David Hurwitz on Opportunities in Korea: Value Investing Congress Las Vegas ~ market folly

Tuesday, April 8, 2014

David Hurwitz on Opportunities in Korea: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is David Hurwitz of SC Fundamental who pitched opportunities in Korea.

David Hurwitz's Value Investing Congress Presentation

•    Value investors investing for over 20 years. 20% of their book is in Korea.
•    Unbelievable value in Korea.
•    Activism has worked out well so far. Launched a fund on activist opportunities in Korea.
•    Market capitalization of Korea is bigger than Hong Kong and Italy – similar to Germany.
•    GDP ranks 15th in the world.
•    Trades at 1.1x book versus S&P 500 at 2.6x
•    Graham and Dodd investments are available in KOSPI.
•    Warren Buffet has invested in Korea.
•    Korea is NOT Japan.
•    Minority shareholder rights are very well protected – better than the USA.
•    They have a ROE versus Japan
•    Difficulties of investing – lower volumes, need a trading ID, which isn’t hard to obtain. Accounting is a tad bit difficult due to the transition from Korean GAAP to IFRS. No other activists. Icahn was active in a Korean company years back.
•    Partners with the country’s pension funds. Voted against management – publicly stated they are going to vote for activists (they are the biggest asset manager).
•    1.5% ownership, you can call an annual meeting – phenomenal. At the AGM, you can put out proposals such as board member, buybacks, etc. You have to have held the shares for 6 months.
•    Statutory audit – a position that is effectively appointed by outside shareholders to oversee that the board does its duty properly – access to all books and records.
•    Contacted one of their contacts statutory auditors (activist campaign), the auditor didn’t even know what it meant/obligations.

•    Past case studies – Kubibo Design (spelling?) – trading for net cash, EV of 0. Without subtracting cash traded for 4x earnings. Growing business. Founder owned 50% of the Company. Gave them the cold shoulder. Put the proposal on the ballet requesting the statutory auditor. Real proxy fight and won. End of the day, CEO apologized, looked at capital allocation and the price increased.

•    Kabalem Co – cash was 70% of the market cap, 40% P/PV and 3.9x sustainable earnings. Told them would you buy your competitor for 4x earnings? They said of course. SC then proceeded to tell them that they could buy back their stock for 4x earnings and the light bulb went off – good outcome.

•    Current names – not risen in values from originally purchase price

•    Samho Development idea 1. Civil engineering business – government work.
•    Trades for .5x BV, 12.6% ROE, net cash is 105% of market cap.
•    15 years of consistent earnings. Earnings can cut in half and still a bargain.
•    Owns 6% of the Company.
•    Invested in venture capital and asset management business – so poor capital allocation.
•    Progress made? Passed resolution to repurchase shares. CFO gets it now
•    Convinced them to get rid of biotech investments.

•    Ktcs Corp – call center own the countries 411 directory and a reseller.
•    EV/EBIT of 1x.
•    P/E is 7x P/BV under 1, ROE ex cash 48%. Stable business.
•    Small shareholder has put through a few shareholder proposals.
•    Statutory auditor was fishy – getting paid more than the CEO.
•    Controlled by Korean Telecom – 16% owner.
•    Promised accountability – CEO bought a material amount of shares personally.

•    Strategy – buy things cheap that they make a good return as a passive investor- go active as needed.
•    Have Korean partners and Korean analysts.

Be sure to check out the rest of the Value Investing Congress presentations.

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