June 2012

Global Value Investing Interviews and Insights

Latin American value - and how Grupo Gloria made a killing in sugar plantations

Jose LaRosa talks about small cap value plays in stabilizing Latin American economies.
t turns out the Wests most successful capitalism. From Brazil to Beijing, management. These types of companies grounds for global value investors today.

export has been entrepreneurial

are among the most attractive hunting With this in mind, we spoke with Jose

we are seeing a sea of companies emerging

out of the developing economies. They are often family-owned. They are usually highly volatile local exchanges. And they small cap. They are frequently traded on are increasingly developing surprisingly

La Rosa about Latin America in general

"In my whole life, I have known no wise people who didn't read all the time - none, zero." - Charlie Munger I don't know anything, but I do know that everything is interesting if you go into it deeply enough. Richard Feynman

and Peru in particular. Jose runs a familyLatin America.

style fund based in Lima and focused on (Continued on page 2)

strong competitive moats and professional

South Koreas volatile small-to-mid caps - and why CJO Home Shopping is interesting today

S
1

Chan Lee and Albert Yong of Petra Capital talk about attractive value plays between a rising South Korea and a slowing China.
outh Korea is one of those economies that global value investors pay attention to. It a lot of inefficiencies that global value investors hunt for. This month we spoke with Chan whose market prices are significantly

discounted to their intrinsic value. Since inception, Petras investment portfolio has returned 27.2% annualized, net of all fees to investors. (Continued on page 7)

is export-driven. It is relatively small.

And it sits adjacent to emerging market could almost be considered a crossborder special situation. In this, it has

Lee and Albert Yong at Petra Capital Management, an investment advisory and portfolio management firm based in Seoul, South Korea. Petra focuses on undervalued Korean public companies

behemoth China. The entire economy

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Latin American value - and how Grupo Gloria made a killing in sugar plantations
Jose LaRosa talks about small cap value plays in stabilizing Latin American economies.
(Continued from page 1) Jeffrey: In terms of investing in Peru and Latin America, how would you describe your overall approach? Jeffrey: In terms of the two strategies you mentioned, lets say the Warren Buffett-Tom Russo strategy versus the they be different in a market like Latin America as opposed to in the West?

Seth Klarman strategy, how would

Jose: I would describe it as doing valuebased investing with a 50-50% split. 50% is closer to Seth Klarman. Meaning 50% is similar to how Buffett invests and 50% is buying great companies and paying not

Jose: In Latin America, capital is more scarce than in developed countries. Since - meaning you can have better yields here. its more scarce, its more highly regarded For instance, Im sure Tom Russo would of 18 times or maybe 15 times earnings.

great but fair prices. We understand that years, ten years, etc.). But we also like, or

its very smart for the long-term (i.e., five our investors like, more short-term results. So we focus 50% on the more abundant scuttlebutts of Latin America, similar to Seth Klarman. This means buying not necessarily the greatest companies but very, very cheap and highly volatile

be happy to buy, lets say, Nestle at a price You can buy a small Nestle here in Peru with the most amazing brand name, and you can find it here for a price of 9 to 11. So far theres not too much competition felt 50 years ago. Jeffrey: The Jose LaRosa
Jose LaRosa was born and raised in Lima, Peru. He runs a family fund focused on applying classic value investing strategies in Latin America. Prior, Jose co-founded SUPERA, a human capital consulting firm focused on Latin America. Supera serves clients in Mexico, Venezuela, Colombia, Ecuador, Panama and Peru.

here. So, I feel like Warren Buffett maybe

stocks in which you can quickly make a in less than a year.

kind of arbitrage. Hopefully making 30%

are much more volatile across a lot of dimensions. In terms of the

emerging

markets

Jeffrey: How about in terms of etc.? How do you position yourself?

geography, industry, size of companies,

Seth Klarman strategy in Latin America, is it cigarette butts and reversion to the mean - or is it more just overall volatility?

you can buy it right now for a PE of less than 2. I find that unbelievably cheap and also its extremely volatile. Your price can go up and down 50%. The market is making big mistakes and you have a very, very cheap price. So its raining gold right now. the opportunity to buy this great asset at

Jose: For us, its very advantageous medium companies. From $200 million

to focus on under-the-radar, small-tomarket cap all the way up to $1,000 million market cap or so. Not really big because there is too much competition there. We focus on under-the-radar companies. 2

Jose: Again, the lack of competition helps us a lot. Im thinking of this company we can talk about later. This is

an extremely powerful company; lets say the last average ten years return on equity for the company is around 17%. And still

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You can buy a small Nestle here in Peru with the most amazing brand name, and you can find it here for a price of 9 to 11. So far there's not too much competition here. So, I feel like Warren Buffett maybe felt 50 years ago.

