9th annual Spring value investing congress

April 4, 2014 Las Vegas, NV

In Search of Hidden Champions in South Korea
Chan H. Lee & Albert H. Yong, Petra Capital Management

www.ValueInvestingCongress.com

In Search of "Hidden" Champions in Korea

The Value Investing Congress 2014

Strictly Confidential | April 2014

Disclaimer
These slides serve as a supplement to an oral presentation (together, the Presentation) and are for informational purposes only and should not be considered as the giving of any investment, financial, securities, or other advice by Petra Capital Management (Petra). In particular, the Presentation does not constitute an offer, inducement or invitation to subscribe for or purchase any securities, services, or products in any jurisdiction. Certain funds or accounts managed by Petra may have positions that provide them with an economic interest in the price movement of the securities mentioned in the Presentation and securities similar to those discussed in the Presentation. Any such positions are subject to change at any time and without notice. Petra may change its views on the securities and markets discussed herein at any time and has no duty to update you on any such change in views or trading positions that may result. This Presentation is only current as of April 4, 2014, or such earlier dates specifically noted in the Presentation. While the information contained herein has been prepared in good faith from sources believed to be reliable, Petra gives no representations, warranties or undertakings (express or implied) as to, or in relation to, the accuracy, reliability or completeness of the information or opinions in this Presentation, and all liability therefor is expressly disclaimed. You must make your own independent assessment of the materials herein, after making such investigations and taking such advice as you may deem necessary. In particular, any estimates or projections or opinions contained herein necessarily involve significant elements of subjective judgment, analysis and assumptions, and you should satisfy yourself in relation to such matters. All trade names, trademarks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. Certain statements in the Presentation may be forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward looking statements. Forward looking statements contained in the Presentation regarding past trends or activities are included only for illustrative purposes and should not be taken as a representation that such trends or activities will continue in the future. You should not rely on forward looking statements, which speak only as of the date of the Presentation.
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Petra Capital Management Overview

Investment advisory and discretionary management firm based in Seoul, Korea licensed with the Financial Services Commission of Korea

Co-founded by Managing Partners, Albert H. Yong (MBA) and Chan H. Lee (JD); both received their professional degrees from UCLA in 1997

Disciples of Benjamin Graham, focusing on undervalued Korean public companies with

potential catalyst(s) whose market prices are trading at a significant discount to intrinsic value; a bottom-up stock selection approach and detailed fundamental/research-based analysis

Petra: 15.3% vs. KOSPI index: 0.7% (year 2013) Petra: 24.4% vs. KOSPI index: 4.1% (annualized return since inception in Sept 2009)

Korea offers compelling value investing opportunities

Many Korean companies with earnings power + strong balance sheet + growth potential

Many small/mid-cap Korean companies are underfollowed or misunderstood

Various mispricing opportunities in Korea (market price vs. intrinsic value)
2

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Petra Capital Management 2012 VIC (Omaha)

300%

KG INICIS
250% 200%

CJ O Shopping

KOSPI KG INICIS +202.7%

150%
100% 50% 0%

CJ O Shopping +106.4%

KOSPI -0.2% (Korean Index)

6/30/12 8/31/12 10/31/12 12/31/12 2/28/13 4/30/13
3

-50% 4/30/12

6/30/13

8/31/13

10/31/13 12/31/13

2/28/14

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Petra Capital Management 2013 VIC (Las Vegas)

40%

Sebang
30%

Daechang Forging

KOSPI Daechang Forging +16.9% Sebang +11.9% KOSPI -1.9% (Korean Index)

20%

10%

0%

-10%

-20% 3/5/13

5/5/13

7/5/13

9/5/13
4

11/5/13

1/5/14

3/5/14

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Table of Contents
I. Korea: A Long-term Powerhouse

II.

Investing Opportunity Nexen Tire

III. Alternative Way to Buy Nexen Tire (1) Preferred Stock

IV. Alternative Way to Buy Nexen Tire (2) Holding Company

V.

Conclusion

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I.

