Samsung is Korea: Or is Korea Samsung?

After Chengdu I headed north to Seoul to attend the Samsung Global Investors Conference, courtesy of Samsung Securities.  A stopover at Hefei gave me a brief taste of possibly the most efficient airport I have ever passed through.

My last visit to Seoul was in March 2009.  Not much seemed to have changed.  The crane index appeared higher than six years ago, though not by enough to change the economic index.

The conference was held at the Hotel Shilla, a happy coincidence as it is my favourite hotel in Seoul.  The location is not the most convenient, but a manicured garden and excellent facilities more than make up for that.  In the Shilla, you know you are in Korea.  This is not yet another Four Seasons or Marriott.  Still fusion décor has taken over since my last stay.  The rooms have been refurbished and are now more convenient for the business traveller, but they have lost some character in the process.  I suppose that does count as progress.

I like the Shilla, but it is not cheap; and if your room rate does not include breakfast you may want to give that meal a miss.  There is an extensive buffet but at $55 it should be better.  I expect to be ripped off at breakfast, but this is the biggest bill I think I have ever had : should have drunk an extra orange juice.  The other point of interest about the Shilla is that it is the location for possibly the most extensive range of duty free luxury brands anywhere.   Even without tax that is not the place to voyage for value, but others might disagree.  The line-up is impressive.

There were nearly 90 corporates presenting so selecting who to see was a challenge.  Of course Samsung has clout.  Chaebol rivalries apart they can corral more or less whoever they want.  Would you ignore a call from Samsung if you are a serious company in Korea?   

Korea is an interesting economy.  The country has produced a surprising number of world class companies for a relatively small population.  Samsung of course is one of the most recognised names in the world, its brand ranked as the seventh most important globally by Forbes; and it deserves to be.  Posco is arguably the most efficient steel producer.  They are home to world class car companies, perhaps the best ship builders, and some of the most efficient construction companies with skill sets that run the gamut from desalination to nuclear.

Sadly corporate governance remains the weak link.  The half a dozen families who control much of corporate Korea have shown little interest in minority shareholders.  The recent ‘nut’ rage incident perhaps reveals what they really think, but they try not to let the mask slip too often.  Korea is one of the only financial markets where corporate governance has gone backwards over the past decade.  The focus of the families is firmly on succession planning, inheritance issues and tax avoidance.  In cleaning up complex corporate structures with cross holdings and way too many related party transactions, there will be winners and losers; but this will not be decided in a rational value based process.  Unless you understand family dynamics, these groups are almost uninvestable.  The contempt some of these families have for their outside shareholders was conclusively demonstrated last year by Hyundai, indulging in one of the worst examples of value destruction in recent listed company history, spending a small fortune on a vanity HQ that sends a message about priorities that is all wrong.  The payback period on this project is probably about 50 years, though it will be great for the egos of the family and senior executives.

Hyundai:  Design Proposal for New Headquarters

That said, and in part because of this, Korea is one of the cheapest markets in the world right now.  A value investor has to look and see if it is possible to sidestep the value traps and buy a good business at a decent discount.  My guide in this exercise is Ju Kim, truly one of the few brokers still on the sell side who really cares about whether his clients do well or not.  I have been working with him for over twelve years.  He has never steered me wrong.  If you are investing in Korea or thinking about it, you should track him down in New York where he is based.  He also knows a great place go for Korean barbeque when you are in Seoul.

And it came to pass that I did find one gem (I hope) among the dross.  That topic is deferred for another day.  In addition I got to see Posco and had an interesting discussion about trends in the auto industry.  LG Display is clearly one of the best in that business and will be a leading OLED player, and perhaps a pioneer in AMOLED too.  There is a lot going on.  LG is likely to remain a key player, but so much change makes it harder to identify which horse to back, if any.  This industry does not have a distinguished history of generating return on investment; rather it is a capital hog.

Korean construction companies have been among the world’s most active MNCs with a global footprint, boldly going where many competitors fear to tread.  The Gulf has not always been kind to them, or indeed to anyone in this business since 1978, but on the whole they are good at what they do.  I find the risk/reward profile less than it should be much of the time, but there comes a point in every cycle where the sector can provide a decent ride.  As the domestic housing market comes out of the doldrums this might be such a moment.           

Then there is Naver, the King of Search in Korea and owner of Line, the leading messaging service in Japan, Indonesia and Thailand.  Naver is hard to analyse, a task not made any easier by the reluctance of the company to disclose data that would be useful to investors.  I understand the point about competition, but there is a balance and as a public company Naver has not got that right.  I suspect there is an interesting Sum of the Parts case to be made.

There are a couple of changes in the environment that could prove helpful to equity investors.  First the current government has been very vocal about the need for Korean companies to pay more dividends; and they should because they can.  At the start of the last decade yields in Korea were decent.  Now they are pitiful, the lowest in Asia.  Some companies have not raised the absolute amount in ten years.  Payout ratios have plunged.  Even Japan seems ahead of Korea in understanding this rather basic point.  Share with your shareholders.  The campaign appears to be having some effect, and in an era of invisible interest rates, dividends can be a critical driver of share price performance, so if companies do fall into line that could cause the whole market to rerate positively.

Second the National Pension Plan is lining up to increase its allocation to equities following the example of its counterpart in Japan.  Korea like Japan is an aging society and the current rate of return at the NPP will not suffice to meet its future expected liabilities.  A move to more equities is being forced on it, but key to making the move pay off will be higher dividends.  When the NPP talks, managers at many Korean companies will listen; or at least they will have to listen, and appear to take their suggestions seriously  and perhaps even act.  The NPP has a lot more clout than foreign institutions when it comes to asking for  higher dividends.  So there are two reasons to hope corporate Korea will become more responsive to the concept of Total Shareholder Return.

No country visit is complete without a comment on the airport.  Incheon should be a star.  It looks great; but is struggling.  It took me nearly thirty minutes to get through immigration and security.  That is just too long for a serious airport.  Based on the number of passengers sprinting through the terminal and rushing up escalators it is something they need to fix; more channels and perhaps more people too, at least at peak periods.  Getting in on arrival was also slow.  When flying out of Seoul my advice is to leave extra time.  I also have to add that the food selection in the Singapore Air Lounge is the worst I have encountered anywhere.  To end on a nicer note, they do have plenty of small trolleys in the terminal.  This issue is my personal pet peeve, and for me the key indicator to rate whether the operator cares about passengers.