Ori Eyal on Korean Preferred StocksVW Staff
Ori Eyal is the Managing Partner of Emerging Value Capital Management LLC. He has over thirteen years of experience in global value investing. Prior to launching Emerging Value Capital Management, he worked at Deutsche Bank Asset Management in New-York where he led multiple successful investments in South Korea and around the world. Ori holds an MBA from the University of Chicago Booth School of Business, an MSc in Computer Science from the Open University of Israel and a BSc from the University of Maryland.
Korean preferred stocks, which are mostly equivalent to common stocks, trade at price discounts of 50%-70%. We recommend investing in a basket of carefully selected 20 Korean preferred stocks. Multiple catalysts over the next five years should reduce this huge price discount to a more reasonable 30% (or less). Adding 7% annual market appreciation and a 3% dividend yield results in a triple (200% return) from current prices. Importantly, the risk of permanent capital loss is extremely small since we invest in a diversified portfolio of 20 extraordinarily cheap, dividend paying, preferred stocks. Therefore, we view this opportunity as exceptionally compelling from a risk-reward standpoint.
Over 100 public companies in South Korea have listed both common and preferred stocks. The Preferred stocks in Korea are very different than preferred stocks in the US and in most other countries. In fact, Korean preferred stocks are materially equivalent to Korean common stocks. They are required to pay a higher dividend than the common stocks, have an equal claim on cash flows and profits, get preferred treatment in case of liquidation, and they are treated fairly whenever corporate events take place.
Most Korean preferred stocks were originally issued several decades ago when the government pressured chaebols to raise more equity and delever their capital structures. The chaebols wanted the extra equity capital, but they also wanted to retain control of their companies — hence the new non-voting shares.
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