For a long time, minority shareholders in Korea have been negatively impacted by an unhealthy closeness between the country’s business conglomerates, known as chaebols, and the government. Such companies, which are predominately family-owned, include Samsung, Hyundai and LG Group.
This has allowed the controlling shareholders of many operationally sound companies to mismanage balance sheets and expand into areas that are not in the best interests of minority shareholders.
However, newly elected government officials are stepping in and starting to implement reforms to eliminate many of these practices.
For example, the government is looking at removing the ownership circularity evident in many powerful conglomerates, which has allowed families to maintain a tight grip on these businesses. The authorities are also seeking more progressive capital management policies, which would attract more international investors to the country.
Antipodes Partners is bullish on the prospects for Korea and has an approximate 10% net long exposure to the country. Korea remains a cheap market and the prospect for continued corporate governance reform heightens the appeal of the country.
Reforming chaebols Samsung and Hyundai
For example, despite a strong run in recent years, the firm is still optimistic on Samsung Electronics, which is trading on an ex-cash P/E below 8x. While the group has had to overcome corporate governance issues in recent times, it is continuing to improve its operational structure and is pursuing a more shareholder-friendly dividend pay-out and share buyback policy – the significance of which should not be underestimated.
Looking at reform candidates outside of Samsung Electronics, Antipodes believes it is highly probable Hyundai Motor will be the next major chaebol to reform and restructure.
Hyundai’s stock is available for purchase on less than 2x pre-tax profits, once it is conservatively adjusted for the value of group investments and its $12bn (£9.1bn, €10.3bn) cash pile.
While there is not doubt the transition to electric vehicles presents long-term challenges for all automakers, the firm believes spinning out non-core assets, lifting dividends and buying back stock would be incredibly value-enhancing for minority shareholders.
The attractive prospects outside of chaebols
Aside from the chaebol reform beneficiaries, Antipodes sees KT Corporation as one of the cheapest global telecommunications companies on several of its measures. This is extraordinary for a dominant broadband player that is lifting dividends and has already sunk enough capital to cover the Korean population with 1 gigabyte per second of broadband internet.
Last, but not least, the firm likes KB Financial, the leading retail banking franchise in Korea. Trading on 0.7x book value and a 7x P/E, the bank is benefitting from the relatively consolidated Korean banking industry becoming more return-focused in lending practices.
In addition, management is simultaneously rewarding shareholders with growing dividends, share buybacks and voluntary redundancies over the last few years.
