Gamevil, Hyosung: Undervalued Holding Companies in Korea

Chan Lee and Albert Yong of Petra Capital Management presented their in-depth investment thesis on Gamevil (Korea: 063080) and Hyosung (Korea: 004800) at Asian Investing Summit 2019.

Thesis summaries:

Gamevil is a mobile game company based in Korea. It is a classic example of the holding company/parent company discount opportunities in Korea. At the current stock price, the company’s current market cap is almost equal the market value of its equity stake (25%) in Com2uS, which is also publicly listed. Although the company posted losses in recent years, its business operation is likely to turn around to earn about USD 1.8 million in net income.

As a parent company of Com2uS, most of Gamevil’s value is derived from its stake in Com2uS, which is also significantly undervalued. Com2uS is a globally competitive mobile game developer/publisher, which generates 80% profits outside of Korea. Its flagship game, Summoners War, has more than 100 million downloads globally and continues to generate recurring earnings from its active users. Com2uS also has a strong pipeline of new games over the next 12 months and is expected to earn USD 127 million of net income and holds net cash of USD 725 million. If the value of the stake in Com2uS is added to the value of Gamevil’s business operation, the company’s total intrinsic value comes out to be USD 530 million, which is significantly higher than the current market cap of USD 310 million.

Hyosung is a holding company of an industrial conglomerate and is a good example of holding company discounts in Korea. The company transitioned into a holding company structure by spinning off its 4 major subsidiaries in 2018. The company is a global market leader in spandex and tire cord through its subsidiaries. The value of Hyosung is about USD 2.1 billion, if the value of the stakes in four major subsidiaries, other subsidiaries and affiliates and real estate holdings is added. This SOTP value is much higher than the company’s current market cap of USD 1.4 billion despite the recent rise in the stock price.

The stock has more upside potential than the current discount implies for a couple of reasons. First, the valuation multiple is likely to expand once the ongoing reorganization process is completed before the end of 2019. Second, the company is likely to implement a more shareholder-friendly capital allocation policy as the controlling family has now has a stronger incentive to pay out more dividends. The current dividend yield of 6.5% is among the highest in Korea. Chan and Albert also think that the intrinsic value of some of its globally-competitive subsidiaries is likely to grow even further.

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About the instructors:

Chan H. Lee is a Managing Partner and the Portfolio Manager of Petra Capital Management. Mr. Lee has over 20 years of investment experience in Korea and his investment career has focused on identifying and analyzing undervalued competitive companies whose market prices are significantly discounted to intrinsic value. Mr. Lee is also constantly on the lookout for mispricing opportunities and special situations where investors can profit handsomely from a subsequent change of valuation. Prior to co-founding Petra in 2009, he was a Director/Head of M&A at Hana Financial Investment. Mr. Lee started his career in finance as an M&A lawyer in Korea. Mr. Lee received his JD from the UCLA School of Law and his BS in Business Administration from the University of California at Berkeley where he was a member of Beta Gamma Sigma.

Albert H. Yong is a Managing Partner and the CIO of Petra Capital Management. Mr. Yong has more than 20 years of experience of investing in Korea. Mr. Yong utilizes a disciplined and patient deep value investing approach to seek superior risk-adjusted returns with limited volatility and bases his investment decisions on detailed, research-based analysis and thorough due diligence. Mr. Yong believes that the Korean stock market currently offers compelling value investing opportunities for international investors. Prior to co-founding Petra in 2009, Mr. Yong was a Managing Director and the CIO of Pinnacle Investments and a Portfolio Manager of Pan Asia Capital where he was in charge of managing the Korean equity portfolio. Mr. Yong received his MBA from the UCLA Anderson School of Management and his BS in Electrical Engineering from Seoul National University.