Description

Summary

NICE Holdings was previously written up by timothy756 in late ‘20 and that writeup is worth reading for additional background. Hopefully this post is additive to your understanding of the opportunity. 

NICE Holdings is a Korean holding company focused on financial infrastructure and manufacturing. 

NICE trades at a ≈ 60% discount to its asset value despite having compounded value well in excess of market rates over-time and owning a collection of high quality and industry dominating businesses, many of which are themselves undervalued. Return of capital is also improving with a large buyback program and increasing dividends.

We believe NICE's existing businesses can generate > 10% returns through a combination of organic growth and capital returns. This business growth, in addition to NICE’s capital allocation (new investments and capital return) should lead to double digit compounding in intrinsic value per share over time and absent a re-rating would lead to acceptable, if unspectacular returns.

While there is no hard catalyst for a re-rating, NICE is buying back stock, increasing dividend payouts and focusing more on investor outreach. It also has a bunch of hidden assets that are implicitly negatively valued today (they are growth businesses with negative earnings that are buried within the larger segments). Over a long period of time, as the businesses continue to grow, capital returns increase, NICE (hopefully) reaches out to more Western investors or one of the venture bets gets realized, we believe it is more likely the discount will shrink rather than maintain or grow. 

Excluding the venture / growth bets, we think NAV / shr today is around 30,000 KRW vs a share price of 12,600. Growing at 10% per year, we believe it could approach around 50,000 out 5-years + ≈3,000 in cumulative dividends.

At a 40% discount, it is a low 20s IRR, at a 20% discount, it is a 30% IRR. We don’t know what the right discount is or where it will trade, but we will endeavor to provide some detail about how we think through this component of the investment below.

Main Businesses & Current Valuation

NICE’s primary businesses are mostly publicly listed, but they also have two substantial privately owned assets, NICE Investor services (a credit rating agency) and KIS I&C (an offline merchant acquirer). Sorry for crappy formatting, this is a screencap as I couldn’t get the table to format well on Google Docs.

While we go into more detail on the main businesses in the appendix, it is worth quickly giving a summary of how we think about them.

We believe NICE Info Services is a wonderful business with great growth prospects and competitive position. NICE Investors Services is also a very strong business in a growing market, albeit one with more volatility. NICE I&T and KIS I&C are fairly similar businesses that are both involved in payments processing for Korean merchants. While this is a much tougher industry than in the US (MDRs are regulated by the Korean government at a very low level), NICE is the strongest player in the industry with the most scale and has managed to continue to take share and go through repeated government fee cuts. NICE Infra is a real estate business. 

These combine for about 70% of NAV and we think are high quality, growing and dominant businesses that we understand fairly well. 

This fits with the NICE investments philosophy of only wanting to be in businesses where they can be a dominant #1 and a key part of the value chain.

ITM is a semiconductor business active in the POC and PMP business. They make a component that regulates the voltage/electricity in small electronics and prevents overheating which is a contributor to battery life and performance. This and LMS make up the bulk of the rest of the value and are not businesses in which we have strong conviction, though do believe it is plausible that ITM’s earnings grow substantially over the medium-term (as management forecasts) as orders fill their new production plants allowing them to get operating leverage and return margins to near historical levels.

Look-Through Earnings 

While not necessarily the right thing to focus on given different business prospects for different divisions, we also look at NICE’s valuation on a look-through earnings basis which basically just takes their pro-rata earnings of the public stakes + their earnings from the private stakes - holdco costs and interest. 

On this basis, we believe FY22 look-through EPS for NICE is about ≈1,900 KRW/shr (6.5x PE) including almost no contribution from ITM (we assume about 5Bn KRW in net profit for ITM in FY22 vs >40Bn in 2019 despite significant interim capacity expansion). If ITM were to return to its prior level of earnings production, it would add about 400KRW/shr in EPS to NICE Holdings.

We don’t give credit for this. Our FY27 “out year” EPS estimate of 2,900 has ITM returning to 50% of FY19 profits. At 2,900, the forward PE is around 4x or 3x including cumulative dividends. 

It is not that we don’t believe they have a unique technology or market position, actually the diligence we did indicated they had a pretty unique production process in the niche of small device PMPs. That said, we don’t have high conviction in the outcomes for ITM so don’t want to underwrite a recovery until we see signs of it.

Historical Discount & NAV Compounding

Interestingly, we do not believe this has been a perpetual discount to NAV situation. While it’s hard to get too much detail given no analyst coverage, piecing together old filings as well as NAVER message boards (the closest thing to the pulse of how this was valued years back) we can conclude that it was once a pretty well liked stock, particularly during the period when NICE Info’s share price was on a massive run from 2013 to 2019.

