Jun 1, 2021Liked by Michael Fritzell

Note that South Korean households held most of their wealth in real estate, so % investing in equity had a really low base. The South Korean government has been imposing strict regulations in real estate investing, so a lot of money inflow into equity market.

I have to disagree with your view that increasing trading volume, retail activity signals a bubble in the Korean equity market.

I agree certain sectors are speculative and bubblish(mainly driven by retail) like biotech, IPOs, but there are a lot of attractive Korean stocks out there still.

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Exactly, that's right. A bubble is a very vague concept. I suppose "speculative mania" is a better way to describe it. At some point, trading volumes will go down in my view.

Yes, the speculative activity is definitely centred around a few sectors: biotech, software and EVs especially. I'm having some issues finding attractively priced Korean stocks. Is there any that you think I should dig deeper into?

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Haven't done a formal write-up, but let me just briefly discuss about a stock that I recently ran into. Want to know more about how you think about it.

KCC Glass (344820 KS) looks interesting. Mainly 3 biz segments (automobile glass, glass used for construction, PHC piles which are used in construction). I am bullish in all three segments. Although PHC pile biz has secular growth coming, Automobile glass and construction glass should be what moves the stock most.

Korean glass industry is duopoly btw KCC Glass (#1) and Hanglass (#2) (bought out and run by a PE Firm). KCC Glass has a dominant m/s in both auto and construction.

Auto glass biz

-basically what drives this business is how much glass they supply to HMC/Kia Motors and at what price

-We are at a perfect storm of increased price and quantity of automobile glass

-Price: higher ASP of automobile glass coming from more usage of laminated glass vs tempered glass (HMC sales mix has been improving to more luxurious cars like the Genesis and the Palisade models which use way more laminated glass, and also EVs - which can be a longer term story - use a lot more laminated glass for soundproof, heat protection)

-Quantity: Strong automobile sales from HMC/KIA

-KCC Glass is owned and run by Chung Mong-Ik, who is related to the Hyundai Family

Construction glass biz

-I am very bullish on Korean construction industry

-The South Korean government failed to curb rising housing prices - they tried to focus on the demand side by levying high taxes and price ceiling policies on real estate, but this failed. They switched their stance to tackling the supply side - increase quality home supply in the Metropolitan area through reconstruction (a lot of apartments are old in Seoul)

-There has been a lot of demand for remodeling, reconstruction in Korea

-However, there is significant glass shortage in Korea right now

-Indonesian imported glass has been a threat to KCC Glass and Hanglass previously b/c of their cheap price. However, due to rising transportation/shipping fee (caused by demand from China), import from Indonesia dramatically decreased. I read your bearish article on Chinese real estate, and I am curious whether this can just be a temporary upside to the industry, or if this can go on 2-3 years

-Glass spot price has been consistently increasing globally

PHC pile

-haven't done too much research into this but with construction boom, secular growth

From a valuation standpoint, the company looks very cheap compared to peers. KCC Glass posted very strong 1Q results even though 1Q usually is weakest season (auto sales and construction both strong in later quarters.) 1Q strength was mainly from strong auto sales. So given continuing strong auto sales and higher ASP and demand for construction glass, we can see strong results for later quarters. They posted 24.6 bil KRW bottom-line for 1Q 21. I think they can do 160 bil KRW for 21 FY. With current mkt cap of 1.05 tril KRW, they are trading at 6.56x 21E P/E. Thats far below Korean construction-related names like LG Hausys, Hanssem, Hyundai Livart. It is also far below Asian glass manufacturers like Nippon Sheet Glass, Xinyi Glass, etc. I personally see about a 50% upside from current px.

Other issues

-Company has strong corp. gov (sth that can be rare to find in the Korean equity mkt) - pays strong dividend so can have some downside protection

-Company recently invested about 58.2 bil KRW in Indonesia to build manufacturing facility (I talked with the IR and they said it was targeting growing Indonesian construction business and will be built in 2-3 years)


-How will the recent automobile chip shortage affect 2Q?

-Where are we at the cycle (can glass shortage something that goes on for 2-3 years?) - maybe you can provide some insight here b/c related to Chinese glass demand

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