are what they see in the movies, and what they see in the movies is this siesta guy, this not hard working guy. I dont believe a siesta at all and I know Buffett does

that is true at all. For instance, I dont do a siesta. On top of that, on top of hard

Jeffrey: If you look at Ben Grahams

time, it was much more of a balance

wise, the reserves for the country (Peru)

working people that come from suffering

sheet approach. Not as much focused focused on industries that were asset heavy such as infrastructure, factories, manufacturing, transportation - as

are higher than Brazils, higher than the have learned our lessons the hard way that helps me to truly believe in Peru for the long-term.

a lot, I think that I am vested here, so that is why I think like Buffett. Buffett, you know, the macroeconomics of the USA might not be too good for the next five years, but he will not move.

on future earnings. And also a lot more

Chiles, and higher than Mexicos. We from 30 years ago. So, thats something

opposed to the last fifty years which have been more about services and goods. How much of your thinking in Latin America is balance sheet versus income statement focused?

way. Im thinking OK, what if the stock market closes for these great companies and I cant buy so cheap? It doesnt dividends. I see the companies, I know

So, that mindset helps me feel the same

Jeffrey: Looking at Latin America today from a Western perspective, what are one or two things that people

matter; I just can make great money in the management, I know the reputation, I demand, and I know the fundamentals are in place, so I let time do the work.

are getting wrong? What is something vice versa?

Jose: Obviously we look hard into both,

they think is true thats not? Or

know their balance sheets and I know the

but if you ask me to pick one over the other we are, since we believe so much in the brands and in the strong moats of these companies, I tend to look more like the balance sheet. I could be wrong, but thats how I approach it.

Jose: I believe when you are not on the ground, or when you have not put your feet on the ground, a lot of misconceptions can come to your mind. For instance, I

strongly recommend American people or

The bottom line would be that I

60% to the earning capacity and 40% to

Western investors fly to Latin America

and feel it and put your feet here.

Jeffrey: How much do macro themes drive your ideas?

The market is making big mistakes and you have the opportunity to buy this great asset at a very, very cheap price. So it's raining gold right now.

Jose: It doesnt guide me but it serves me, meaning that I believe the fundamentals for Peru are solid. We were not in this the fundamentals are good, and thats has very low debt to GDP ratio. Its like

was born in Latin America and in Peru, time, I had the wrong idea about America. Hollywood movies. Latin

place 20 or 30 years ago. Today I believe why I feel very safe. Peru, for instance, 20% right now. And when compared to

and before I went to the U.S. for the first It was an idea that came to me just from America for a Western

Compare lifestyles, compare the airports. Chicago, like our airport is brand new. years old, 50 years old.

For instance, when I go from Lima to Chicago Airport is, I dont know, 40 Things have been changing for

GDP, we have a lot of reserves. Percentage 3

mindset what theyre getting wrong

is that they think that Latin Americans

good. Still, this is not perfect. We have

political turmoil, and this is not as stable

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INVESTOR INSIGHTS

Gloria S.A. (XLIM: GLORIAI1-VL)

Peru-based company, primarily engaged in production & distribution of dairy products. Product portfolio includes variety of milks (Fresh, UHT, Soy, etc.), yogurts, cheeses, butter, marmalades, canned fish & sea food, coffee, chocolate powder, fruit punches, alongside packaging and other conglomerate products. Share Info (Currency: PEN) Price Close % Change Market Cap (Mn) Dividend Yield 12.7.12 9.00 68.19% 704 0.70 11.12.31 5.35 (11.21%) 2,256 0.07 10.12.31 6.03 181.56% 2,541 0.06 09.12.31 2.14 37.96% 902 0.10 08.12.31 1.55 (42.12%) 849 07.12.31 2.68 48.57% 2,584 0.04

Market Share / Competition

"Its about share of mind, distribution capability, logistics capability, pricing power, et cetera. Gloria is a very well-known brand name here in Peru, and they are number one in milk. Gloria actually competes with Nestle under another brand name called "Ideal", and still Gloria has an 80% market share and commands a higher price."~Jose