Korea: A Long-term Powerhouse

Country Overview

Country Name: Republic of Korea (South) Area: 100,140 km2

Population: 50 million (2013)

GDP: US$1,130 billion (2012) 15th in the world GDP per Capita (PPP): US$31,950 (2012) 26th in the world Average GDP Growth: 4.7% (Since 1999) Foreign Exchange Reserves: US$346 billion (2013) 7th in the world Inflation (CPI): 1.3% (2013) Unemployment Rate: 2.7% (2013) Account Surplus: US$71 billion (2013)

Source: International Monetary Fund, World Bank, Statistics Korea

Total Equity Market Cap: US$1,187 billion (2013) 13th in the world

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Remarkable Economic Achievement

The Korean economy has achieved remarkable economic achievement in a short period of time
Rapid Economic Growth
1950s 1960s

1970s

1980s

1990s

2000s

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Strong Fiscal Position

Koreas Sovereign Credit Rating

Sovereign Debt and Budget Balance

All three major credit rating agencies, Fitch, S&P and Moodys, upgraded Korea to its highest ratings since the country was first rated in 1986

Koreas level of sovereign debt (36.7% of GDP) is one of the lowest amongst developed economies

Sovereign Debt to GDP Ratio

Korea US
36.7% 72.5 % 81.9% 127.0% 156.9% 214.3%

AA+

Germany Italy Greece

AA

Japan 0%

50%

100%

150%

200%

250%

AA-

The Korean government had a budget surplus in 11 of the past 12 years

Budget Balance % of GDP

A+

Korea Germany Italy

-3.0% -6.9% -9.9% -10.0% 0.2%

1.4%

US Japan Greece

ASource: Fitch, S&P, Moodys

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

Source: CIA World Factbook 2012

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Korean Education
Performance in Math, Science and Reading Math
Shanghai-China Singapore Korea Japan Germany Australia OECD average Italy Spain United States Israel
Source: OECD, PISA 2012 Database

Korean Students

Science 580 551 538 547 524 521 501 494 496 497 470

Reading 570 542 536 538 508 512 496 490 488 498 486

613 573 554 536 514 504 494 485 484 481 466

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Exceptional Infrastructure

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Leading Korean Companies in the World

14 Korean companies made into the list of 2013 Fortune Global 500 Companies
# of Global 500 Companies Korean Fortune 500 Companies

Rank
1 2 3 4 5 6 7 8 8 10 US China

Country

# of Global 500 Companies

132 89 62 37 31 29 22 14 14 9
Source: 2013 Fortune Global 500

Japan UK France Germany Netherlands Korea Switzerland Canada

Source: 2013 Fortune Global 500

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Champions from Korea

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13

Hidden Champions from Korea

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Strong Economic Outlook

According to a forecast made by Goldman Sachs, Korea is to become one of the wealthiest countries by year 2050 in terms of GDP per capita
GDP per Capita Projection

(US$) 90,000 US Korea Japan UK Germany

80,000

70,000

60,000 Russia

50,000

40,000

Brazil China

30,000

20,000

India

10,000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Source: Goldman Sachs

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Beneficiary of U.S./E.U. Recoveries

Export Breakdown Export Value Chain

China EU

US Others

Asia ex. China

22%

26%

9%

Total Exports: US$560 billion 11%

32%

Source: Korea International Trade Association (2013)

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Attractive Valuation
Attractive Valuations
Country China Brazil Korea Hong Kong France Germany Taiwan U.S. India Mexico Shanghai Comp Bovespa KOSPI Hang Seng CAC 40 DAX 30 TWSE S&P 500 Sensex Mexican Bolsa Index P/E 7.8 9.4 9.7 9.8 12.6 12.9 14.3 15.2 15.6 17.8 P/B 1.1 1.0 1.0 1.2 1.3 1.6 1.7 2.3 2.5 2.4

There has been a huge advance in the Korean market; nevertheless, many Korean stocks

still sell at more attractive prices than stocks in other major countries.
Source: Bloomberg (as of January 31, 2014)

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Korea Summary

Korea is no emerging market; Korea is a long-term powerhouse

Korea tends to get lost in the headlines of much larger neighbors, China and Japan Korea is home to the worlds most successful companies with leading technologies, skilled labor forces and highly educated management Korea has many competitive hidden champions that are poised to become global brands

Korean stocks are still cheap

The Korean stock market continues to offer various mispricing opportunities for value investors

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II.