We show our best attempt at an estimate of historical NAV with and without ITM (really only matters in 2017-2018 as prior to that was likely thought to be worth nothing and following that it had IPO’d).

Most of the value growth was driven by earnings growth and multiple expansion at NICE Info, earnings growth at NICE Investor Services and the IPO of ITM.

All that is to say, at many points in its history, NICE was not a hated or totally ignored stock and price more or less approximated value. We believe sentiment changed in the last few years with the passing of Mr Kim Kwang-Soo and ascension of Wonwoo Kim, his son (and associated potential tax selling consequences associated with it), the less robust share price performance of NICE Info and the IPO of ITM which complicated the story further. There is also a general distaste towards holding companies in Korea today, which for the most part might be valid given the track record of many of them, but we think unfairly penalizes NICE. 

Since 2012, admittedly a weaker point in the cycle for Korean equities, NICE’s NAV/shr + dividends compounded at a 12-13% CAGR. While it may seem that 2012 is cherry picked (it got very hard to build it back to prior peak in 2007 and I don’t think would meaningfully change the analysis) today as an endpoint is probably quite punitive given the significant undervaluation of many of their publicly traded stakes. If we were to run this same analysis from 2012 to 2019-2021, you’d come to 15-20% annual compounding.

In summary, we think that these are primarily good to great underlying businesses and NICE management has mostly invested shareholder capital well over-time. 

Brief Company History

NICE (National Information & Credit Evaluation) was founded in 1986 with the original businesses being consumer credit information (similar to Experian) and credit ratings.

Over the next 20-years, NICE moved into other financial infrastructure businesses such as merchant acquiring (1991), ATM network management (1996) and corp credit bureau (2003) with a philosophy of becoming the dominant, high quality provider in all its segments.

Additionally in the 2010s, they began a smaller investment program in new areas like manufacturing (BBS, ITM, LMS) and early stage growth (Birdview, OKPOS, Vietnam etc).

NICE listed in 2004 and over-time IPO'd significant parts of their business in order to allow the Holding Company to remain lean and create separate incentives / reporting lines for the different divisions, generally maintaining a 30-40% stake.

This included NICE I&T and Info Services (early 2000s), NICE TCM (2006), NICE D&B (2011), and most recently ITM (Late 2019).

While not the founder, Kim Kwang Soo became the driving force behind NICE when he became the largest shareholder in 2005.

At the time, it was still a relatively small business (200Bn KRW in revenue vs. 2.5T today) but he and his team spearheaded their expansion over the next 13-years until his unfortunate passing in 2018.

His son, Kim Wonwoo, now the scion of the family (and ≈49% owner) is currently learning more about the business as a board member and chief digital innovation officer. In our discussions with him, we have found him to be honest, humble and eager to learn rather than trying to take control before he's ready. He has also been focused on continuing to modernize the culture and allow employees to spend a portion of their time thinking of new ideas and businesses rather than just processing tasks. One of his first major initiatives was changing the review cycle to reflect this more subjective element as opposed to just annual financial targets.

From what we have heard, for a company of its size, NICE is one of the top rated destinations of university graduates given its corporate culture, well treated employees and interesting work environment. We never actually saw this survey, but have heard that they were rated as the #1 destination for university graduates for companies their size. 

Do They Care about Shareholders?

Overall, we think they do care about shareholders and the stock price in the long-term. This is not a company run by John Malone, and we’re not trying to imply that it is. That said, it is not a Korean conglomerate that is run to grow in size with no focus on value creation.

Let’s get the biggest one out of the way - through all our research, calls, channel checks etc, we have seen no evidence of impropriety, them stealing from the company or transferring value out of the company. On the contrary, their reputation is for acting with integrity, being a great place to work and caring about shareholder value. On the last point, calls with formers indicated that there was always a focus on shareholder value but not on investor communication. The thought was let’s just generate value and investors can come along for the ride. Under Wonwoo Kim, shareholder communication and transparency has been more highly emphasized.

After going through years of financials, conversations with the company and former employees, we are confident that apart from some small things, they have not acted unfairly towards the company and are an honest team that cares about shareholder value. They also own 48% of the company so our economic incentives are aligned.  

