9th annual Spring value investing congress

April 4, 2014 • Las Vegas, NV Opportunities for Activism in Korea
David Hurwitz, SC Fundamental •


Opportunities for Activism in Korea
April 2014


This presentation is for informational purposes only and does not constitute investment advice. Nothing contained herein shall constitute an offer to sell or a solicitation of an offer to buy any security or partnership instrument. Information and analyses relating to the companies presented herein are based on the company’s filings and security prices as of March 26, 2014 or such other time as indicated. Index and economic data is sourced as indicated herein. Investments funds managed by SC Fundamental LLC and its affiliates (collectively, “SC”) had or have positions in the companies discussed herein. SC has no ob ligation to update the information contained herein and may make investment decisions inconsistent with the views expressed in the presentation. SC makes no representation or warranty as to the accuracy, completeness or timeliness of the information, text, graphs, and analyses contained in this presentation. SC expressly disclaims all liability for errors or omissions in, or the misuse or misinterpretation of, anything contained in this presentation. Past investment performance is no guarantee of future results.

Country Overview

Korea’s GDP ranks 15th in the world *

The total market capitalization of Korean companies approximates $1.2 Trillion* – Nearly the size of Australia ($1.3 trillion) and Germany ($1.4 trillion) – Larger than Switzerland ($1.1 trillion) and Hong Kong ($1.1 trillion) – More than twice the size of Italy ($0.5 trillion)

Fiscally sound government and economy – Budget surplus 9 of the past 10 years – Public debt / GDP is amongst the lowest of developed economies (approx. 34%) – Currently running a trade surplus – S&P sovereign rating of A+

* IMF, World Bank, OECD data as of 2012.


Numerous Cheap Stocks in Korea

Overview Comparison to the S&P 500*:
P/E 2014e P / Book KOSPI S&P 500 9.3x 15.9x 1.1x 2.6x

Dollar amount of companies trading for less than:
8x 5-Year Average Earnings 70% of Tangible Book Value BOTH of the Above 130% of Net Cash Current Assets Minus TOTAL Liabilities AND Profitable (True "net-nets") $300+ Billion $190+ Billion $25+ Billion $57+ Billion $2+ Billion

*Source: Bloomberg

Warren Buffett on Korea

2006: 2006:

Purchased 4% of Posco
“If I’d been running a little partnership three years ago, I’d have started 100% in Korea.” Given a copy of a Korean stock market guide, he found the values so compelling he put together a $100mm portfolio of 20 companies. “I could find better things to do with a million dollars probably in Korea than I could probably find in the U.S. market.” “We like the ethos of Korea for shareholders and we like the performance of the businesses.” “We’re looking to buy big businesses in Korea.” Went to Korea for the second time to visit TaeguTec, the first Berkshire company in Korea.


2008: 2011: 2011:


Korea Is Not Japan

Korean management teams are often receptive to shareholder overtures.
Minority shareholder rights are better protected in Korea. Korean minority shareholders are more vocal and proactive about their shares. Management teams in Korea often hold large stakes in their companies. Korea has passed, and is considering additional, anti-Chaebol legislation while little has been done in Japan to diminish Keiretsu power. Korean institutional shareholders beginning to vote against management when economically beneficial.

Returns on equity in Korea are much higher and P/Es are much lower.


Difficulties of Investing in Korea

Few companies report in English Trading ID required Trading volume is generally lower than in the U.S. Holding company structures frequently opaque Recent accounting change from Korean GAAP to International GAAP makes historical comparisons challenging Shareholder activism not yet widely embraced

Rights of Minority Shareholders in Korea
Classification Ownership Requirements (at least 6 month holding period) 1.5%

Extraordinary Shareholders Meeting

Shareholder Proposal

1.0% *

Request for Dismissal of Director

0.5% *

Request for Dismissal of Statutory Auditor

0.5% *

Request to Inspect Accounting Books


Request for List of Shareholders


Request for Cumulative Voting


* Lower thresholds apply under certain circumstances.


Past Case Studies
Company: Overview: Investment Rationale*: Kukbo Design Co., Ltd. Kukbo provides interior design services for commercial properties. Cash & Equivalents = 101% of market cap; Price/Book: = 55%; No debt; P/E = 4.2x 15+ consecutive years of profitability. Successfully named a statutory auditor to the board, positive changes for shareholders


Company: Overview: Investment Rationale*:

Komelon Corp. Korea’s leading measuring tape manufacturer, has sold products in over 80 countries. Cash and equivalents = 70% of market cap; Price/Book = 40%; No debt; P/E = 3.9x 15+ consecutive years of profitability. Share buybacks, revised dividend policy, increased company awareness

*At time of initial investment

Case Study – Samho Development (010960)

– Samho constructs highways, tunnels, subways and other civil projects. – Government-related work >90% of revenue – Large number of competitors recently deceased

Valuation at Initial Purchase:
– – – – – – Net cash & equivalents = 106% of market cap Price / Book = 50% 5-Year average ROE = 12.8% P/E = 6.3x (with depressed earnings) 15+ consecutive years of profitability Shares peaked near W12,000 per share, currently just over W3,000)

Note: SC and its affiliates are substantial shareholders

Case Study – Samho Development (cont)

– – – – Large pile of idle cash Part of cash invested in biotech stocks Part of cash invested in venture capital Started money-losing asset management business

– – – – – – Passed a board resolution to repurchase shares May be convinced to exit biotech investments Reviewing dividend policy May be convinced to sell or close down asset management business Earnings likely closer to bottom of the cycle Future: More things the company can do – We will continue to work with them

Case Study – KTcs Corp (058850)

– Engaged in call center services – 411 directory services, partially ad-based in Korea – Re-sells various services provided by Korea Telecom

Valuation at Purchase
– – – – – – – Net Cash / Market Cap: 76% Current Assets – Total Liabilities / Market Cap: 82% P / E: 7.3x Price / Book: 96% 5-Year Average ROE: 12% ROE Ex-Cash: 48% EV / EBIT: 1.2x

Case Study – KTcs Corp (cont)

– – – – Large pile of idle cash Bloated cost structure 411 business likely to decline over time Controlled by Korea Telecom (18% owner)

– Local shareholder put several proposals on March annual meeting ballot:
• Higher dividends, Board seat, Statutory auditor

– – – –

CEO purchased shares, promised more transparency, accountability “Crony” statutory auditor replaced by statutory auditing committee Shareholders and press now scrutinizing company actions Company cancelled 3 million treasury shares


Numerous Korean stocks present extremely compelling value opportunities.

Potential to unlock shareholder value with activism.

Valuations and environment remind us of the US in the late 1970s / early 1980s.


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