Management / Ownership

Gloria S.A.s sustained long-term growth began with the leadership of Jorge Rodrguez and his brother. In 1986, they staged a two-tier consolidation maneuver, first purchasing the majority of Peruvian stakeholders shares (March), then acquiring a majority stake in Nestle of Switzerland (August) whose subsidiary Carnation Company owned the rest of Glorias shares. During the 90s, the brothers built an impressive M&A track record through a series of vertical and horizontal integrations. They acquired FARPASA to solidify leadership in analgesic/laxatives market, followed by RACIEMSA to harness logistics & transportation capability, then DOnofrio (1990 ice cream, candy, chocolate, cookies and sweet panettone bread market), Centro Papelero (1992 cardboard box market), Sociedad Agraria Ganadera Luis Martn (1993 yogurt), INDERLAC (1994 UHT milk, milk cream, cheese and juices), and even progressed several geographic conglomerate deals such as with Cemento Sur (1995 cement), that capitalized on the regions geopolitical development trends. The next watershed came in 1998 when the initial construction of Glorias Huachipa Industrial Complex was completed (14,500 sq. meter area, US$20 million), which laid the foundation for future expansion of business scale. Jorges post-millennium strategic investment activities have been characterized mostly by growth capital injections into core capabilities, alongside several close-knit horizontal integrations to continue leveraging the operational know-how and economies of scale that come with industry consolidation (e.g., milk cream and the sugar market). Financials (Currency: PEN) Net Sales (Revenues) (Mn) Operating Profit (EBIT) (Mn) EBIT Margin (%) 5-Yr Average (%) Net Margin (%) 5-Yr Average (%) Valuation (Currency: PEN) Price/Earnings EPS Book Value (Mn) 12.7.12 12.7.12 17.25 LTM 0.52 11.12.31 2,566 309 12.03% 14.00% 7.60% 9.00% 11.12.31 11.56 0.46 2.12 10.12.31 2,288 322 14.05% 14.81% 9.28% 9.39% 10.12.31 11.97 0.50 1.96 09.12.31 2,546 288 11.29% 14.60% 6.72% 9.06% 09.12.31 5.28 0.41 2.03 08.12.31 2,552 430 16.87% 15.48% 11.90% 9.67% 08.12.31 3.29 0.47 1.03 07.12.31 2,839 442 15.58% 15.17% 9.49% 9.49% 07.12.31 9.59 0.28 0.64

Source: ThomsonFinancial, Datastream, Worldscope

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as America. I give you that for sure, but since we are fully vested, were Peruvians, so we think like Peruvians or Latin Americans.

Jeffrey: Switching to Grupo Gloria,

Percentage wise, the reserves for the country (Peru) are higher than Brazils, higher than the Chiles, and higher than Mexicos. We have learned our lessons the hard way from 30 years ago.

could you walk us through your basic investment case? How do you see this company?

are very hard working, very smart, very frugal, Western-educated, and they were smart enough to buy Gloria at whatever price back then. They are right now one of the wealthiest businessmen in Peru and in Latin America.

consumer mind. Which shows up in

pricing power. But then in some ways they look different because they have into manufacturing, and even into sugar cane production. How much of moved upstream fairly significantly

Jose: Its about share of mind, distribution capability, logistics capability, pricing power, et cetera. Gloria is a very well-

known brand name here in Peru, and here competes with Nestle, a brand name which is referred to as ideal, and commands a higher price.

they are number one in milk. Gloria

I could buy at an amazingly cheap price.

I got into Gloria back in 2009 when

their competitive position do you think flows from the different aspects of this?

I bought it at like PE of 5 if I remember correctly. The dividend yield for the first year was like 12%. It was unbelievable. When the fear left the market, lets say, made like 200% profit in two years or so. 2011, I sold it at a PE of 13 or so and I Still, I believe that Glorias a company to buy and to keep for sure. And if Nestle is smart enough - and if the Rodriguez then it would be a great deal for Nestle.

still Gloria has 80% market share and I believe Gloria has a super brand

Jose: Well, the Rodriguez brothers come from a disciplined background. They have been hard workers forever. They love their work. They love their work maybe, more than anything else. a lot from going along with them. Jorge is a Western educated businessman. He

name here, great share of mind, and great distribution capability. Also its a brand name that is not only is strong other food products. Originally,

Thats why shareholders have benefited

in milk, but it has been translated into Gloria belonged to

brothers made the mistake of selling it -

has a couple of degrees from England. is built amazing moats around Gloria. something like 18% or so. 16 to 18%, and has been investing a lot in growth.

Hes very smart and what he has done The average ROE for the last ten years is that is regardless of the fact that Gloria When a strong companys investing

I got into Gloria back in 2009 when I could buy at an amazingly cheap price. I bought it at like PE of 5 if I remember correctly. The dividend yield for the first year was like 12%. It was unbelievable. When the fear left the market, let's say, 2011, I sold it at a PE of 13 or so and I made like 200% profit in two years or so.
Carnation, an American company,

a lot in the future, they take a hit in earnings in the short-term. If they stop

growing they can become even more market a very solid 16% ROE, 16 to

profitable, so they have shown to the Jeffrey: When you look at their 18% average ROE in spite of strong

like 30-40 years ago. And Carnation, then, decided to sell it. The buyers were

because of the political turmoil back the Rodriguez family, two brothers, who 5

competitive advantage, in one sense

it looks like a strong consumer brand where theyve got a share of the

investment in infrastructure, distribution infrastructure, land, plants, et cetera. Why then have they diversified into other

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businesses like sugar plantations?

and they have been trying to put as But theres a point where you run out of

Every year, there will be a cash pile,

much as they can into Glorias growth. ways to do this. So they were building up these large cash piles, and they bought a smaller Gloria-type company in Bolivia investment and very profitable.

