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MICHAEL D. SEO, CFA
Leveling the Playing Field
Investment opportunities in the changing South Korean landscape
mostly agricultural economy to a powerful exporter with
the 11th highest GDP in the world. Its growth has been built on the back of its chaebol system — conglomerates of companies that are family-controlled, often spread across multiple industries. While this structure has served Korea well in terms of rapidly developing its industrial base, it has also been associated with ongoing governance issues. The risks associated with investing in Korea have historically resulted from its stock market having a much lower valuation than those of comparable economies.
S outh Korea has grown over the last 50 years from a poor
As an example of recent governance issues, consider that Chey Tae-Won, chairman of the SK chaebol, had been serving a four- year prison sentence for embezzling $40 million from the SK companies. He was pardoned by former President Park Geun- Hye in the summer of 2015 and soon found himself back in the familiar leadership role of his family conglomerate. Political actions such as this pardon or nepotism within large publicly
CHART 1: CHAEBOL % SHARE OF THE KOSPI INDEX
60% 50% 40% 30% 20%
10%
0% Market Cap
Ms Samsung ME Hyundai Me SK
GLOBAL FORESIGHT THIRD QUAPTER 2017
es |G Ma | otic
Director of Equity Research
212.549.5232
mseo@rockco.com
traded corporations are common, if not expected, in Korea. Throughout its history, the nation’s gyrating politics and powerful businesses maintained a symbiotic relationship that propelled tremendous GDP growth while tarnishing the political reputation of a nation. The cultural and regulatory disregard of misconduct is at the root of Korea's corporate governance, especially among the chaebols.
The five most recognizable chaebols as shown in CHART 1 (Samsung, Hyundai, SK, LG, and Lotte) collectively represent over 50% of the market capitalization of the Korea Composite Stock Price Index (KOSPI) and 47% of its revenues. Samsung Electronics alone represents a 21% share of the KOSPI market capitalization and 21% share of employees which is emblematic of the chaebols’ influence in Korean society.
During Park Geun-Hye’s 2012 presidential election campaign and political career, Ms. Park had been critical of past presidents who had abused the power to pardon individuals and sought to limit the government’s role in granting pardons. Her decision
Revenue
Employees
Source: Bloomberg
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