Investing Opportunity Nexen Tire

Video Nexen Tire

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Nexen Tire (002350) Snapshot

Stock Price (3/21/2014) EPS P/E BPS P/B
(Won) 25,000

13,950 Won 1,407 Won 9.9x 9,098 Won 1.5x

Industry Market Cap Sales (2013) EBIT (2013) Dividend Yield

1) 2)

Auto Parts 1,303 billion Won1) 1,728 billion Won2) 177 billion Won3) 0.4%

21,000

US$1,185 million US$1,571 million 3) US$161 million

17,000

13,000

9,000

5,000 12/30/10 US$1 = 1,100 Won

6/30/11

12/31/11

6/30/12

12/31/12

6/30/13

12/31/13

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Overview

Established in 1958, the Company manufactures automobile tires The Company is one of the fastest growing tire manufacturers in the world
Nexen Tire Sales Trend

(billion Won) 2,000

OE

RE
CAGR 20%
12%

US$1.7 billion
20%

1,500 11% 10%

20%

1,000
5% 6% 500 95% 94%

7%

88% 89% 93% 90%

80% 80%

0 2007
Source: Nexen Tire

2008

2009

2010

2011

2012

2013

2014E

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Products Tires

Nexen Tires CP672, was ranked third among 20 tire brands as judged in the latest comparative testing conducted by the U.S. Consumer Reports
U.S. Consumer Reports
(%)

Ultra-High Performance Tire Sales Portion

40

Nexen

Hankook

Kumho

37

35
30

34 32

27
25 20 17

26 22 19 17

27

25
23 21 23

15
14 10

2009

2010

2011

2012

2013

One advantage Nexen Tire has over their competitors is that they are still far cheaper in price. Nexen Tire has lately increased their product range with the introduction of new tire

patterns especially in the performance range.

Source: Nexen Tire

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Price Segment
High Mid Low

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Global Presence

Sales by Region

24%

29%

2%

North America Korea Europe China Others

Source: Nexen Tire

Total Sales: US$1.6 billion

18% 27%

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Production Capacity
(thousand units)

Qingdao (China)

Yangsan (Korea)

Changnyeong (Korea)

50,000

45,000

CAGR 13%

40,000
11,000 35,000

10,000

30,000 8,000

10,000

25,000

20,000 20,000 19,000 19,000 10,000 11,000 6,000 3,000 0 2012

Source: Nexen Tire

19,000

15,000

5,000

12,000

2013E

2014E

2015E

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State-of-the-Art Facilities

Nexen Tires new plant, which is known as one of the most sophisticated factories in the world, covers an area of more than half a million square meters, equivalent to an area of 46

football fields

Cutting edge technology was used to create an automated process that minimizes waste

and unnecessary negative impact on the environment.

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Growth in Global Market

OE sales are expected to grow rapidly with improved tire quality and brand image
Global Market Share Global Customers

Nexen Goodyear

Bridgestone Hankook 0.8%

Michelin Others

15.3%

56.5%

Market Size: ~US$180 billion

14.0%

10.1% 3.3%

Source: Tire Review (2012)

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Financials

Income Statements
2010 2011 1,429,956 24.73% 1,085,681 75.92% 344,274 24.08% 232,294 16.24% 114,316 7.99% 166,358 11.63% 87,765 6.14% 2012 1,706,160 19.32% 1,249,359 73.23% 456,801 26.77% 276,580 16.21% 180,221 10.56% 261,782 15.34% 133,265 7.81% 2013 1,728,240 1.29% 1,239,242 71.71% 488,998 28.29% 311,966 18.05% 177,032 10.24% 277,142 16.04% 122,634 7.10% 2014E 1,918,020 10.98% 1,386,729 72.30% 531,291 27.70% 329,899 17.20% 201,392 10.50% 301,129 15.70% 140,591 7.33% 1,146,468 13.52% 831,792 72.55% 314,675 27.45% 210,282 18.34% 104,394 9.11% 184,647 16.11% 81,173 7.08%

(Unit: million Won) 2015E 2,148,320 12.01% 1,548,939 72.10% 599,381 27.90% 369,511 17.20% 229,870 10.70% 344,805 16.05% 161,983 7.54%

Sales % Growth Cost of Sales % COGS/Sales Gross Profit % Margin SG&A % SG&A/Sales Operating Income % Margin EBITDA % Margin Net Income % Margin

Valuation

(Unit: Won, million Won; US$, thousand US$) Won US$ 1.27 12x 15.35 93,415,810 1,433,847 1,184,683 1,407 12x 16,884 93,415,810 1,577,232 1,303,151

EPS (Forward) Multiple Target Price Per Share Number of Common Shares Common Equity Value Common Market Cap

