“Soft” Shareholder Activism in Korea“Soft” Shareholder Activism in Korea“Soft” Shareholder Activism in Korea“Soft” Shareholder Activism in KoreaAsia Value Investor Conference (Hong Kong)Asia Value Investor Conference (Hong Kong)
Strictly Confidential | December 2015
Disclaimer
These slides serve as a supplement to an oral presentation (together, the “Presentation”) and are forinformational purposes only and should not be considered as the giving of any investment, financial, securities,or other advice by Petra Capital Management (“Petra”). In particular, the Presentation does not constitute anoffer, inducement or invitation to subscribe for or purchase any securities, services, or products in anyjurisdiction.
Certain funds or accounts managed by Petra may have positions that provide them with an economic interestin the price movement of the securities mentioned in the Presentation and securities similar to thosediscussed in the Presentation. Any such positions are subject to change at any time and without notice. Petramay change its views on the securities and markets discussed herein at any time and has no duty to updateyou on any such change in views or trading positions that may result. This Presentation is only current as ofDecember 8, 2015, or such earlier dates specifically noted in the Presentation.
While the information contained herein has been prepared in good faith from sources believed to be reliable,Petra gives no representations, warranties or undertakings (express or implied) as to, or in relation to, theaccuracy, reliability or completeness of the information or opinions in this Presentation, and all liabilitytherefore is expressly disclaimed. You must make your own independent assessment of the materials herein,after making such investigations and taking such advice as you may deem necessary. In particular, anyestimates or projections or opinions contained herein necessarily involve significant elements of subjectivejudgment, analysis and assumptions, and you should satisfy yourself in relation to such matters. All tradenames, trademarks, service marks, and logos herein are the property of their respective owners who retain all
Strictly Confidential
names, trademarks, service marks, and logos herein are the property of their respective owners who retain allproprietary rights over their use.
Certain statements in the Presentation may be forward looking statements. By their nature, forward lookingstatements involve a number of risks, uncertainties and assumptions that could cause actual results or eventsto differ materially from those expressed or implied by the forward looking statements. Forward lookingstatements contained in the Presentation regarding past trends or activities are included only for illustrativepurposes and should not be taken as a representation that such trends or activities will continue in the future.You should not rely on forward looking statements, which speak only as of the date of the Presentation.
1
Table of Contents
I. Petra Capital Management – Introduction
II. Korea Overview
III. Soft Activism Opportunities in Korea
IV. Past Activist Investments by Petra
V. Takeaway
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I. Petra Capital Management – Introduction
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)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
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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
4
1 Month 3 Months YTD Annualized Since Inception*
Petra Portfolio (Net of Fees) 0.1% -1.2% 5.1% 16.0% 148.7%
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)
40
60
80
100
120
140
160
180
Petra Portfolio (Net of Fees) KOSPI
(%)
KOSPI 3.4% 0.0% 5.9% 3.4% 22.7%
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-20
0
20
9/30 3/31 9/30 3/31 9/30 3/31 9/30 3/31 9/30 3/31 9/30 3/31 9/30
Note: Petra's returns were independently verified by the Korea Securities Depository; past investment performance is no guarantee of future results
*Performance inception date: September 16, 2009
20102009 2011 2012 2013 2014 2015
II. Korea Overview
Remarkable Economic Achievement
Rapid Economic Growth
The Korean economy has accomplished remarkable economic achievement in a short period
of time
1940s 1950s 1970s1960s
1980s 1990s 2010s2000s
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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 - 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
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Source: World Bank, OECD, Bloomberg
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
Korea’s Sovereign Credit Rating Sovereign Debt and Budget Balance
All three major credit rating agencies, Fitch, S&P and Moody’s,
