Description

Daishin Securities is a top 10 Korean broker-dealer with its fingers in a number of other businesses (real estate, asset management, savings bank among others).

There’s not a lot to say about the business - it’s exactly what you’d expect from a family-run Korean broker/financial conglomerate.  It is conservatively run and does not earn its cost of capital.  It generally makes net income of between KRW100bln and 125bln (and rising slowly over time) on equity of KRW2.7trln (KRW2.5trl tangible).  Daishin has not lost money since 2002.

So, boring, conservatively managed and financed financial business halfway around the world generating a 4-5% RoE - why should anyone care?

Because it is extraordinarily cheap and provides a high payout ratio.

Korea being Korea, the accounting procedures are extremely weird.  Before we get into valuation a few things to go over:

1. Share Count:

Daishin has 3 share classes: Common, 1st Preferred, and 2nd Preferred.  Daishin has repurchased very substantial portions of each.  Frustratingly, Bloomberg does not adjust the market cap for the repurchased shares and they seemingly cannot be persuaded to do so.  Further, Daishin’s two preferred share issues, which can most simply be thought of as non-voting common shares are excluded from Bloomberg’s market cap calculation. In reality, there are ~66m shares outstanding.

2. Net Income:

In calculating Net Income Blomberg (at a minimum) subtracts preferred dividends despite the fact that the preferred shares participate fully in the earnings of the business and pro-rata in its dissolution/sale.

With that in mind here are the valuation metrics with appropriate adjustments for the economic reality:

Note: Preferred shares with tickers ending in “5” are entitled to the common dividend plus 1% of “par” value which is almost always KRW5,000 (thus 1% being an additional KRW50).  Other preferred issues are generally just entitled to the common dividend.

Most importantly, the Company is paying out the bulk of its earnings in dividends providing a nearly 10% yield.  In addition, the Company routinely buys back stock (principally the common) so there is additional “current return” benefit (i.e. your valuation-static return is close to the earnings yield than the RoE).  In general, I peg the current return (dividends + buybacks) at ~12% (on average - some years they buy back ~5% of the stock, others none) with a further ~1% return from retained earnings.

In the intermediate term, the Company is trading ~30-40% cheap vs. its historic dividend yield (though, to be fair, the payout has risen so some discount makes sense - though not this large given the crummy RoE and thus return on retained earnings) so there may be some upside to that ~12% annual return over the coming quarters/years.

Longer-term, the brokerage business is arguably sub-scale and a possible acquisition target (past sales of brokers have gone off at a premium to book).  That said, I don’t foresee a sale anytime soon as a 42 year old third generation family member recently took over as Chairman.  

What is interesting to note, however, is that unlike most Korean companies, the controlling family doesn’t have particularly extensive ownership.  In aggregate, they own ~18-20% of the voting shares.

So, in sum, you get a 9-10% dividend yield from a highly stable, conservatively financed business.  At a constant payout, this yield should be growing at inflation + ~2% (from buybacks and retained earnings) for a total valuation-static realish return of ~12%.  The current dividend yield is at the high-end of the historic range so there is some prospect for a revaluation in the intermediate period (+~30-40% possibly).  You also have a kicker if this thing ever gets sold which would probably result in a ~3-3.5x. That is, I think an investment in Daishin should return ~12% + inflation , has the prospect of a ~30-40% revaluation in the medium term, and the prospect of a triple in the long-term.  You are also buying assets denominated in a currency that remains quite cheap vs. the Dollar (not far from its all-time lows on both the unadjusted and GDP-adjusted big mac index).

In terms of which security is most attractive I think it matters on the type of account buying.  If taxes are not a consideration I prefer the common as the preferreds are trading at a historically small discount (there is ~10% downside in the prefs to their historic discount and I suspect you will get a chance to swap at a 10% larger discount before the additional dividend makes up for that 10%) as well, you get more liquidity in the common.  If you are a taxable investor I think either preferred is good and the decision should be driven by your liquidity needs (pref 1 slightly more expensive but with ~3x the liquidity).

Risks:

The major risks to me are:

• The Company expands into value destructive fields.  There is some evidence that this might occur: in 2017 the Company started buying Manhattan real estate - while Covid was, obviously, impossible to predict at that point in time it never struck me as a good idea and, among other things, the Company ended up buying interests in both an office building at 400 Madison Avenue and the Times Square Theater.

• The family is buying back stock and paying high dividends to buy time for total control.  The Company increased the dividends some years ago after some pressure from an investor group.  They also began buying back stock more aggressively (after a hiatus from buybacks) and have been, notably, focusing on the common shares.  It is possible the family saw their vulnerability and decided to behave appropriately until they could consolidate their position and ownership of the voting shares.  That said, at the current pace, it will probably take a decade or so before the family’s position is secured.

Catalyst

No catalyst - need to be patient but with this dividend yield time is its own reward.