Every year, there will be a cash pile, and they have been trying to put as much as they can into Gloria's growth. But there's a point where you run out of ways to do this.

of poor management, they basically took the company to its knees. It was knowledge, and for years it was extremely privatize it again and they made a public Rodriguez family. owned by employees, employees with no poor. Then the government decided to offer. The only brave bidders were the They were the only bidders because

prices. Right now Gloria is 9 soles a share

named Pilandina. It was a very smart Then they found an amazing opportunity

which is a PE of 13-14. And the current PE

of Casa Grande is 3.6. So your earnings book value and your ROE is over 20%.

yield is 27%. You are pretty much paying

which is a great sugar cane plantation called Casa Grande. Casa Grande is the largest sugar cane

Jeffrey: What do you think investors are getting wrong about Gloria today?

plantation in Peru. Its an almost mystical

place because it has been famous for 200 30,000 hectares. Its still the biggest in to ship sugar and to sell it all over the country. And also, thanks to the weather and the land, they are famous for having

years as a plantation of approximately Peru and is right on the coast, so its easy

it was so full of problems and nobody wanted to take responsibility for them. So as soon as they bought it, Jorge Rodriguez

Jose: I think its maybe a matter of liquidity. Its not very liquid so large local players avoid it. In Latin America, we have these private pension funds and they manage very large amounts of money. because of its size and lack of liquidity.

moved and began to live there. Every day

he solved one problem after another, labor relationships, technology, water, seeds, quality of cane, structures, everything. commodity boom, sugar prices are very of Casa Grande is something like on top of So, right now since we are in kind of a high and the average last three years ROE 25%. So not only did he buy it very cheap, but also hes making a lot of money. So, thats why Im sure hes happier maybe, with Gloria. The pricing power of Casa Grandes not as strong as Gloria. You

They dont look too much at Gloria

one of the highest yields in the world, higher than Hawaii, higher than many other places, even Brazil.

Jeffrey: Last question. How do you going on?

government took it and nationalized it.

Since it was so powerful, the

keep your balance when all this is

The government did that in the 1970s during a military coup. But, because

Jose: I believe there are two things. Its

for the time being with Casa Grande than

mindset and its cash. These help me

sleep very well at night. Maybe, the most important thing is cash. If I dont make any money for the next three years, I will

know, sugar is a commodity, but it still since they bought it very cheap.

has a huge margin of safety for Rodriguez

be all right since I have a nice large cash reserve (safety net). Second is a frame of friend, not because I like pessimism, but if there is a time to be really alert and to be mind. As Buffett says, pessimism is my because I like the prices it produces. So, buying great assets at great prices or not so great assets at very cheap prices, I think we are in that neighborhood right now.

Jeffrey: Looking at the valuation in the Gloria shares, if any?

today, what kind of upside do you see

Jose: I am not buying Gloria at current 6

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South Koreas volatile small-to-mid caps - and why CJO Home Shopping is interesting today
Chan Lee and Albert Yong of Petra Capital talk about attractive value plays between a rising South Korea and a slowing China.
(Continued from page 1) Jeff: How would you describe your overall approach? one mission is to preserve investment capital and our second mission to rates of return over the long-term. compound investment capital at high Were always trying to find a Jeff: How would you balance an immediate discount versus future growth? Is one much more important

than the other? Are you more willing to buy great companies with a higher price versus not great long-term companies at a deep discount?

Chan Lee: We specialize in discovering undervalued Korean companies - with an emphasis on the small to mid-cap space. We employ a disciplined deep value approach to earn superior returns with

competitive company that is selling at a significant discount to intrinsic value. We invest only when there is a margin

of safety of at least 30~40%. Generally speaking, we like great companies that have cheap value. In this regard, we have tools and models in

