James Lim of Dalton Investments presented his in-depth investment thesis on Meritz Financial Group (Korea: 138040) at Asian Investing Summit 2018.

Thesis summary:

Meritz Financial is a financial holding company that owns 52% of Meritz Fire & Marine (#5 in size and #1 in ROE in South Korean non-life insurance business) and 43% of Meritz Securities (#6 in size and #1-2 in ROE).

Since the appointment of talented new management a few years ago, Meritz Fire & Marine has improved ROE from 9% to 20% and Meritz Securities from 4% to 14%. Meritz Fire & Marine is seeing high growth in new premiums (#2) due to a competitive sales commission rate, based on low fixed costs and relationship building with general agencies, which have displayed strong growth. Meritz Securities has become a dominant player in the real estate financing business, with strong risk management, and is now going after large-scale deals and foreign deals. The shares recently traded at 1x P/B, 6x P/E, and a dividend yield of 3.4% despite a payout ratio of only 20%.

The main shareholder owns 68% of the equity, and the talented co-CEOs each have a $10 million base of stock options while most of their performance-based bonuses get paid out over ten years and linked to share price performance, inducing long-term thinking and strong alignment of interests with minority shareholders. The group has a merit-based culture (thus the name Meritz) and stands out from the conservative, rigid, and rather bureaucratic Korean financial industry.

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About the instructor:

James Lim is a Senior Research Analyst for Dalton’s Asia equity research team, and has 4 years of investment experience. Prior to joining Dalton in 2015, Mr. Lim worked as a senior associate consultant at Bain & Company in Seoul, Korea. Mr. Lim holds an MBA from the University of Chicago, and a BS in Business Administration from Yonsei University.