Value Investing Opportunities in Korea (Presentation by Petra)
Value Investing Opportunities in Korea (Presentation by Petra)
Value Investing Opportunities in Korea (Presentation by Petra)
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Join us for the 9th Annual New York Value Investing Congress!
Investment advisory and portfolio management firm based in Seoul, Korea registered with the Financial Services Commission of Korea
Co-founded by Managing Partners, Albert H. Yong (MBA) and Chan H. Lee (JD); both received their graduate degrees from UCLA in 1997
Value investors, focusing on undervalued Korean public companies with potential catalyst(s) whose market prices are trading at a significant discount to intrinsic value; a bottom-up stock selection approach and detailed fundamental/research-based analysis
Petra: 138.1% vs. KOSPI index: 21.3% (cumulative return since inception in Sept 2009)
Many Korean companies with earnings power + strong balance sheet + growth potential Many small/mid-cap Korean companies not followed by sell-side analysts Various mispricing opportunities in Korea (market price vs. intrinsic value)
1
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KG INICIS
200%
CJ O Shopping
KOSPI
150%
KG INICIS +231.9%
100%
50%
0%
-50% 4/30/12
11/30/12
12/31/12
1/31/13
2/28/13
3/31/13
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Table of Contents
I. II. Korea Overview Types of Mispricing Opportunities in Korea
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I. Korea Overview
Country Overview
Country Name: Republic of Korea (South) Area: 100,140 km2 Population: 50 million (2012) GDP: US$1,164 billion (2011) 15th in the world GDP per Capita (PPP): US$31,753 (2011) 25th in the world Average GDP Growth: 5.0% (Since 1999) Foreign Exchange Reserves: US$327 billion (as of December 31, 2012) 8th in the world Inflation (CPI): 4.3% (2012) Unemployment Rate: 2.8% (2012) Trade Surplus: US$30 billion (2012) Total Equity Market Cap: US$1,189 billion (as of December 31, 2012) 13th in the world
Source: International Monetary Fund, The World Bank, Statistics Korea
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All three major credit rating agencies, Fitch, S&P and Moodys, have recently upgraded Korea to its highest ratings since the country was first rated in 1986
Koreas level of sovereign debt (33.4% of GDP) is one of the lowest amongst developed economies
Germany
AA+
US Italy Greece
AA
Japan
AA-
A+
0.6 0.1
-10
-8
-6
-4
-2
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The Korean industry structure is well diversified while most emerging economies are disproportionately concentrated in few dominant industries
Industry Structure by Country
Korea vs. World China Taiwan Brazil
Utilities Telco IT Financials Healthcare Con. Stp. Con. Dis. Industrials Materials Energy -
1.7 4.4 2.8 5.0 28.0 11.6 16.3 21.3 0.5 8.7 4.9 10.1 13.3 9.5 15.1 10.4 14.9 8.5 2.5 10.6 5 10 15 20 25 30 Korea AC World
Utilities Telco IT Financials Healthcare Con. Stp. Con. Dis. Industrials Materials Energy -
5.6
IT Financials
25.8
Healthcare 0.0 Con. Stp. Con. Dis. Industrials Materials Energy 0.7 20 40 60 1.8 3.0 3.5 12.5
Healthcare 0.0 Con. Stp. Con. Dis. Industrials Materials Energy 20.7 10 20 30 5.3 3.3 26.1 8.8
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Korea is strategically positioned geographically and industrially to benefit considerably from the robust growth in emerging markets
Exports Exposure
China
50%
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Hyundai Motor along with Kia Motors is the worlds fastest growing and 4th largest automaker and has more than 10 percent of the global market share
Korea's Big Three shipbuilders Daewoo Shipbuilding and Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries dominate the global shipbuilding industry with over 50 percent of the global market share
The South Korean city of Pyeongchang has been awarded the 2018 Winter Olympics, the first city in Asia outside of Japan to host the Winter Olympics; hosting the Winter Olympics will directly add US$20 billion to the Korean economy
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The Korea government is introducing a new bill on corporate governance of financial companies; the Ministry of Justice is working on another amendment to the Korean corporate law to better define the role of outside director
The recent Korean corporate law amendments require super-majority board approval for transactions
between the company and its director(s) and impose personal liability on director(s) for such decisions
Economic democratization
The newly elected Park administration has pledged to promote free-competition economy that protects the market and smaller companies as well as consumers from unfair business practices
The Korean government is set to enact regulations restricting the cross-holding ownership structure of chaebols and prohibiting inequitable business transactions with affiliated companies
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The Korean stock market has approximately 2,000 companies with total market capitalization of US$1,189 billion, the 13th largest in the world (as of December 31, 2012)
Sector Breakdown Number of Listed Companies by Market Cap
Large Cap
(>2 trillion Won)
105
Metals 5% Retail 5%
Mid Cap
(2 trillion ~ 200 billion Won)
392
Chemical 9%
Services 11%
1,427
0
Source: Korea Stock Exchange Source: Korea Stock Exchange
500
1,000
1,500
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The Korean stock market drastically outpaced the U.S. stock market over the last decade
Trends of Stock Markets in Korea and the U.S.