As mentioned in the previous section, they have compounded value significantly over time through good investments and business growth. It is impressive how many aspects of Korean financial infrastructure they came to dominate or be a major player in (Credit Ratings, Credit Scores / Credit Bureau, Merchant Acquiring) over the last 20-years. The ITM investment was also large and has generated almost a 5x return in 8-years based on its current trading price.

There are tons of small bets they have made and I am sure some have not gone well, but they are harder to track given the disclosures. They have also made some bigger bets that didn’t go well (such as BBS), but to their credit, didn’t endlessly throw money at it when they realized it was a lost cause and shut it down.

Wonwoo Kim (the new scion of the family) went to University in the US and seems to bring a refreshing mindset to the company. While he does not run the company, he is on the board, the largest shareholder and we believe has significant influence. That said, despite having been at the company for several years, he has been mostly learning the different businesses rather than coming in swinging. We appreciate that. Calls with former employees describe him as willing to learn the business from the existing team and humble. We have found the same in our conversations with him.

Whether or not he has the business building chops of his father remains to be seen, but nothing we have seen from him suggests he wants to take the company in a drastically different direction and is respecting the foundations of the company and the senior cadre of business leaders that worked with his father for 20-years.

Another area he has had an impact on is capital returns and IR communication. In the past 5-years, DPS has gone from 130 to 375 due to earnings growth and a higher payout ratio. Additionally, after having not really done any meaningful buybacks for almost 8-years, they started buying significant amounts of stock back in 2021. At the end of 2020, they had about 38M shares outstanding, or 20M shares of float. Since then, they have repurchased 2.2M shares, including about 1.8M year to date. We think these are both meaningful positives for intrinsic value compounding and a signal that management cares about value creation. 

As is often the case with stocks trading at 60% discounts, there is a bit of a wrinkle here. The higher dividends are likely partially motivated by Mr. Kim’s need to pay inheritance taxes on his acquired shares (though this ends in the next 1- or 2-years) and in our conversations with management, they have described the share repurchases as being both shareholder value enhancing and stabilizing the share price following selling from a large institutional holder.

We don’t think share price stability should be the goal of a repurchase program but also do think they are genuine in their desire to enhance shareholder value and recognize the stock is deeply undervalued and are taking steps to improve it.

Finally, for a small Korean company, they have a great IR team that is responsive and knowledgeable, have started publishing helpful English financials and presentations which do a good job telling the story. We believe Wonwoo Kim has been a driving force behind this and as their IR efforts ramp and capital returns continue, we believe the shares should at least partially re-rate over-time.

Main Risks / Uncertainties 

1. Corporate governance goes backwards

While we believe NICE is materially undervalued, our investment is contingent on steadily improving capital allocation. Halting their buyback, ceasing to raise their dividend or going backwards on new transparency initiatives would be thesis break

2. Their businesses are highly regulated introducing political interference risk

Many of their businesses operate in highly regulated industries where they possess personal identifiable information (PII). Korea is very sensitive about protecting this information, any issues around data breaches or misappropriation of data could severely harm their core businesses

Their payments businesses have faced continuous pressure on their profitability as the government has reduced merchant discount rates every few years. We believe this has caused consolidation in the industry which in the long-term will accrue to NICE's benefit as they are one of the last scale players standing and pricing pressure has started to ease, but in the interim can cause drops in profitability

3. Conglomerate Risk

As with any conglomerate, the disclosures per division are relatively limited and the level of understanding you can have about each sub-business is less than with standalone entities. To be honest, we feel like our understanding of each individual business is less than for other investments where the entire bet is on a single business, but at least the financial segments here are relatively analogous to global business models we understand

4. Investing in Korea as non-Koreans

We are cognizant of the fact that as non-Korean speakers we are at a significant informational disadvantage vs. local investors

Appendix: More Detail on Main Businesses

If of interest, we can go over the key businesses in greater detail in the comments, but briefly on the 4 main businesses:

1. NICE Info Services

They are the dominant consumer credit bureau in Korea with 60% market share (the other player is KCB, a JV of a consortium of banks). They are viewed as the highest quality player in the industry. While both they and KCB have access to much of the same data, the way the data is cleaned and analyzed and built into usable solutions for clients is superior at NICE vs KCB. Additionally, KCB has limited exposure to the growing alternative lender and subprime space where NICE dominates. 

They are a very small part of the cost structure for banks (think around $1-2M a year for a key input into tens of billions of credit decisions) and once their solution is integrated into your workflow, they are very hard to remove.

NICE Info has grown revenue and EBIT at a 10% and >15% CAGR respectively since 2014 on the back of increased credit check and solutions usage, particularly for subprime consumers which is an underdeveloped segment in Korea despite slow growth in their smaller corporate credit bureau business. 