Chan Lee: I think were more in the latter, the deeper value. In more advanced financial markets, it makes sense to look for greater companies with future

limited volatility. We utilize a bottom-up stock selection approach through detailed fundamental/research-based analysis. We spend a considerable amount of

invented our own proprietary screening competitive Korean companies that are trading far below their intrinsic value. discovering

growth that have a reasonable price. Here in Korea, because the market is considered to be more inefficient, there

effort in evaluating the downside risk of

every investment. At Petra, our number

are more opportunities for us to find an

Chan H. Lee is the co-founder and a Managing Partner of Petra Capital Management, an investment advisory and portfolio management firm based in Seoul, Korea which focuses on undervalued Korean public companies whose market prices are significantly discounted to intrinsic value. Since inception, Petra investment portfolio has returned 20.4% annualized, net of all fees to investors. Prior to co-founding Petra, he worked as an investment banker and corporate attorney for more than 10 years 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 believes the Korean stock market is a goldmine for value investors because so many stocks are cheaply valued compared to their earning power and strong balance sheet. Prior to co-founding Petra, Mr. Yong was a Managing Director and the CIO of Pinnacle Investments and a Portfolio Manager of Pan Asia Capital where he was responsible for managing the Korean portfolio. Mr. Yong received his MBA from the UCLA Anderson School of Management and his BS in Electrical Engineering from Seoul National University.

Chan H. Lee and Albert H. Yong

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of the factors. For example, we would

Right now, we're more careful in picking the right company in Korea because of Chinas current situation. It may have some exposure to emerging markets, including China, but it also should have a strong base in Korea so that even if something terrible happens in China, it won't affect it as much.
okay competitive company that is trading like growth but we normally do not give our valuation of the company. Jeff: Looking at are now seeing so many competitive domestic Korean companies that are becoming regional players in Asia.

definitely avoid Korean companies whose Chinas commodity boom.

business outlook is heavily dependent on

Jeff: In terms of your screen, what kinds of situations catch your eye?

Chan Lee: The Korean market is very

at a really deep discount. Of course, we much value to future growth potential in

volatile, so the past two weeks there Generally speaking, we have a number our watch list and we pay close attention

has been a big plunge in the market. of good companies that are always on to the prices of these companies. That would be the first place where we would look whenever the market plunges. For example, if a companys stock

Jeff: How much do macro-themes drive your thinking?

primary opportunity, how much of that opportunity is Korea-to-China? Korea-to-other economies versus Korea on its own? more

Korea

as

the

Chan Lee: Its hard to ignore the macrosaid earlier, were more of a bottom-up

developing

environment in times like this. As we firm, utilizing a disciplined deep value

price was down 10~15%, without much

Chan Lee: I think its a good mix now;

approach. However, when we analyze

reason, that would grab our attention. We have a number of companies on our short list that are considered to be competitive and good companies, but we

especially, now that everyone is worried about China. We expect some type of landing in China. We dont think its going to be a hard landing but some type of gradual, soft landing. Because of the rather gloomy outlook on China and elsewhere in the world, were now looking at companies that are strong in terms of domestic sales and do not put so emerging market growth story. much emphasis on the China growth or Right now, were more careful in

company by company, we also look at the current European crisis and the gradual

macro-environment, especially given the slowdown in China. We dont use macro in picking industries or getting on a company, we would consider it as one screening list but when we value each

havent invested or made any decisions about them because of the price. A market like this right now gives us good

opportunities to review these companies

at a much lower price. We think that the

picking the right company in Korea may have some exposure to emerging

because of Chinas current situation. It markets, including China, but it also should have a strong base in Korea so that even if something terrible happens in China, it wont affect it as much. We 8

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Chan Lee: We dont have a set rule in

We always knew CJO Shopping was a good company but the reason we became really interested was because after CJO Shopping sold off its partial equity interest in its Chinese joint venture, the price dropped almost 30% within a week or so.
market is inefficient and we are seeing a lot of mispricing opportunities in Korea. macro-environment right now, we can

managing our portfolio risk but we are As Charlie Munger said, we believe with a large margin of safety provides sufficient diversification.

extremely careful in picking each stock. that investing in a few select companies Therefore,

we spend a long time analyzing each company and we are very careful in some of the picks we consider the macroto load up our portfolio with companies now. A lot of portfolio companies we picking the companies one by one. For environment. For example, we dont want that have a huge exposure to China right have now are more domestic oriented. These portfolio strategies change from management rule per se, but we are very careful in picking each company. time to time. We dont have a portfolio

see some situations where prices drop for no particular reason or the market overreacts to certain news. We can find some special situations like that. It could be a drop in quarterly

Jeff: So volatility might give you a give you a special situation where you might look at a company that wasnt on

buying opportunity. Would volatility

your short list? That you might react to a situation as opposed to a company that youve been watching for a while?

earnings, as in the recent case of POSCO in Pohang, South Korea). Because of the downturn in the global economy and