KOSPI
S&P 500
+161%
250
1951.6
200
150
+35% 1585.2
1172.5
100
747.7
50
0 2002
Source: Bloomberg
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
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Attractive Valuation
There has been a huge advance in the Korean market; nevertheless, many Korean stocks still sell at more attractive prices than stocks in other major countries Warren Buffett
Attractive Valuations
Country
China Korea Hong Kong Brazil France Germany U.S. India Taiwan Mexico Japan Shanghai Comp KOSPI Hang Seng Bovespa CAC 40 DAX 30 S&P 500 Sensex TWSE Mexican Bolsa Nikkei 225
Index
P/E
10.0 10.6 10.8 11.1 11.3 11.8 14.0 14.4 14.7 16.3 24.1
P/B
1.7 1.2 1.5 1.1 1.2 1.5 2.2 2.6 1.7 3.0 1.5
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KOSPI index is underperforming most other indices in year 2013, a sharp contrast to other major equity markets
Nikkei 225
S&P 500
FTSE 100
CAC 40
DAX 30
Hang Seng
Shanghai Composite
KOSPI -5%
Source: Bloomberg
0%
5%
10%
15%
20%
25%
30%
35%
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The Japanese Yen has significantly weakened in the past few months; however, it is still relatively overvalued compared to its level against the Korean Won before the global financial crisis in 2008
1,400
1,300 1,200 1,100 1,000 900 800 700 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Bank of Korea
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The Korean stock market may have overreacted to the weakening of the Japanese Yen; so far, its effect on the Korean exports and imports has been minimal
(billion US$) Exports (LHS) Imports (LHS) 50 Trade Balance (RHS) 6 45 5 4 3 35 2 1 25 8 55
(billion US$)
JPY
40
30
-1
-2 -3
20
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II.
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
(Unit: million Won)
Company
KCC Engineering & Construction Dongwon Development
Net-Net Value
209,110 230,121
Market Cap
142,970 142,569
Dongil Industries
Shinyoung Wacoal Hanshin Construction HNK Machine Tool Keyang Electric Machinery Choil Aluminium Kyeryong Construction Samyang Tongsang
157,788
95,262 176,217 107,779 86,859 83,122 101,839 117,116
137,752
94,500 88,409 81,435 80,312 78,300 76,806 75,300
85,795
64,724 133,565 103,061 87,769 76,178 87,401 53,122
62,458
61,500 60,541 59,639 57,110 54,172 50,142 48,840
Seung Il
Keum Kang Steel
51,775
67,192
47,217
46,894
. . .
Source: Petra analysis
. . .
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. . .
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Many Korean preferred stocks trade at about 40% of the value of the equivalent common stocks; the gaps have been widening over the past decade
Preferred Stock Price in % of Common Stock Price
57.4%
46.5% 40.1% 34.1% 34.7%
31.5%
27.4% 21.6%
32.9% 25.0%
24.8%
Source: Bloomberg
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Increasing number of Korean public companies are transforming into a holding company structure by spinning off the business operation; however, many holding companies are unreasonably, significantly discounted by the market compared to the value of their subsidiaries
Company
Company A
Hanjin Heavy Industries & Construction Holdings
S&T Holdings Iljin Holdings Dongwha Holdings SK Holdings KISCO Holdings SeAH Holdings
P/B
0.1x
0.1x 0.2x 0.2x 0.2x 0.2x 0.2x
Subsidiary
0.2x
0.2x 0.2x 0.2x 0.2x 0.3x 0.3x 0.3x 0.3x 0.4x 0.5x 0.5x 0.5x 0.6x 0.6x
. . .
20
. . .
