If your list of South Korean companies stops at Samsung, Hyundai and “that one that makes beauty products,” you’re not alone, and you might be missing out. Gabriel Sacks, Co-Manager of abrdn Asia Focus plc, takes us on a tour beyond the usual suspects, revealing how political change, corporate reform and a few brilliantly obscure businesses could make South Korea the next big thing in your portfolio.
Here is a quick challenge for you: name five South Korean companies. I would hazard a guess that most people – and even most investors – might come up with two or three. Can you complete the set? Samsung is probably the go-to, not least because you may own one of its mobile phones. Kia and Hyundai might also feature on the list, not least because you may own one of their cars.
And then… ? Pretty tricky, right? All credit to you if you can somehow pluck another couple out of the air, but it seems safe to suppose relatively few readers would be able to rattle off five with ease. In turn, it also seems safe to suppose that in-depth familiarity with South Korean stock markets is not exactly widespread. There are two reasons in particular why this could be the case right now.
The first is that the majority of South Korean businesses rarely gain the attention of investment analysts. The aforementioned big players are routinely “eyeballed”, but much of the market-capitalisation spectrum – especially the lower end – is customarily ignored. This problem is common throughout Asia. It can represent a significant issue for many investors, who remain unaware of the myriad opportunities to be found among the region’s smaller companies.
The second factor at play here is that South Korea has recently experienced a period of marked political turmoil. The trouble began last December, when the country’s conservative leader, Yoon Suk Yeol, sought to impose martial law. The move sparked public protests. Yoon was eventually impeached and removed from office. A new president, Lee Jae-myung, of the left-wing Democratic Party, was elected in early June, bringing to an end almost six months of tumult and uncertainty.
The bad news about this saga was that South Korean markets slumped in the face of nearly half a year of upheaval. Needless to say, this did very little to stir further investor interest.
The good news, though, is that calm has at last been restored. Lee now appears to have a largely clear path towards implementing his agenda, the main elements of which include increased spending, a reinvigoration of consumer confidence and expansion of the nation’s advanced manufacturing facilities.
Crucially, these goals are likely to mean a renewed focus on something else that many readers might struggle to name: the Corporate Value-up programme. The revival of this initiative can only add to South Korea’s investment appeal.
Shareholder value and smaller companies
Corporate Value-up was inspired by far-reaching governance reforms in Japan. It involves what South Korea’s Financial Services Commission has described as “fundamental changes in our capital markets”[1].
As in Japan, the aim is to encourage listed companies to raise dividends, buy back shares and generally pursue policies that “place a priority on shareholder value”[2]. Importantly, smaller businesses are likely to be better positioned – not to mention more willing – to accomplish these objectives.
The thorny subject of cross-shareholding is key here. A controversial phenomenon that has long been rife in a number of Asian economies, it revolves around companies holding shares in their business partners.
Cross-shareholding is often centred on ownership models that are dominated by extremely wealthy families with no incentive to shake up the status quo, partly due to very high levels of inheritance tax. In these instances, in all likelihood, Corporate Value-up could have limited impact.
By contrast, smaller companies are less likely to be burdened by such structures. But the pivotal question is this: how is it possible to learn of the brightest prospects in the small-cap space if, as noted earlier, coverage by investment analysts is so low?
In our view, this is where an on-the-ground presence and a commitment to direct engagement enter the reckoning. In South Korea, as in every Asian market, a first-hand grasp of the places, people and practices at the heart of investment decisions can go a long way towards shaping genuinely informed choices.
This is how, for example, our fund came to hold Leeno Industrial. A classic behind-the-scenes enabler of technological progress, the company produces testing equipment for printed circuit boards, semiconductors and other components vital to the ongoing digital revolution.
Park Systems is another hidden gem that escapes most investors’ gaze. It specialises in industrial-use atomic force microscopy, which is a high-resolution imaging technique that can visualise and measure surface properties at the nanoscale level – an essential requirement as miniaturisation continues to accelerate.
Classys, which operates in the fast-developing aesthetics arena with its non-invasive ultrasound procedures, also features among our South Korean holdings. With revenue growth currently hitting around 30% a year, the business already exports to Brazil and Japan and is set to break into Europe and the US soon.
These companies are not defined by complex underpinnings and the threat of resistance to positive, lasting transformation. They are instead characterised by excellent management, a determination to keep innovating and scope for long-term growth.
The likes of Samsung, Kia and Hyundai obviously have their own attractions. But finding the most promising investments in South Korea – as in almost any market, whether in Asia or elsewhere – usually entails looking beyond the household names that immediately spring to mind.
Gabriel Sacks is Co-Manager of abrdn Asia Focus plc. He recently featured on the second episode of Wealth DFM Talk, our brand new podcast which unpacks the latest developments in the world of wealth management.
[1] See, for example, Financial Services Commission: “Active support to be provided to promote voluntary efforts of listed companies in enhancing their value”, February 26 2024 – https://www.fsc.go.kr/eng/pr010101/81778?srchCtgry=&curPage=&srchKey=sj&srchText=&srchBeginDt=2024-02-01&srchEndDt=2024-02-29.
[2] Ibid.