(worlds fourth largest steel maker, based

Albert Yong: Of course, we sometimes find a situation where we look at a company which is not in our watch list. We are very flexible. But as we said earlier, we always look at our watch list first. For example, we always knew CJO Shopping was a good company but the reason we became really interested was its partial equity interest in its Chinese

less demand in Asia, especially China, POSCOs latest quarterly earnings were lower than the analysts expected and there will remain low, albeit slightly higher than

was a price drop. Its 2nd quarter earnings the 1st quarter earnings. However, we paid

Jeff: In terms of portfolio makeup, how many positions do you normally like to hold and whats the expectation for time?

more attention to the companys long term

strength and balance sheet rather than

because after CJO Shopping sold off joint venture, the price dropped almost

30% within a week or so. CJO Shopping has a number of different businesses, including its cable operation business in Korea and its overseas home shopping

Because of the downturn in the global economy and less demand in Asia, especially China, POSCOs latest quarterly earnings were lower than the analysts expected and there was a price drop.

TV operations, with tremendous value. However, after the recent price collapse, the company is currently valued as operations and its cable company. if there is a zero value to its Chinese

short term earnings numbers. These types of situations would give us opportunities.

Albert Yong: Usually minimum 10

20 stocks. Typical holding period is 6 term investors but in Korea as you know, there is a lot of volatility, meaning that

Jeff: How about managing risk across the market?

months to 2 years. Were more of long-

your portfolio given the volatility of

Chan Lee: So because of the crazy 9

sometimes prices will skyrocket closer to intrinsic value for no reason or the

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INVESTOR INSIGHTS

CJ O Shopping Co., Ltd (KOSDAQ: 035760)

Korea-based multimedia retailer engaged in television (TV) home shopping, Internet shopping mall and catalogue sales businesses. Product portfolio includes apparel, accessories, beddings, electronic products, cosmetics, sport products, furniture, household products, kitchen products, food products, mobile phones, among others. Share Info (Currency: KRW) Price Close % Change Market Cap (Mn) Dividend Yield 12.7.12 193,400 (25.04%) 1,160,067 1.03734 11.12.31 258,000 11.69% 1,552,372 0.78 10.12.31 231,000 204.03% 1,360,170 0.52 09.12.31 75,980 97.20% 827,754 08.12.31 38,529 (25.00%) 432,497 3.18 07.12.31 51,373 (31.95%) 576,585 2.86

Market Share / Competition

Approximately $1 billion market cap, solid domestic position in market with only five competitors (HomeAway, Inc., Start Today Co. Ltd., Hyundai Home Shopping Network Corporation, Trade Me Group Limited, N. Brown Group plc, Home Retail Group PLC) where CJO ranks number two in terms of market share.

Management / Ownership

Corporate leadership is homogenous with the director level and above almost exclusively raised and educated in Korea. From the CEO (2008) to directors, most management has been with the company for between 1 and 7 years. Ownership is divided among directors' interests (24,120 Common) and major shareholders CJ Corp (2,420,495 Common, 39.86%) and Mirae Asset Investment Management Company Ltd (616,134 Common, 10.15%). Of the 90 remaining institutional investors, 5 are minority shares, 15 are between 1% and 0.2% ownership, 35 hold less than 0.2% stakes, and about 35 recently exited or nearly exited their investments last year. Financials (Currency: KRW) Net Sales or Revenues Operating Profit (i.e., EBIT) EBIT Margin (%) 5-Yr Average (%) Net Margin (%) 5-Yr Average (%) Valuation (Currency: KRW) Price/Earnings EPS Book Value (Mn) Cont. Future P/E Est. 12.7.12 7.04 12.7.12 16.05 LTM 18,697 14.12.31 7.36 11.12.31 1,597,815 251,210 15.72% 14.25% 7.04% 5.67% 11.12.31 13.8 18,697 80,692 13.12.31 9.41 10.12.31 1,244,855 251,693 20.22% 13.82% 11.20% 10.12.31 22.6 10,222 59,253 12.12.31 10.69 09.12.31 1,104,094 191,435 17.34% 13.79% 7.40% 6.21% 09.12.31 10.13 7,500 49,787 08.12.31 963,557 81,781 8.49% 13.07% 2.68% 6.58% 08.12.31 16.35 2,356 43,363 07.12.31 867,523 88,537 10.21% 14.52% 3.61% 7.52% 07.12.31 18.31 2,806 41,697

Source: ThomsonFinancial, Datastream, Worldscope

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INVESTOR INSIGHTS

market sometimes over shoots. Jeff: Switching to CJO Shopping. investment case?

