Like a number of other investors, I have been building a basket of Korean preferred stocks. As rh121 explains in his excellent write-up of Daelim Industrial (000215), Korean preferred stocks are really non-voting common stocks with a priority to receive dividends. These preferred stocks still trade at a discount of around 50%, which I believe more than compensates for the low liquidity and lack of voting rights. Please read rh121’s write-up, as well as trev62’s informative write-up of LG Household (051905) for more background on the general opportunity as well as specific Korean preferred stocks. Furthermore, Li Lu and Andrew Weiss (Weiss Asset Management) have discussed the opportunity at conferences and summaries are available online. Weiss actually launched a fund to focus exclusively on Korean preferred stocks. In short, buying the preferred stock at around 50% less than my rough estimate of fair value (and market value of the common stock) is an attractive investment. It’s impossible to predict when/if the common-preferred spread will close, but I am happy to invest at a significant discount to intrinsic value and hope to benefit from time arbitrage.
Nexen Tire is a Korean tire manufacturer. The preferred stock (002355) trades at a 57% discount to the common shares (002350), yields 1.0% and trades at 5.7x, 4.5x and 4.0x LTM, 2014 and 2015 consensus estimates. Furthermore, the 5- and 10-year ROE is 14% and 22%, respectively, while the preferred stock is trading at 0.8x book value.
Nexen Tire does not file English language financials and I do not have any strong insight into the tire industry, however, I do believe Nexen Tire preferred stock has a significant margin of safety and makes an attractive addition to my Korean preferred stock basket. Nexen Tire’s original equipment (OE) customers make up about 18% of the business and include Hyundai/Kia, Mitsubishi, Fiat, Chrysler, Scoda and VW. Nexen Co. (005720) owns around 40% of Nexen Tire.
There are several interesting trends which should benefit low-cost manufacturers like Nexen:
Tire labeling system – already implemented in Europe, Japan and Korea. Allows consumers to more accurately compare tires based on three rated categories (rolling resistance/fuel efficiency, wet grip and noise). This should help low-cost manufacturers like Nexen close the pricing gap with the higher-tier brands. For the most popular replacement tires (205/55 R16 per RMA), I ran some searches on ctyres.co.uk. A Nexen tire is £45 and similar to/somewhat higher rated tires from Bridgestone and Michelin run £55-70.
More expensive tires – trend toward larger and high spec tires in developed and emerging markets. In the US replacement market, tires less than or equal to 15” dropped from 82% of the market in 1999 to 25% in 2013 (source: Michelin).
I do not hold a position of employment, directorship, or consultancy with the issuer. Neither I nor others I advise hold a material investment in the issuer's securities.
It’s impossible to predict when/if the common-preferred spread will close, but I am happy to invest at a significant discount to intrinsic value and hope to benefit from time arbitrage.