Description

Overview

Samyung Trading is a $200m market value Korean listed eyeglass lens manufacturer with operations in Korea, China and Vietnam. Samyung’s eyeglass lens business is a 50:50 JV with industry giant EssilorLuxottica. The eyeglass lens business is a fantastic business with high margins, high returns on capital, secular growth trends, recession proof economics, competitive advantages and strong barriers to entry. Samyung is the most egregiously mispriced company we own. The company has no sell side coverage and the equity accounted JV (rather than consolidated) and excess cash hides the business quality from a typical quantitative screen. Despite being one of the highest quality business we own, Samyung trades at 6.6x 2019 P/E with excess cash at both the JV level and the holding company level. In comparison, when Essilor was its own pure-play lens public company prior to merging with Luxottica in 2018, it traded at an average P/E of 26x from 2006-2018.

Samyung Trading also owns a 39% stake in Cubic Korea (021650) and a 100% stake in a chemical distribution business, but these two assets contribute ~5% of Samyung Trading’s intrinsic value, thus we will focus on lens manufacturing business.

Lens Market Overview

The lens market has two vastly different segments. There are commodity lenses and value-added lenses. While there are ~150-200 manufacturers that can make commodity lenses, only four can create value added lenses. Essilor is the industry behemoth with 40-50% market share and 75% of industry R&D spending. Value-added lenses require significant R&D and manufacturing capabilities. While a lens may seem like a simple product to make, it can be up to 25 layers (dust repellance, fog repellence, blue light blocking, scratch resistance, anti-glare, polarizing, etc.) with each layer requiring high yields at the individual manufacturing process level otherwise creating a faulty final product. Additionally, lens thickness (index level) is extremely complicated and very few companies can manufacturer a 1.74 index lens.

Additionally, the competitive advantages and barriers to entry extend beyond R&D and manufacturing complexity. Distribution and relationships are also especially important. Distribution is very fragmented with many independent opticians and optometrists across the global (Essilor works with 300-400K of them) and many different chains. Most importantly, the lens is a small cost to the optician relative to final sale price of a pair of glass. Opticians care about quality and reliability and have sticky relationships with the lens manufacturers. Opticians markup the price of the lens by about 7-8x before selling to the consumer, leaving plenty of margin regardless of whether they are paying slightly more for the highest quality lens. Simply put, an optician would not risk saving $1-2 on a $200 pair of glasses to deviate from a product family that they are familiar with, trust and has worked well for them. Consumers often do not know which brand they are buying, but opticians are keenly focused on providing a high-quality product, because if they do not it will reflect poorly on their practice.

The lens market is a secular grower due to population growth and a rising middle class. Lastly, the industry is typically recession proof with eye ware decisions being driven by needs. In 2009, the JV grew sales by 11% and maintained margins and Essilor grew sales 6.3% and maintained margins.

Essilor’s Experience in Korea and Relationship with Essilor

Essilor’s business structure is different from most other multinational industry leaders in that 16 of their 33 manufacturing plants are JVs with different partners. The structure is the result of M&A to enter new markets and expand into existing territories. Samyung Trading is Essilor’s second oldest partner with their original relationship dating back to 2002. Interestingly, Essilor is the only JV partner that Essilor has partnered with on multiple plants (Korea, China, and Vietnam). Samyung serves as the operator of all three of these plants and we believe the multiple JVs illustrates their strong capabilities.

Essilor entered Korea in 1987 but after years of losses, they sold the business in 1993. Samyung started their lens manufacturing business, named Chemiglas, in 1988 and opened a local subsidiary in China in 1997. By 2002, it was the 2nd largest player in Korea when Samyung sold a 50% stake in Chemiglas to Essilor. They renamed the JV as Essilor Korea. The business today still operates very autonomously from Essilor with ~60-70% of sales sold into Korea and China markets and the remaining 30-40% of sales sold to Essilor for their own distribution. There is no technology sharing agreement and 90% of the profits stem from products that are manufactured and developed at the Essilor Korea level.

 The history in Korea and structure of the arrangement is important as it shows this is not a financial arrangement with a royalty or licensing fee paid by Samyung to be part of Essilor or a contract with some looming expiration or renewal date. The JV is a real standalone business that doesn’t depend on Essilor and doesn’t warrant any discount. In fact, Samyung’s management has indicated that both Samsyung and Essilor have expressed interest in being 100% owners of Essilor Korea, but neither side wants to sell.

 Business Quality/Financials

Since Samyung equity accounts the JV, the financial statements obscure the business quality. The JV files its own financial statements under Essilor Korea (에실로코리아) in DART (Korea’s version of the EDGAR). Essilor Korea has grown sales at 7.2% CAGR over the last five years, has averaged a 27% EBIT margin, a 58% Greenblatt ROI, a 34% ROE and has ~60B KRW in cash and no debt. Financially, the results at Essilor Korea are equal to or better than Essilor which had an 8.5% growth rate from 2012-2017 (which includes a benefit from M&A), an 18% EBIT margin, and a 54% Greenblatt ROIC.

 Valuation

Samyung Trading’s market value is 236B KRW. We value the Essilor JVs at Essilor’s historical multiple (26x P/E). Samyung’s 50% share of earnings is 26B KRW (EBIT less 25% tax rate). At a 26x P/E, this is worth 676B KRW. The market value of Cubic Korea is 20B and the value of the chemical distribution business is 50B at 10x average earnings. Lastly, on Samyung’s parent balance sheet is 194B KRW in cash. A large portion of this cash (82B KRW) is from special dividends from Essilor Korea in 2018 and 2019 to move some of the excess cash upstream to Samyung and Essilor. Lastly, we include Samyung’s 50% share of the ~60B KRW in cash that we estimate is at Essilor Korea, for an additional 30B in value. In total, we believe Samyung trading is worth 970B KRW, an upside of 311%.

Catalyst

No catalyst, just very undervalued and a good business where time works in your favor.