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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; the corporate governance and rule of law have improved significantly in Korea, creating a more favorable environment for shareholder activism
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17,600 Won
Industrial
2,356 Won
7.5x 36,415 Won 0.5x
18,000
16,000
14,000
12,000
10,000 12/31/09
6/30/10
12/31/10
6/30/11
12/31/11
6/30/12
12/31/12
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Investment Thesis
The Company is one of Koreas leading regional port operating companies that provides integrated logistics services, including harbor stevedoring, transportation and storage
Sebang
The port stevedoring business has a high entry barrier in Korea because only a few companies are granted with a port operating license by the government
The Companys subsidiary, Sebang Global Battery, is Koreas leading manufacturer of automobile batteries with a domestic market share of 43% The value of the Companys equity stake (37.9%) in Sebang Global Battery (also listed on the Korea Stock Exchange) is not properly reflected in the stock price of the Company
The Company is a good example of holding company discounts in Korea as the Company is trading at an unreasonable, excessive discount compared to the sum of the value of its business operation and publicly-traded subsidiary The Companys liquidation value far exceeds its market cap
Attractive Valuation
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The Company was established in 1965 and is currently owned 38.3% by the founding family and 16.2% by institutional investors
The Company is one of Korea four major regional integrated logistics companies with a portoperating license
The Company is a controlling shareholder (37.9%) of Sebang Global Battery, Koreas leading provider of automobile batteries, which it had acquired in 1978
(Unit: million Won)
Category
Integrated Logistics Services
Sales (2012)
688,833
%
95.9
Sebang (004360)
Construction
5,523
0.8
37.9%
Battery
23,643
3.3
Total
717,999
100
Source: Sebang
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The Company provides fully integrated logistics services, including harbor stevedoring, transportation and storage
The Company operates in several major ports in Korea, including Busan, Gwangyang, Masan and Pohang, and offers transportation services of containers and bulk cargo from harbors to logistic centers
The Company has a strong bargaining power as only a few selected operators are permitted to conduct stevedoring services in each port
Integrated Logistic Services Breakdown by Services
5.2% Transportation 41.3% 53.5% Harbor Stevedoring Storage
Harbor Stevedoring
Source: Sebang
Transportation
Storage
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The Company is poised to benefit from increasing port traffic in and out of Korea
Port Traffic Growth Market Share*
Company 2010 2011 2012
1,300
CAGR 4.0%
1,200
CJ Korea Express
14.9%
18.1%
15.9%
Dongbang
8.5%
9.4%
8.0%
1,100
Sebang 7.8% 8.2% 7.1%
1,000
Dongbu
1.5%
1.5%
1.3%
900
KCTC
0.8%
0.9%
0.7%
800 2007
Source: Sebang
Others
44.7%
38.4%
45.9%
2008
2009
2010
2011
2012
* Market share in terms of port traffic in Koreas 23 major ports
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Income Statements
2008 2009 1,173,681 -1.57% 944,211 80.45% 229,470 19.55% 85,457 7.28% 144,012 17.10% 146,197 12.46% 95,425 8.13% 2010 1,394,503 18.81% 1,152,414 82.64% 242,088 17.36% 91,218 6.54% 150,870 19.80% 153,070 10.98% 105,697 7.58% 2011 764,646 -45.17% 691,627 90.45% 73,019 9.55% 32,130 4.20% 40,890 20.10% 42,461 5.55% 54,818 7.17% 1,192,435 959,359 80.45% 233,076 19.55% 86,682 7.27% 146,394 15.60% 149,331 12.52% 94,165 7.90%
(Unit: million Won) 2012 717,999 -6.10% 649,510 90.46% 68,489 9.54% 34,050 4.74% 34,439 22.60% 36,252 5.05% 54,088 7.53%
Sales % Growth Cost of Sales % COGS/Sales Gross Profit % Margin SG&A % SG&A/Sales Operating Income % Margin EBITDA % Margin Net Income % Margin
Valuation
(Unit: million Won; thousand US$) Won US$ 24,827 10x 248,273 27,310 10x 273,100
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Established in 1952, Sebang Global Battery (the Subsidiary) manufactures a wide range of automobile and industrial batteries
GS Yuasa of Japan, one of the worlds leading manufacturers of automobile and motorcycle
batteries, owns 16.0% of the Subsidiary
The Subsidiary boasts a strong balance sheet with little debt and is also significantly undervalued, trading at 7.3 times its earnings
(Unit: million Won)
Category
Automobile Batteries
Sales (2012)
645,461
%
76.3
Financial Summary
Share price (4/19/2013) Market cap 50,800 Won 711 billion Won 6,991 Won 7.3x 41,823 Won 1.2x
Industrial Batteries
198,530
23.5
Motorcycle Batteries
