Petra Capital's Presentation on Nexen Tire: Value Investing Congress Las Vegas ~ market folly

Tuesday, April 8, 2014

Petra Capital's Presentation on Nexen Tire: 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 Chan H. Lee and Albert Yong of Petra Capital Management whose presentation was entitled "In Search of Hidden Champions in South Korea."  They pitched Nexen Tire as a long.

Petra Capital's Value Investing Congress Presentation

•    South Korean based value manager based in Seoul – disciples of Ben Graham. Outperformed the Korean index – since inception annualized returns of 24% outpacing the KOSPI.
•    Misconception – Korea is not an emerging market
•    Size of Kentucky – GDP over $1 Trillion dollars in addition to being on of the wealthiest countries in the world.
•    Korea’s credit rating is higher than Japan, China, Israel and Italy.
•    Korean culture is heavily focused on education.
•    One of the best infrastructures in regards to internet – 83% high speed penetration and 80% using LTE smart phones.
•    GS thinks in FY15 – one of the wealthiest by GDP per capita.

•    Nexen Tire – Trades at 9.9x p/e. It is a hidden champion. Nexen tire currently Korea’s third largest manufacturer. One of the fastest growing tire manufacturers.
•    Growing at 20% a year – overall industry grew at 8% a year. Last year replacement tires declined by sales to auto makers increased materially.
•    Third tier tire manufacturer by tire price and brand recognition. 1st tier are players like Michelin/Goodyear.
•    Sales are diversified across the globe. Built a new factory in Czech Republic to penetrate Europe further.
•    Very efficient factories – cost structure is materially lower. Factories are highly automated.
•    Trades around 9x should be worth between 12x – 13x.
•    How to buy this cheap? Preferred stock. Pay a slightly higher dividend but no voting rights. 60% discount to the common stock! Trades at 4x PE .
•    Need to be careful – choose the right security. The price of common stock shouldn’t be overvalued. GAP will narrow eventually. 
•    Another method to buy this business cheap: Holding Company – Nexen Corp the holdco. $300 market cap, 70% BV, 6x P/E. 70% of the value is derived from Nexen Tire. 40% stake in Nexen Tire is GREATER than its market cap.

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

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