US$1 = 1,100 Won Source: Nexen Tire, Petra analysis

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Nexen Tire Highlights

Superior

cost competitiveness via state-of-the-art manufacturing facilities

and skilled labor force

Growing

brand power through quality improvement and sports marketing

Increasing

OE market sales by offering money for value products to global

automakers

Strong

RE market sales even during the economic downturn

Well-positioned

to capture growth in global markets

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III. Alternative Way to Buy Nexen Tire (1) Preferred Stock

Preferred Stock

Many Korean preferred stocks trade at about 60% discount to the equivalent common stocks No voting on preferred stocks but same economic benefits as common stocks
13,950 Won*

5,830 Won*

Nexen Tire Common (002350) 60% Discount

Nexen Tire Preferred (002355)

Preferred Stock
* As of March 21, 2014

Common Stock
32

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Preferred Stock Discount/Mispricing

(Won) 25,000

Nexen Tire Common

Nexen Tire Preferred

20,000

15,000

10,000

5,000

0 2/28/11

8/31/11

2/29/12

8/31/12
33

2/28/13

8/31/13

2/28/14

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IV. Alternative Way to Buy Nexen Tire (2) Holding Company

Holding Company

Nexen Corp., the Holdco, owns 40.8% of Nexen Tire plus other subsidiaries Equity stake in Nexen Tire represents approximately 70% of the Holdcos value

Nexen Corp. (005720)

40.8%
Nexen D&S KNN* (058400) Nexen Tech* (073070) Nexen Engineering Kaya Development

Nexen Tire* (002350)

* Publicly listed on the Korean Stock Market

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Nexen Corp. (005720) Snapshot

Stock Price (3/21/2014) EPS P/E BPS P/B
(Won) 100,000

79,800 Won 12,505 Won 6.4x 108,070 Won 0.7x

Industry Market Cap Sales (2013) EBIT (2013) Dividend Yield

1) 2)

Auto Parts 406 billion Won1) 224 billion Won2) 23 billion Won3) 0.5%

90,000

US$369 million US$240 million 3) US$21 million

80,000

70,000

60,000

50,000 12/30/10

6/30/11

12/31/11

6/30/12

12/31/12

6/30/13

12/31/13

US$1 = 1,100 Won

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Holding Company Discount/Mispricing

(12/30/10 = 100) 300

Nexen Corp.

Nexen Tire

250

200

150

100

50 12/30/10

6/30/11

12/31/11

6/30/12
37

12/31/12

6/30/13

12/31/13

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Valuation Summary
1)

US$380 million

2) US$860

million

Other Subsidiaries

180 billion Won

55% Discount

950 billion Won2)

Nexen Tire
Preferred
10 billion Won

640 billion Won

(US$860 million)

Common Market Cap

420 billion Won1)

410 billion Won (US$380 million)

Operation

130 billion Won

Market Cap
Source: Petra analysis

Intrinsic Value
38

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V.

Conclusion

Conclusion

Nexen Tire is a hidden champion from Korea with superior cost competitiveness via state-of-art manufacturing facilities and skilled labor force

Nexen Tire is well-positioned to capture growth in global markets

The Korean stock market offers three different ways to invest in Nexen Tire:
1) Common Stock 2) Preferred Stock 3) Holding Company (Nexen Corp.)

002350:KS

002355:KS

005720:KS

Korea is home to many competitive hidden champions that are poised to become global brands

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Contact Us
Petra Capital Management
9F, 25 Eunhaeng-ro, Yeongdeungpo-gu Seoul, Korea 150-871 Telephone: +82-2-3774-0986 Fax: +82-2-783-0079 Email: info@petracm.com www.petracm.com

Important Notice
This material has been prepared by Petra Capital Management. This material is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the materials. It should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this material are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Petra Capital Management as a result of using different assumptions and criteria. Petra Capital Management is under no obligation to update or keep the current information contained herein. Petra Capital Management may, from time to time, as principal or agent, have positions in, underwrite, buy or sell, make a market in or enter into derivatives transactions in relation to any financial instrument or other assets referred to in this material. Petra Capital Management operates rules, policies and procedures, including the deployment of permanent and ad hoc arrangements/information barriers within or between business groups or within or between single business areas within business groups, directed to ensuring that individual directors and employees are not influenced by any conflicting interest or duty and that confidential and/or price sensitive information held by Petra Capital Management is not improperly disclosed or otherwise inappropriately made available to any other client(s). Neither Petra Capital Management nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material. 2014 Petra Capital Management. All rights reserved. Petra Capital Management specifically prohibits the redistribution of this material and accepts no liability whatsoever for the actions of third parties in this respect.

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