2,339
0.2
Total
846,330
100
P/B
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The Subsidiary is the largest manufacturer of automobile batteries in Korea with a market share of 43.4% and the worlds 5th largest manufacturer
The Subsidiary benefits from declining lead price which will reduce its raw material costs,
improving gross profit margin
The sale of automobile batteries in the aftermarket is a big plus as the Subsidiary is less likely to be affected by the economic downturn
Profitability
2012
34% 10% 8% 7% 4% 2% 35%
2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 2010 2011 2012
(US$/ton)
3,000
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Income Statements
2008 2009 627,174 0.41% 479,404 76.44% 147,771 23.56% 53,774 8.57% 93,996 17.10% 94,628 15.09% 70,290 11.21% 2010 790,200 25.99% 622,217 78.74% 167,983 21.26% 61,733 7.81% 106,251 19.80% 106,842 13.52% 79,210 10.02% 2011* 953,872 20.71% 752,482 78.89% 201,389 21.11% 68,772 7.21% 132,617 20.10% 133,264 13.97% 105,375 11.05% 624,589 460,321 73.70% 164,268 26.30% 54,361 8.70% 109,907 15.60% 110,517 17.69% 75,369 12.07%
(Unit: million Won) 2012 846,330 -11.27% 655,118 77.41% 191,213 22.59% 68,067 8.04% 123,146 22.60% 124,252 14.68% 97,869 11.56%
Sales % Growth Cost of Sales % COGS/Sales Gross Profit % Margin SG&A % SG&A/Sales Operating Income % Margin EBITDA % Margin Net Income % Margin
Valuation
(Unit: million Won; thousand US$) Won US$ 83,127 10x 831,273 181,371 1,012,643 384,298 307,439 91,440 10x 914,400 199,508 1,113,908 422,728 338,182
Normalized Earnings Multiple Operation Value Cash & Investments Equity Value Share of Sebang (37.9%) Intrinsic Value (20% Discount)
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Valuation
Operation
Market Cap
Other Subsidiaries
US$1 = 1,100 Won Source: Petra analysis
44 billion Won
Market Cap
32
Intrinsic Value
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Liquidation Value
The Company trades at 50% of its book value; we think that the book value fairly reflects the Companys liquidation value
(Unit: million Won)
Book Value Liquid Assets Cash & Equivalents Account Receivable Other Receivables Investments Sebang Global Battery Other Subsidiaries Other Investments PP&E Land Building Other PP&E Investment Property Land Building Other Assets Total Assets Total Liabilities plus Non-Controlling Interest Liquidation Value
Source: Sebang, Petra analysis
Market Cap
64,075 67,654
33,297 903,191
96,112 67,654
16,648 922,028
293,228
609,964
293,228
628,800 296,000
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44,800 Won
Industrial
11,345 Won
3.9x 44,222 Won 1.0x
90 billion Won*
279 billion Won 30 billion Won 2.2%
* US$82 million
50,000
40,000
30,000
20,000
10,000 12/31/09
6/30/10
12/31/10
6/30/11
12/31/11
6/30/12
12/31/12
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Investment Thesis
The Company is one of Koreas leading manufacturers of excavator/tractor parts The Company maintains strong business relationships with its global customers, including Volvo, Caterpillar and Doosan Infracore and is poised to benefit from the seeming recovery of investment activities in Asia
Daechang Forging
There exists a catalyst where the Company can improve shareholder value by reorganizing the complex ownership structure of its subsidiaries and affiliated companies
Shareholder activism can expedite the value unlocking process if the controlling shareholder (i.e., the founding family) is slow on making necessary changes
The Company is exceptionally cheap, trading at 3.9 times its 2012 earnings, implying minimal downside risk (even without activism) The Companys current market valuation is significantly discounted compared to its peers in the industry
Attractive Valuation
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Founded in 1955, the Company is one of Koreas leading manufacturers of excavator/tractor parts
The Company has a long track record in the industry as the Company is one of the first companies to manufacture excavator/tractor parts in Korea
The Company is 44.0% owned by the founding family (including its specially-related parties) and is now run by the 3rd generation son
(Unit: million Won)
Sales 249,800
% 89.5
Ownership Breakdown
Automobile Parts
19,043
6.8
45.2%
Others
10,282
Total
279,125
100
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The Company manufactures excavator/tractor parts which include links, roller assemblies, track shoes, track chains, seals, pins, bushings, bolts and nuts
Known for its strong relationships with global customers, including Volvo, Caterpillar and Doosan Infracore, the Companys exports to Asian countries account for 60% of its sales
The Companys presence in the aftermarket has a stabilizing effect during the economic downturn
