“Soft” Shareholder Activism in Korea – Asia Value Investor Conference (Hong Kong) by Petra Capital Management
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Petra Capital Management – Introduction
- Petra Capital Management (“Petra”) is a licensed investment management firm based in Seoul, Korea registered with the Financial Services Commission of Korea since August 2009
- Co-founded by Managing Partners, Albert H. Yong and Chan H. Lee (investment style: 60% Benjamin Graham + 40% Charlie Munger)
- Petra specializes in investing in undervalued Korean public companies and employs a disciplined deep value investing to earn superior returns with limited volatility; a bottom-up stock selection approach and detailed fundamental/research-based analysis
- Petra: 5.1% vs. KOSPI index: 5.9% (2015 YTD, net of fees) Petra: 16.0% vs. KOSPI index: 3.4% (annualized return, net of fees, since inception in Sept 2009)
- Korea offers compelling value investing opportunities
? Many Korean companies with earnings power + strong balance sheet + growth potential
? Many small/mid-cap Korean companies are underfollowed, misunderstood or mispriced
Petra Performance
- Petra Korea Value Equity Strategy has continued to deliver a steady return for its investors and substantially outperformed the Korean index (i.e., KOSPI)
Remarkable Economic Achievement
- The Korean economy has accomplished remarkable economic achievement in a short period of time
Korea Overview
Korea’s GDP ranks 13th in the world (US$1.4 trillion in 2014)
- Total Equity Market Cap: US$1.3 trillion
– Nearly the size of Switzerland (US$1.5 trillion), India (US$1.5 trillion) and Canada ($1.8 trillion)
– Larger than Australia (US$1.0 trillion), Spain (US$0.7 trillion) and Italy (US$0.6 trillion) - Fiscally sound government and economy
– Budget surplus 9 of the past 10 years
– Public debt/GDP is amongst the lowest of developed economies (~35% in 2014)
– Korea’s sovereign credit rating is better than that of Japan
– Foreign reserves of US$370 billion places Korea sixth in the world
Strong Fiscal Position
Attractive Valuation
- Numerous public companies are traded at discounts to book value and with single digit P/E ratios
- Current valuations of many stocks in Korea are reminiscent of the valuations of companies in the U.S. that attracted activists and LBO buyers in the late-1970s and early-1980s
- Most of the small to mid-cap Korean public companies are controlled by the founding family members who often hold excess cash and pay very little dividend
“Soft” Shareholder Activism
- Shareholder activism is an investment strategy by which investors attempt to use their shareholder rights to actively participate in management of a publicly-traded company in order to increase the company’s value, especially when the company’s stock price is underperforming
- After acquiring a significant number of shares of a target company from the market, investors will request management to take certain shareholder-friendly actions that can unlock shareholder value
- Shareholder-friendly actions could take in the form of:
? Share buybacks or increased dividends
? Increase in transparency by appointing an independent board member
? A spin-off or break up of a business unit/subsidiary - Investors may be willing to go as far as engaging in a proxy fight in order to pass certain shareholder proposals at the shareholders meeting
- However, in Korea, the U.S.-style of “contentious” shareholder activism is not well received; working constructively with a target company in a nonpublic setting to elicit desired changes that can maximize returns for all shareholders is much more effective
Activist Opportunities in Korea
- Minority shareholder rights are well protected in Korea
- Korean management teams are generally receptive to shareholder overtures
- Corporate governance and transparency have improved significantly in Korea, creating a more favorable environment for shareholder activism
- Korean institutional shareholders, including the National Pension Service (NPS), are becoming more vocal and beginning to vote against management when economically beneficial
- Foreign investors own approximately 30% of the total equity in the Korean stock market
- Government adopted measures to lower dividend tax rate and tax “excess cash” at corporations
How Cheap? Net-Nets
- There are still many publicly listed Korean companies which can be categorized as “Net-Net” as defined by Benjamin Graham, the Father of Value Investing
See full slides below.
