Description

The Korean market trades at less than 10x earnings and if you bought the index 15 years ago you made no money in a very volatile way.  It is an especially hard market for foreign investors to buy – the company I am presenting here isabout $10 billion but has no form of an ADR that I am aware of for a U.S. investor to invest.  Very few companies report in English (and in full disclosure early I do not speak Korean and have not translated anything nor met with anybody who does).  That sounds to me like a much more likely place to find undervalued stocks than the U.S.

This idea starts with the #2 automotive electric battery maker in the world.  LG Energy Solutions is GM’s JV partner and they have many other OEM partners all over the world.  Volkswagen among others in Europe, even Tesla in China. 

The market cap of the leader, CATL, is about $180 billion.  The stock has not dropped like other EV “investments” but I make no argument about its valuation except to contrast it with the number 2 player.

The fairly close in share #2, LG Energy Solutions is a January sub-IPO which has a market cap of less than half of that.  I am going to work in trillions of Korean won from now on.  Around 1,300 to the US dollar so think about billions of USD.  LGES has a market cap of 94 trillion won (about $70 billion) implying a huge discount to CATL.  I don’t know which of those valuations, if either, is right, but we are just starting to peel this onion.  We do have a view of the battery business that a) it is going to grow a lot, and b) ROIC is likely to correlate with size and scale and we now know who the big players are and LG is clearly one of them.

81.8% of LGES is still owned by LG Chem after the spinoff of LG Energy Solutions in January.  LG Chem is also listed on the Korean exchange.  This is just one of LG Chem’s businesses and not where they make their money yet.  They have a petrochemical business which is decently profitable but almost totally irrelevant to this thesis.  Its stake in LGES is worth 77T won based on where it trades on the market.

LG Chem’s market cap is 44T won.  Trades at an enormous discount to its ownership in the EV battery company and it has other profitable businesses.  So why aren’t I buying LG Chem?

Let’s peel the onion one layer further.

LG Corp (the stock I am recommending buying) owns 1/3 of LG Chem.  Take just the market cap of LG Chem without even thinking about whether that is itself at a big discount to intrinsic value.  LG Corp’s market cap is about 12.5T won.  Its ownership in LG Chem is worth 14.5 even without looking through to its spinoff holding. 

We are far from done.  Chem is not the only thing LG Corp owns. 

Let’s next put on the table 33.7% ownership of another global company – you probably have their products in your house.  Its my washer and dryer that make cute sounds when they finish.  LG Electronics is a global player in display screens, home appliances and TVs.  The market cap of this company is about 17T won  – LG Corp. owns a third of it.  And that market cap is based on a single digit multiple of earnings.  So this could be undervalued in itself.   So 33.7% of 17, that’s another 6.  So we have found 18.5 now vs. a 12.5 market cap.

But wait, there’s more.  You also get 34% of a listed Korean cosmetics and household goods company.  This one trades at a 25 multiple, but looks like a pretty good business.  The market cap of this piece is about 12, so what’s 1/3 of that?  Another 4.  So far we’ve found about 23T won using LG Chem’s market price, not its underlying holdings.

We’re not done yet.  There is a telecom piece, also listed, that has a market cap of about 5 at 7x earnings multiple and LG owns 38% of that one.  So at market that would be another 2 in the hopper.

And its got about some excess cash and some odds and ends that analysts seem to value at about another 5 or so.

No debt.  So I see something like 29 trading for 12.5.  That’s a hell of a holding company discount for a set of listed valuations that look low in themselves.  Holding company discounts in Europe and other places are 10-30%, not 67%.  The discount was significantly wider than that a year ago, but the listed stocks have come down.  That’s just what stocks in Korea do apparently.  Foreign investors seem to have completely given up on Korea. 

Trades about $30 million a day.  This is not a microcap.

We have limited visibility here but management has done a few things, including the battery spinoff, to try to close the discount.  Their last action was to announce a share repurchase at the parent level – that would be the game changer if they did it decisively, but they didn’t.  That announcement still closed the discount by about 10%.  There is a statement in the annual report about being conscious of the discount and willing to take action.  They’re not Berkshire but they are not brain dead either.

This is no secret.  You can find this same analysis in a number of sell side reports though many of them will tell you all the reasons the stock is not going to go up next week.  I’ve owned it for a year – I am not arguing that it is going to go up next week.

But this is in Korea where sum of the parts valuations go to die.  You will see enormous skepticism in the sell side reports – and clearly on the buy side if its trading where it is – that anything will ever change.  Price targets are based on how the stock has traded recently, with little thought about what would happen if anything changed.

Analysts on LG Corp are using a 60% discount to listed NAV as their target price.  That’s insane.

Just sayin’ this looks like an interesting place to be playing deep value games.  The Korean market looks very cheap on the numbers – the problem for us was lack of disclosure at the ones that look cheap.

We can’t find a sell side analyst who has as their bull case “what if the discount closed to 25%?” which is a typical holding company discount in Europe.  Why can’t that happen – their biggest asset is a highly prized global business.  Or investors could come back to Korea for whatever reason.

This just looks WAY too cheap with a number of ways to win.  And an enormous margin of safety to be wrong and still make a good deal of money.

The views expressed are those of the author and do not necessarily represent the views of any other person. The information herein is obtained from public sources believed to be accurate, reliable and current as of the date of writing.  The author will not undertake to supplement, update or revise such information at a later date.  The author may hold a position in the securities discussed.

Catalyst

Potential for management action to close discount