Chan Lee: The home shopping operators

Could you walk us through your

Albert Yong: CJO Shopping is one of

the leading Korean home shopping TV operators. Many of CJOs competitors have entered the Chinese market, but as of right now, CJO Shopping is the only company that has succeeded in China. actually right now the number one home shopping TV channel in China. Early this year, CJO Shopping sold

We knew that the home shopping business in Korea is not really that competitive. You have only five companies and this is one of the leading ones.
is the number two company. And we knew the companys operations were strong and well managed in the industry. So actually it didnt take much time to decide to buy this company because we the price was cheap. already knew the company so well. And

in Korea are doing well because once again, there are only five players. And all of them actually have entered China. But what is important to note here is that CJO Shopping is the only one thats making the number one home shopping channel competitors, they all have been losing a lot of money from their China operations. to close down their Chinese operations.

money in China. In fact, its TV channel is in China today. But all of the other

One of its joint ventures in China is

As such, some of them actually decided

Jeff: In terms of CJOs Korean their competitive position is?

11% of that leading Chinese joint venture. the stock price dropped a lot. We actually and we realized that the current price CJO Shopping also owns Koreas leading operations and its Chinese operations

presence, how durable do you think

The market overreacted to that news and have known this company for many years after the stock price drop was attractive. cable operator. But the values of its cable are not priced in the stock after the stock price drop. So we thought that it was an opportunity created by the markets buy this company. overreaction. Thats why we started to

Jeff: Do you think this is a trend operation being overvalued, and then if it disappears, a situation of the company being over-penalized for it?

we might see elsewhere? A China

Albert Yong: I think its probably durable. We have five players, and in my opinion they are second in terms of market share, one. And these home shopping channels products. Also this business doesnt shopping businesses tend to generate tons with the domestic position.

but in many ways better than the number have enormous bargaining power over require a lot of capex to grow so TV home of cash flow. So we are very comfortable

Albert Yong: Thats true, but when looking at Korean companies with China operations, we try to avoid the companies

with a very small presence in China and just a lot of hype. We try to look at the companies with a really significant

presence in China. In this case, we knew that they were already successful in values were not priced in the stock, so its China and at the current price all those just probably a no-brainer in this case. related companies, that story is already priced in and sometimes overpriced. So we try to find out the real value of the related companies.

Jeff: Where did you focus your question you were digging into?

Chan Lee: Right, plus the fact that you shopping channel in Korea. There are

research? What was the primary

need to have a license to operate a home only five, and currently as far as we know

Albert Yong: We had already followed this company for many years. We knew that the home shopping business in Korea only five companies and this is one of the leading ones. Actually, CJO Shopping 11

But usually youre right, for many China

there is no plan for the government to issue any additional licenses. So thats the natural barrier.

is not really that competitive. You have

China operations when looking at China-

Jeff: In terms of valuation, what upside do you see in the shares?

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INVESTOR INSIGHTS

Albert Yong: Once the market recognizes the value of its cable operator and its

that the current price does not reflect fully overseas operations, then probably we think go up fast. This company is not a very big either. Its market cap is over $1 billion.

Jeff: Looking to the next year in Korea, what do you think is attractive to foreign investors?

the price of CJO Shopping probably will company but its not a very small company

Albert Yong: Actually most of the Korean markets are affected by global is not really that big so it tends to be issues in Europe and in China. But Korea ignored by most investors in the West, the US and Europe. I think the Korean companies are actually getting stronger currently. Many companies have become

Many companies in Korea have never been this competitive. As mentioned earlier, the strengths of these Korean companies are not fully priced in the market.

Jeff: Do you have a price target for that stock that you can share?

your balance in terms of analysis, temperament, and emotions?

Albert Yong: Actually at the moment its price is about 190,000 Korean Won, about 300,000 Korean Won, closer to its intrinsic value. and we think it could go up to roughly to

more competitive and stronger since the

start of the global financial crisis after Lehmans bankruptcy in September 2008. Its not all types of companies in

Albert Yong: Actually analysis is always important but during this kind of market environment, the right temperament is

Korea, but we think the global crisis and weak currency help some of the Korean exporters, and that also helps many other domestic suppliers. So, I think that the strength of Korean companies is not properly reflected in current stock market prices. Eventually it will show up in the price. Probably, in the next year or so.

more important than the technical skill because a lot of people want to sell. So we think that at the current moment that temperament is important.

Jeff: Do you see a catalyst that would maybe make that happen sooner rather than over time?

Albert Yong: We dont think CJO

Chan Lee: Especially for long-term value investors like us, I think the gloomy picture of the current market environment gives us tremendous opportunities to find good companies, if not greater companies

Shopping has any special catalyst, but

a couple of reports with good quarterly results I think are enough to be a good catalyst.

Jeff: Any industries in particular you to right now?

think are really worth paying attention

at a cheaper price. Fearful markets are companies with strong fundamentals.