upgraded Korea to its highest ratings since the country was first
rated in 1986
Korea’s level of sovereign debt (34.5% of GDP) is one of the
lowest amongst developed economies
34.5%Korea
Sovereign Debt to GDP Ratio
AAAA--
A+A+
AAAA
AAAAAAAA+AA+
The Korean government had a budget surplus in 9 of the past 10
years
0.9%KoreaBudget Balance % of GDP
231.9%
177.1%
132.0%
74.4%
74.3%
0% 50% 100% 150% 200% 250%
Japan
Greece
Italy
US
Germany
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Source: S&P, Fitch Source: CIA World Factbook 2014
A+A+
AA
AA---6.9%
-3.4%
-3.0%
-2.8%
0.4%
0.9%
-8% -6% -4% -2% 0% 2%
Japan
Greece
Italy
US
Germany
Korea
III. Soft Activism Opportunities in Korea
Attractive Valuation
Numerous public companies are traded at discounts to book value and with single digit P/E ratios
KOSPI
MSCI ACWI
P/E
11.1x
15.1x
P/B
1.0x
1.9x
Source: Bloomberg (P/Es and P/Bs based on CY 2016 estimates)
S&P 500 16.3x 2.6x
Companies Trading for Less Than
8x 5-Year Average Earnings
70% of Tangible Book Value
Both of the Above
Dollar Amount
$150+ billion
$200+ billion
$100+ billion
130% of Net Cash
Current Assets Minus Total Liabilities AND Profitable (True Net-Nets)
$150+ billion
~$2 billion
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Source: WISEfn (as of October 30, 2015)
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 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
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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
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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
(million Won)
Company Net-Net Value Market Cap
Motonic 302,604 286,886 Motonic 302,604 286,886
Dongil Industries 203,207 130,524
Mi Chang Oil 135,916 132,707
Korea Airport Service 117,139 92,665
Man Ho Rope & Wire 114,550 59,594
Dongbang Agro 104,786 76,112
HNK Machine Tool 85,383 39,073
Sam Sung Climate Control 84,118 83,799
Bookook Steel 83,407 59,000
Namyeung Vivien 76,382 69,634
Keum Kang Steel 73,166 59,318
Taegu Broadcasting Corporation 69,937 63,603
Fine Digital 64,227 60,672
Hwacheon Machinery 60,333 59,400
Avaco 59,015 55,170
Motor & Technology 54,057 39,339
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Motor & Technology 54,057 39,339
Asia Technology 48,831 48,567
Aztech WB 48,274 47,437
Yooshin Engineering 46,954 30,900
Dongshin Construction 46,861 46,200
Samil Enterprise 43,816 31,806
.
.
....
.
.
.
Source: WISEfn (as of October 30, 2015)
14
44%45%
50%
Korea Discount – Capital Allocation
Country Dividend Yield Payout Ratio
Dividend YieldCorporate Cash Holdings (% of GDP)
Hoarding Cash “Dividend Stingy”
44%
34%
19%
15%
20%
25%
30%
35%
40%
45%Korea 1.3% 15.5%
India 1.5% 33.1%
Japan 1.6% 32.9%
China 1.7% 32.9%
Philippines 2.0% 37.7%
United States 2.1% 51.1%
France 3.0% 60.6%
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11%
0%
5%
10%
15%
Japan Korea Germany United States
15
Source: Bloomberg (dividends based on 2014 results)
France 3.0% 60.6%
Brazil 3.8% 61.1%
Taiwan 4.0% 55.1%
Russia 4.9% 53.7%
A New Policy of Returning Money to Shareholders
Amid widespread recognition that Korean corporate capital allocation policies need to
improve, Korean companies are turning course to become more shareholder friendly
- Samsung Electronics recently announced another round of share buybacks over
US$10 billion and Hyundai Motor hiked its dividend payouts by more than 50% in 2014
-- Total cash dividends in 2014 (US$14 billion) by Korean public companies increased by
more than 20% from 2013
The Korean government recently adopted two key pieces of legislation (becoming effective
in the beginning of year 2016) that could be of great benefit to Korean shareholders
- Deduction on the taxes on dividend payments
- Imposition of penalties on Korean corporations for holding excessive cash
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Source: WISEfn
Rights of Minority Shareholders in Korea
Classification and Requirements 5% Disclosure Requirements
► Any shareholder who holds more than 5% of voting shares
(including voting shares held by any specially-related
person)
► A disclosure report must be submitted to the Financial
Extraordinary shareholders
meeting
To hold more than 1.5% of voting shares for at least 6 months without interruption
To hold more than 1% (0.5%)* of voting ► A disclosure report must be submitted to the Financial
Services Commission of Korea and the Korea Stock
Exchange within 5 business days after the execution date
► Any change of more than 1% with respect to the number of
voting shares must be reported within 5 business
Shareholder proposal
To hold more than 1% (0.5%)* of voting shares for at least 6 month without interruption
