In this exclusive article, Gabriel Sacks, Lead Manager of Aberdeen Asia Focus, shares his expert insights on South Korea, focusing on investor perceptions of the nation.
Released in 2003, Oldboy is often credited with sparking global interest in South Korean cinema. Critics now routinely tout it as one of the greatest films ever made. Yet many Western viewers remember it simply as the movie in which the central character eats a live octopus.
The scene in question required four takes. In other words, it required four octopuses. Asked if he regretted putting his leading man through such an ordeal, director Park Chan-wook stressed that his sympathies lay with the meal itself rather than with the person tasked with consuming it. You may now feel strangely inclined to fire up YouTube and bear witness to this infamous spectacle. Before you do, though, let me quickly explain why the same mindset that shapes many film-goers’ recollections of Oldboy also influences many investors’ perceptions of South Korea.
It is basically a matter of looking beyond the obvious. Just as a gratuitous display of mollusc-munching might blind an audience to a film’s finer nuances, the highest-profile businesses in South Korea can divert attention away from the other success stories driving the market to new peaks. In particular, South Korea’s household names persistently obscure the appeal of the country’s smaller companies. Even the investment analyst community repeatedly falls prey to this failing. Why dig deeper when the likes of Samsung and Kia keep dominating the conversation?
I should concede at this point that a number of our Asian funds hold Samsung. They also hold another South Korean producer of High Bandwidth Memory chips, Hynix. Demand in the AI supply chain has been a significant factor in South Korea’s impressive performance of late. Yet the fact is that many of the most promising long-term growth stories are to be found further down the market-capitalisation spectrum and away from the headlines. Here are four examples.
- Hansol Chemical
Alongside AI, what might be broadly labelled “resilience” has become one of the biggest investment themes of our age. Essentially a matter of future-proofing, it encompasses considerations such as energy, defence and security.
In South Korea, as in any market, “picks-and-shovels” investments can hold the key to profiting from this mega-trend – not least in technology-related value chains. Hansol Chemical, whose product range includes components for electric vehicle batteries, is a good illustration of a business whose role in underpinning progress is crucial yet widely unrecognised.
2. Hyundai Marine Solution
Hyundai is one of the few South Korean conglomerates that most investors would be able to name, yet the chances are that they would be thinking only of the car-making element. The reality is that Hyundai has many faces, several of which are arguably more interesting than the go-to option.
Take Hyundai Marine Solution, which helps maintain, repair and refit ships around the world. With 50,000 purchase orders and 80,000 deliveries a year, it offers high returns and strong cashflow. Maybe more investors would take notice if they knew some ship engines are now being repurposed as power sources for AI data centres.
3. Hyundai Electric
Elsewhere in the Hyundai empire, Hyundai Electric manufactures transformers and other electrical equipment. Many of its products hardly qualify as exciting – less still as jaw-droppingly cutting-edge – yet they are fundamental to the ongoing buildout of new energy grids and AI infrastructure.
The company’s reach extends far beyond Southeast Asia. Hyundai Electric supplies transformers to more than 70 nations and even enjoys a majority market share in the US, where it established a subsidiary in 2011. The business is also a major player in South Korea’s embracing of wind power.
4. Classys
Rooted in South Korean approaches to skincare and cosmetics, the “K-beauty” craze is spreading around the globe. Classys, which operates in the burgeoning aesthetics arena and is especially known for its non-invasive ultrasound procedures, has been a notable beneficiary.
The company’s principal export markets to date have been Japan and Brazil, but inroads into the US and Europe are increasingly being made. With many of its offerings around five or six times cheaper than their American counterparts, revenues have been growing at an annual rate of approximately 30% in recent years.
Conclusion
How might investors identify opportunities like these? As hinted earlier, it is usually a case of going the extra mile – both figuratively and literally. A fund like ours relies on in-depth research and on-the-ground insight to unearth the hidden gems in South Korea and in Asian markets as a whole.
Of course, looking beyond the obvious demands times and energy. Make the effort, though, and you are likely to find that the investment picture you discover – unlike that hapless octopus – is a pleasure to digest.
Gabriel Sacks