Jeff: In terms of management, whats your assessment?

often the time when we should invest in Now is the time we should allocate

Albert Yong: We like to avoid some industries which are clearly affected by the global macro environment. Were not sure of the exact direction of the Chinese economy. Some of the industries in Korea changes. We want to avoid those industries companies on an individual basis. are heavily affected by commodity price but other than that we try to approach the

Albert Yong: Actually the importance of the management depends on the company and the industry. For some types of businesses, such as retail, management is very important. But for this type of licensed business, it is important, but not as important as others like retail. of CJO Shopping is outstanding, they are probably good enough. 12

more to stocks. We can buy great companies at a cheap price. There is no doubt that the global economy will while. However, many companies in As mentioned earlier, the strengths of

experience very slow growth for a Korea have never been this competitive. these Korean companies are not fully

Although we do not think the management

Jeff: Last question. Given the volatility

priced in the market. As we have always been doing, we will try to find the best investment opportunity for our investors.

this year, how do you sort of keep

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JEFFREY TOWSON

Letter from Editor-in-Chief

m writing this months letter sitting in a bar on Balboa Island, Southern California. Im basically recuperating after a fairly brutal month of emerging market problems. accounting and market research firms that publish about their company. And so on. The list of ways to cheat is long and fairly impressive. 2. People generally play in teams

That, plus the excessive drinking, has me reflecting over the past year. And the contrasts between investing in the US and in my standard haunts in China and the Middle East.

The guy sitting across the table is actually in secret partnership with the guy who just joined the game. They are signaling. They are directing cards. And

An investor going into a developing economy for the first time typically learns some fairly painful lessons. They discover data is frequently inaccurate. That side-deals are popular. That insider dealing everything from pay-offs to stock manipulation is are frequently forgeries. common. And that documents (including government filings)

with them.

the bartender behind you is probably also working

In investing, teams of friends frequently have multiple relationships. You see the same people sitting on boards or holding ownership of multiples assets. And

interests in multiple ventures. Often through family

But none of this is actually a problem. If you see it clearly for every day.

what it is. Keep in mind people make fortunes in these markets

private transactions between them are common. Some times this is known but generally it is not disclosed. It is a team-sport. People rarely work alone. 3. You need a pistol

The analogy I generally use is that emerging market investing is like playing poker in an old Western saloon. Its still a game of course. There are still cards and rules. And the winner of

You will routinely catch people trying to cheat you. If

the hand still generally gets the pot. But there is also lots of craziness going on. There are lots of unsavory characters. There are fights. There is cheating. And everyone is carrying a pistol.

you dont have a pistol, what exactly are you going to do about it? Sue them? Try to track down where the cash went? Usually the unarmed foreigner ends up walking away with nothing.

So a few thoughts on playing poker in the Old West and on investing in developing economies 1. Keep in mind people cheat

So you need to be armed in some form. You need something people are somewhat afraid of. This can be political connections. It can be the backing of a very large player or company. And you need to be known as someone who can and will hit back. Thats usually enough.

People have cards up their sleeves. They deal from the time.

the bottom of the deck. You spot people cheating all People manipulate the market. They pay for insider government and have another private side-contract.

In private transactions there are more ways of protecting yourself. You can control the technology. and customers. Or the franchise rights. I wrote a protected) investments. You can control the international distribution whole book on these type value-added (and highly

information. They file one set of contracts with the They sell assets to friends (and outside investors get

diluted or written-down). They can collude with the

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JEFFREY TOWSON

4. Be ready for when everyone reaches for their pistols

Just like in the Westerns, every now and then someone than accept their loss, they reach for their pistol. This is for their own gun.

The biggest lesson from all of this is that you need choose very you can do is to investigate the past deals of whoever you are talking to. And talk to their previous partners.

is not pleased with the results of the hand. And rather the point where everyone at the table stops and reaches

carefully who you play with. The single most important thing

In terms of investing, this is something you need to be ready for. It happens. People dont like to lose money Have your cash out of the country. Have your core even if fairly. Get ready for a moment of tension. technology and customers secured and secret. Have a big partner people dont want to mess with. Generally, after a tense moment or two, everyone relaxes and goes back to playing.

Anyways, this letter is a bit of a downer. Hopefully the focus on

small-mid cap opportunities in Latin America and South Korea has been helpful. I find these types of opportunities are the real deep well of global value investing.

A more optimistic letter next month. Cheers. Sincerely,

Jeffrey Towson

5. Finally, have an exit

Sit in the chair near the door. Or in investing terms, have liquid assets. Keep a lot of cash, preferably out of the country. Sometimes things go badly. Be ready.

June 2012

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