Request for dismissal of director/
statutory auditor
To hold more than 0.5% (0.25%)* of voting shares for at least 6 month without interruption
Request for inspection of
accounting books
To hold more than 0.1% (0.05%)* of voting shares for at least 6 month without interruption
To hold more than 0.01% of voting shares
Minority Shareholder Protection in Korea
► The “poison pill”, a common defensive strategy used against
corporate takeovers, is not allowed under Korean law
► In electing statutory auditor, voting rights of the controlling
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To hold more than 3% of voting shares and to provide a 6-weeks notice prior to the shareholders meeting
Representative suitTo hold more than 0.01% of voting shares for at least 6 month without interruption
Request for cumulative voting
*( ) is applicable to any public company whose shareholders’ equity is more than 100 billion Won at the end of the most recent fiscal year
shareholder (including its specially-related parties) are
restricted to 3% in aggregate
► Korean companies generally do not offer dual-class shares
with different voting rights
IV. Past Activist Investments by Petra
Kukbo Design (066620)
Investment Rationale Intrinsic Value vs. Market Cap
Established in 1983, the Company is a top interior design/construction
company in Korea
Two of its major competitors have gone bankrupt due to the latest
slump in the construction industry
The Company is “net-net” as the Company’s net cash holding amount
is equal to its market cap of 25 billion Won ($23 million)
40
60
Operation Value
(billion Won)
Main Products Investment Result
■ Residential Design
- Interior design anddecoration services for apartments and luxurious condos
- Landmark project:
is equal to its market cap of 25 billion Won ($23 million)
The Company’s inefficient management of its cash has been lowering
the Company’s ROE
As the 2nd largest shareholder in the Company, we began to engage in
a proxy fight to unlock shareholder value
Sales of 103 billion Won and operating profit of 4 billion Won in 2010
Price/Earnings: 6.3x; Price/Book: 0.5x
■ Retail Place Design
- Interior design anddecoration services for shopping centers and commercial buildings
0
20
Intrinsic Value Market Cap
Operation Value(25 billion Won)
Net Cash(25 billion Won)
Market Cap(25 billion Won)
7,000
8,000
The statutory auditor recommended
(Won) Entry Price Exit Price Dividend Period Total Return
3,349 Won 6,504 Won 200 Won 6 months 100%
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- Landmark project: Tower Palace
buildings- Landmark project:Galleria Dept Store
■ Office Design
- Interior design anddecoration services for offices
- Landmark project:GE Energy Korea HQ
■ Hospitality Design
- Interior design anddecoration services for hotels and entertainment facilities
- Landmark project: The Westin Chosun 3,000
4,000
5,000
6,000
7,000The statutory auditor recommended
by Petra was elected
Made a public filing regarding joint investment with
a U.S. hedge fund (14%)
The market begins to recognize the intrinsic value
2011-01-25 2011-03-14 2011-04-25 2011-06-092010-12-132010-11-01
Started accumulating
shares
Komelon (049430)
Investment Rationale Intrinsic Value vs. Market Cap
Established in 1963, the Company is Korea’s top measuring tapes
manufacturer
The Company’s net cash and investment holdings of 13 billion Won is
equivalent to half of its market cap of 26 billion Won ($24 million)
The Company has exported to more than 80 countries through its 30
40
50
(billion Won)
575
600
6,000
7,000
Main Products Investment Result
The Company has exported to more than 80 countries through its
subsidiaries and distribution network in the U.S., Europe and China
The Company maintains a strong financial structure with no debt and
generates a steady cash flow
The Company is the world’s 3rd largest measuring tapes manufacturer
after Stanley of the U.S. and Tajima of Japan
Price/Earnings: 6.3x; Price/Book: 2.5x
■ Steel Pocket
- Excellent design- Stainless and nylon coated blade for maximum durability
- Sales: 16.0 billion Won
■ Steel Long
- Heavy ABS frame - Folding rewind crank provides fast blade retrieval
- Sales: 1.6 billion Won
(Pts)(Won)
Entry Price Exit Price Dividend Period Total Return
3,107 Won 6,047 Won 55 Won 7 months 96%
0
10
20
30
Intrinsic Value Market Cap
Net Cash & Investments(13 billion Won)
Operation Value(27 billion Won)
Market Cap(26 billion Won)
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400
425
450
475
500
525
550
2,000
3,000
4,000
5,000
6,000
2011-11-02 2012-01-02 2012-03-02 2012-05-02
Komelon (LHS)
KOSDAQ (RHS)
20
- Sales: 16.0 billion Won- % of total sales: 71%
- Sales: 1.6 billion Won- % of total sales: 7%
