They Ate My Codpiece

By Derek On May 3, 2012 Under Broker Notes

From: Derek Hillen
Sent: Thursday, May 03, 2012 12:02 PM

“I still have twelve ships.”  - Admiral Yi Sun Shin, 1597

I am just back from a very interesting trip to the capital of Asia’s most successful country; Korea. I spent four days there with a client and came back mightily impressed. Having made my first trip to Seoul for the Olympics in 1988, I am no wide-eyed neophyte. During the Olympics, I took the opportunity to travel the length and breadth of the peninsula hitch hiking. (Note: NOBODY in Korea hitch hikes so if you have no money like I did then it is a great way to go…). Many years and many trips later, Seoul has really cleaned itself up. The city is spotless, the people are well dressed and polite and the buildings are tall, numerous and gleaming. There is a law in Seoul that all skyscrapers must have a sculpture so walking down any of the streets (all wide enough to land an Airbus) is like strolling through a giant outdoor gallery. Some of it was great, some hideous but a nice idea anyway.

It was plain to see on my company visits this trip a marked improvement of management attitudes towards shareholders than in the past. Previously, senior Korean management were badly dressed in blocky, often checked blue suits, yellow shirts and sporting white or lime green socks, looking much like awkward tropical fruit. Meetings were tense and adversarial with many questions  brushed off or ignored completely. Today’s Korean managers are younger, hipper and more relaxed. English, while improving as a medium of exchange, is still rare and often not spoken at all even in high end restaurants. At one famous and trendy venue I ordered the “signature” black cod for dinner late in the evening but my charming waitress shook her head and told me sadly, “We have no more codpiece.” (Note: Since writing this I have had a lot of questions about what a “codpiece” is. Popular during the reign of Henry VIII, a codpiece was a pouch that covered a man’s genitals in order to accentuate and protect them. In other words, a medieval jockstrap.)

Korea has long been the cheapest market in Asia and many blue chip companies trade at single digit PEs. Covering the market as a specialist in the 1990s from New York, I always explained the discount to US fund managers looking at it for the first time as due to: 1) opaque management, 2) disdain for shareholders, 3) extremely levered balance sheets, 4) Pyongyang was just 120 kms away.

Today, Korea is still cheap but balance sheets are strong, management strategy is much more transparent, attitudes toward shareholders are undergoing a steady improvement and Pyongyang is, well, still 120 kms away. It is interesting that several of the major companies we saw do not publish financials in English – despite foreigners accounting for a quarter of market turnover. Need to apply some discount there. However, the biggest threat to Korea now, of course, is not the spastic North but rather the sleeping yen. Korea has been able to beat Japan handily with the cross-rate at current levels – will that continue? Samsung (005930 KS) has morphed from an obnoxious wannabe into an admired and globally respected brand that takes market share from everyone. Does anybody even remember Sony? Sharp who? Put them in the same basket as Atari and Esperanto . Whether in consumer electronics, shipbuilding or autos Korea has closed the gap with Japan and can produce high quality goods at less cost. China is still cheaper for slapping stuff together but R&D investment there is close to zero and “Quality Is (not) Job 1,” to paraphrase Ford’s advertising slogan. With a maturing, almost developed economy, Korea’s real growth story is going to continue to be export driven. While a weaker yen represents future grave threat to the impressive gains Korea has made in recent years it seems that is not enough reason to avoid investing there and protection could be had relatively cheaply shorting that currency. Hyundai Motor (005380 KS) and Kia (000270 KS) trade at single digit PEs with double digit earnings growth and we remain overweight the auto sector. Both have broken out of long term consolidation patterns recently and are now reaching new highs. See our daily for more.

My Favorite Korean

My favorite Korean hero (everyone has one) is Admiral Yi Sun Shin who was a towering Clint Eastwood figure in history and Korea’s own Admiral Horatio Nelson. He continuously defeated the much larger and better equipped Japanese navy in many engagements and famous sea battles over a long and turbulent career. He is also remembered for his do or die fighting philosophy, telling those under his command, “Fight like you will die and you shall live. Fight like you will live and you will die.” Admiral Yi was thrown into prison and his command given to a much lesser mortal due to palace intrigues. The Korean navy was almost destroyed during his absence. When Yi was released the king told him to go join the land forces and his response was classic Hollywood: “I still have 12 ships.” He took those 12 ships and defeated the Japanese again. Korea is likely to handle itself well again in the next confrontation with Japan on the export front.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

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