The business today trades at 12x FY23 headline earnings and has almost 25% of its market cap in net cash.

The only knock on this business is that 15% of their profits come from their corporate credit bureau business which is more competitive, less integrated into workflow and experiencing declining profits. Overall we think this is a great business and the shares are significantly undervalued relative to the historical and prospective growth prospects.  

2. NICE Investor Services

This is a credit rating business focused mostly on domestic bonds and loans for corporates, structured products and government. They handle local currency debt as the dollar debt of Korean companies is rated by the big-3.

Like elsewhere, this is a three player market with NICE, Korea Rating (majority owned by Fitch) and KIS all having similar market share around 33%.

We have heard this is a rational market environment from a pricing standpoint and overall bond issuance volumes have grown 5-8 % in Korea in the last half decade. 

NICE’s revenue and profits have grown at 7% and 14% since 2014 (albeit that was a trough year) on the back of market growth and new initiatives like ESG certifications

The downside of this business is that it is volatile with issuance volumes (just like S&P and Moody’s) and there is high operating leverage. Also, while they are very strong domestically, they are less than a minnow globally so not nearly as high quality a business as Moody’s and S&P. That said, they are protected domestically and have a great niche - we think this is a high quality business

3. VAN Businesses (NICE I&T and KIS I&C)

These are merchants acquiring businesses. They are similar except that I&T is larger and also includes a PG business. 

The industry structure is very different than the US, so this is not the “Fiserv of Korea”. In Korea, the MDR is regulated by the government and subject to a review (i.e. going down) every 3-years (or sometimes more frequently as it is popular with small merchants). Historically, the way it rolls downhill is that the credit card companies cut back on rewards and marketing and also push down on the VAN companies who are pretty interchangeable and didn’t have the ability to pushback.

MDRs (scheme fee + acquiring fee + interchange) are already low in Korea at 0.5% for <$0.3M in card volume and the highest tier is 1.6% for large merchants. To be clear, this is the MDR, not just interchange. The 2019 MDR cut was very steep and cost the industry substantial revenues. 2022s was significant, but about 35-40% less severe than 2019 as there is not much fat left to squeeze in the ecosystem (Card ROEs are low, other than two mid-sized competitors, most VAN players except NICE are close to breakeven or loss making - something you can confirm using DART filings that even private competitors are required to file).

So while this backdrop sounds unattractive, I think it has created a relatively good position for NICE as by far the largest player with 28% offline acquiring market share, up from 16% in 2015, though this included a 3pts boost from M&A. The next largest players are low double digits. With continued share gain and likely a more benign pricing environment going forward, we believe this business can grow over-time, albeit with a bit of a buzz-saw pattern from triennial fee cuts. Additionally their PG business which is 20% of earnings is growing revenue in the high teens and should support growth

Most importantly, this business is ridiculously over-capitalized 230Bn KRW of net cash on the balance sheet (net of merchant payables) against a 260Bn market cap for a 6x headline P/E or <1x ex-cash. Management has described the cash build as being targeted at future VAN rollups and PG deals (some of which they have already done) and they initiated a small buyback in September ‘22 (better than nothing!). We don’t think you should look at this as 1x ex-cash, but we do think a portion of the cash will go towards earnings generating M&A or buybacks.

All-in, we think this is a tough industry but these are likely to be among the last players standing, should be share gainers and able to grow well. With the cash, we think NICE I&T is significantly undervalued.

4. ITM

Described a bit in the above paragraphs, a semiconductor manufacturer involved in power supply regulation for smaller electronic devices. Claim to have a unique product in the PMP, a more expensive but higher performance and smaller voltage regulator that is being adopted by high end smartphones, wearables and earphones. 

From 2017 to 2019 was a DD EBIT margin business on sales a fraction of today’s size. A combination of significant capacity expansion into COVID, input cost inflation and delays in purchase orders have led to a situation where the company is earning very little profit despite significant sales growth (>25% this year, >50% higher than pre-covid).

We have found it hard to get a lot of good diligence done on this one given the niche application and fairly limited customer set who are quite tight lipped. They talk about 2.5T of sales and 10% OP margins by 2027 via a combination of existing product wins ramping and new business. That would be 250Bn of OP against a market cap of 700Bn. That said, we have no visibility or insights into the credibility of this target and think the range of outcomes for value is wide from probably about half of today’s level to significantly higher.

Catalyst

Ongoing business growth, buybacks, dividends, investor outreach