and expensive companies as well. I haven’t owned any Korean stocks since I owned Posco many years ago, but I’m a little bit intrigued.


Endnotes:
  1. Hurwitz mentioned in passing in his presentation: http://www.stockgumshoe.com/2014/04/david-hurwitz-opportunities-for-activism-in-korea/

Source URL: https://www.stockgumshoe.com/2014/04/petra-capital-in-search-of-hidden-champions-in-south-korea/


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