■ Special/Stainless Steel
- 100% custom built- Complex production process
- Sales: 2.6 billion Won- % of total sales: 12%
■ Fiber Glass
- EC Class II certified - Heavy duty frame withstands extreme conditions
- Sales: 13.0 billion Won- % of total sales: 6%
Net Cash and Investments as a Percent of Market Cap: 110.6%
Price / Earnings: 12.7x
ROE: 3.0% Price / 5-Year Average Earnings: 3.9x
Dongil Industries (004890)
Company Overview Financial Ratios
Establishedin1966, the Company is engaged in manufacture of steel
products
The Company has a diversified product mix, enabling it to maintain its
niche market position
2,300
2,400
80,000
85,000
Earnings: 3.9x
ROIC: 2.8% Price / Book: 0.4x
5-Year Average ROE: 11.3% EV / EBITDA: N/A
Main Product Stock Price Trend
After weak financial results of 2013, the Company is expected to have
a turnaround through the rising demand of alloyed steel
The Company’s net cash and investment holdings of 130 billion Won is
larger than its market cap of 120 billion Won
The majority shareholder and specially-related parties collectively own
55% of the Company
Main Product
■ Steel Bars
- Steel bars are used for parts in machinery as gears, shafts andfasteners and also as steel materials for forging and cutting
- Primary customer: Neom Inc.- % of total sales: 55%
(Won) (Pts)Entry Price Exit Price Dividend Period Total Return
53,038 Won 75,968 Won 1,000 Won 14 months 45%
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1,700
1,800
1,900
2,000
2,100
2,200
2,300
50,000
55,000
60,000
65,000
70,000
75,000
80,000
2014-04-18 2014-10-18 2015-04-18
Dongil Industries (LHS)
KOSPI (RHS)
21
■ Alloyed Steel
- Alloyed steel is used for deoxidation, deoiling and materialimprovement in order to improve the quality of steel products
- Primary customers: POSCO and Hyundai Steel- % of total sales: 34%
- % of total sales: 55%
■ Casting
- Casting refers to production of heavy industrial machineries including excavator and wheel loader, etc
- Primary customers: Doosan Infracore, Hyundai Heavy Industries and Volvo
- % of total sales: 11%
V. Takeaway
Takeaway
Korean companies have solid economic fundamentals; however, many Korean
stocks are discounted because they hoard cash and pay very little dividend
Corporate governance and transparency have improved significantly in Korea,
The Korean stock market offers potential to unlock shareholder value, if companies
start to buy back shares and increase dividends as a result of shareholder activism
Corporate governance and transparency have improved significantly in Korea,
creating a more favorable environment for shareholder activism
Strictly Confidential 23
Contact Us
Petra Capital Management9F, Anwon Bldg.
25 Eunhaeng-ro, Yeongdeungpo-gu
Seoul, Korea 07238
Telephone: +82-2-3774-0978
Fax: +82-2-783-0079
Important Notice
This material has been prepared by Petra Capital Management. This material is for distribution only under such circumstances as may be permitted by
applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any recipient. It is published solely for
informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No
representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained
herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the materials. It should not be
regarded by recipients as a substitute for the exercise of their own judgment.
Any opinions expressed in this material are subject to change without notice and may differ or be contrary to opinions expressed by other business areas
or groups of Petra Capital Management as a result of using different assumptions and criteria. Petra Capital Management is under no obligation to update
Fax: +82-2-783-0079
Email: [email protected]
www.petracm.com
Strictly Confidential
or groups of Petra Capital Management as a result of using different assumptions and criteria. Petra Capital Management is under no obligation to update
or keep the current information contained herein. Petra Capital Management may, from time to time, as principal or agent, have positions in, underwrite,
buy or sell, make a market in or enter into derivatives transactions in relation to any financial instrument or other assets referred to in this material. Petra
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or between business groups or within or between single business areas within business groups, directed to ensuring that individual directors and
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directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material.
© 2015 Petra Capital Management. All rights reserved. Petra Capital Management specifically prohibits the redistribution of this material and accepts no
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