David Hurwitz's Value Investing Congress Presentation on Korea

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is David Hurwitz of SC Fundamental who presented "activist investing in Korea".


David Hurwitz's Value Investing Congress Presentation

• Has been investing in Korea 7 years. Sees compelling valuations (0.5x P/BV, low single-digit P/E,   discounts to net cash and profitable with good ROEs)
• Numerous Korean stocks present extremely compelling value opportunities. Valuations and   environment remind him of US in the late ‘70s / early ‘80s. Korean shareholders are beginning to   vote against management when economically beneficial. Potential to unlock shareholder value with   activism

• Korea is misunderstood:
o 15th largest GDP in the world. $1.35tn market cap is the same as Germany and bigger than Hong Kong.  Country has had a budget surplus in 9 out of the last 10 years and public debt/GDP is among the lowest in developed economies.  Also has a strong rule of law
o KOSPI trades at 30% discount to S&P on P/E basis, 54% discount on P/B. Lots of these companies are overcapitalized
o In 2006, Buffett said that if he had to start his partnership again he would start by being 100% in Korea
o Korea is NOT Japan. It has made a concerted effort not to follow Japan’s economic plan.  In Japan, you can buy "30 cent dollars" but you have terrible ROEs while you wait for something to happen.  In korea, ROEs of double digits are the norm
o In last few years, crazy announcements from North Korea presented great buying opportunities but not really anymore

• Interesting minority protections:
o Some great minority shareholder protections have developed in Korea but they go relatively unused
o A small amount of money can go a long way. For example, you can get a shareholder proposal with 1% of shares.  With 3% of shares, you can get a seat at the table at the Board of Directors by pushing for a statutory auditor.  Statutory auditors are supposed to make sure that a Board of Directors is doing its duties properly
o Insiders own 15-40% of companies. Controlling families often have their entire livelihood tied to these companies doing well
o Shareholder returns are not high on the list of management priorities but ROEs are still quite good

• Korean government is thinking a lot about what to do with excess cash on corporate balance sheets.   Considering lowering taxes on dividends and taxing excess cash at corporations, though Hurwitz   doubts the latter happens 

• Issues: All but largest companies don't report in English. Also need a trading ID. Low volumes,   opaque holdcos. Accounting change from Korean GAAP to IFRS is challenging to make comparisons over time.  Bloomberg numbers tend to be wrong, particularly for cash, preferred stock, treasury stock, minority interest.  Drew Kim of Samsug Securities is good source for ideas if you don't speak Korean


Long: Samho Development (010960)  

• Primarily government work constructing sewers, highways, etc. with the gov't representing 90% of   revenue. 15+ consecutive years of profitability
• Pullback on capital projects has depressed earnings. In the same time frame, the market has lost   dozens of competitors
• Cash and equivalents 106% of market cap. 50% price to book. 5 year avg ROE is 12%
• Valuation at purchase (September 2013): 6.3x P/E on depressed earnings. shares peaked at   ₩12,000 now ₩3,000
• Issues: large cash pile, invested some in biotech stocks / VC and even started a money-losing asset   management business
• Progress: passed board resolution to repurchase shares. Exited biotech investments. Reviewing   dividend policy, and sold asset management business. Earnings likely close to bottom of cycle 


Long: KTcs Corp (058850)  

• Call center services, 411 directory services, and ad-based revenues. also resell services by Korea   Telecom
• Valuation at purchase (September 2013): net cash 76% of market cap
• Issues: large cash pile, bloated cost structure. 411 business secular decline, controlled by Korea   telecom 18% owner)
• Progress: local shareholder asked for higher dividends, board seat, statutory auditor. CEO purchased   shares, promised more transparency and accountability
• Hurwitz thinks Korea Telecom should decide what it wants to do with this. Would be a good buy for PE investor


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

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.
•    BUSINESS IS FREE $0 EV
•    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.