Main Products Customer Breakdown
Volvo 27% 40%
<Track Chains>
19%
7%
<Track Shoes>
Source: Daechang Forging
Others 7%
<Links>
<Roller Assemblies>
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Income Statements
2008 2009 164,216 -19.82% 152,804 93.05% 11,412 6.95% 4,263 2.60% 7,148 17.10% 7,228 4.40% 3,485 2.12% 2010 263,234 60.30% 243,334 92.44% 19,900 7.56% 4,915 1.87% 14,985 19.80% 15,092 5.73% 12,754 4.85% 2011* 338,129 28.45% 304,979 90.20% 33,150 9.80% 5,595 1.65% 27,556 20.10% 27,663 8.18% 19,535 5.78% 204,808 182,285 89.00% 22,523 11.00% 4,759 2.32% 17,764 15.60% 17,841 8.71% 3,989 1.95%
(Unit: million Won) 2012 279,125 -17.45% 243,823 87.35% 35,302 12.65% 5,115 1.83% 30,188 22.60% 30,289 10.85% 22,689 8.13%
Sales % Growth Cost of Sales % COGS/Sales Gross Profit % Margin SG&A % SG&A/Sales Operating Income % Margin EBITDA % Margin Net Income % Margin
Valuation
(Unit: million Won; thousand US$) Won US$ 19,000 10x 190,000 17,273 10x 172,730
* From year 2011, financials are prepared in accordance with K-IFRS US$1 = 1,100 Won Source: Daechang Forging, Petra analysis
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The Company trades much cheaper than its peers in the heavy equipment parts industry whose valuation has been already depressed due to the recent global economic slowdown
Industry Peers Multiple
(Unit: billion Won)
P/E EV/EBITDA 5.9 6.2 6.6 7.6 30.4 5.6 5.3 5.4 6.8 12.7
Mean Median
11.3 6.6
7.2 5.6
EV 90.3
Sales 312.3
EBIT 30.7
EBITDA 34.3
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The Companys intricate, complex ownership structure is the reason for market discount; DCF Trek, a private company controlled by the founding family, co-owns all of the Companys subsidiaries without providing any plausible explanation to shareholders
The Park Family
80%
DCF Trek
36%
8%
The Company
Bonglim Metal
The Company: 40% DCF Trek: 46%
Najun Metal
The Company: 40% DCF Trek: 46%
Dongchang
Forging
DCF Trek: 40%
Sunway
DCF
DCF Trek: 30%
The Company: 20% The Company: 40% DCF Trek: 32% DCF Trek: 47%
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The Company can improve its ownership structure by acquiring all of DCF Treks equity stakes in its subsidiaries by merging with DCF Trek, which will eventually increase the transparency and shareholder value of the Company
The Park Family
80%
36%
DCF Trek
8%
Merger
The Company
Bonglim Metal
Najun Metal
Dongchang Forging
Sunway DCF
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Valuation
Shareholder Activism
Market Cap
Market Cap
43
Intrinsic Value
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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 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
To hold more than 0.5% (0.25%)* of voting Request for dismissal of director/ shares for at least 6 month without interruption statutory auditor
To hold more than 0.1% (0.05%)* of voting shares for at least 6 month without interruption
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 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
Representative suit
To hold more than 0.01% of voting shares for at least 6 month without interruption
To hold more than 3% of voting shares and to provide a 6-weeks notice prior to the shareholders meeting
* ( ) is applicable to any public company whose shareholders equity is more than 100 billion Won at the end of the most rec ent fiscal year
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V.
Conclusion
Conclusion
Many
Korea
Korean
Korea
shareholders
The
Contact Us
Petra Capital Management
9F, Anwon Bldg. 14-15 Yeouido-dong, Yeongdeungpo-gu Seoul, Korea 150-871 Telephone: +82-2-3774-0978 Fax: +82-2-783-0079 Email: [email protected] www.petracm.com 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 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 Capital Management operates rules, policies and procedures, including the deployment of permanent and ad hoc arrangements/information barriers within or between business groups or within or between single business areas within business groups, directed to ensuring that individual directors and employees are not influenced by any conflicting interest or duty and that confidential and/or price sensitive information held by Petra Capital Management is not improperly disclosed or otherwise inappropriately made available to any other client(s). Neither Petra Capital Management nor any of its affiliates, 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. 2013 Petra Capital Management. All rights reserved. Petra Capital Management specifically prohibits the redistribution of this material and accepts no liability whatsoever for the actions of third parties in this respect.
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