www.ValueInvestingCongress.

com

8th annual Spring value investing congress

May 6, 2013 Las Vegas, NV Taking Advantage of Mispricing Opportunities in Korea
Chan H. Lee & Albert H. Yong, Petra Capital Management

To register and benet from a special discount go to www.ValueInvestingCongress.com/SAVE

Join us for the 9th Annual New York Value Investing Congress!

Taking Advantage of Mispricing Opportunities in Korea

Value Investing Congress 2013

Strictly Confidential | May 2013

Petra Capital Management Overview

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

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

Value investors, 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: 40.0% vs. KOSPI index: 9.4% (year 2012)

Petra: 138.1% vs. KOSPI index: 21.3% (cumulative 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 not followed by sell-side analysts Various mispricing opportunities in Korea (market price vs. intrinsic value)
1

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Petra Capital Management Overview (Contd)

From April 30, 2012 to April 25, 2013

250%

KG INICIS
200%

CJ O Shopping

KOSPI

150%

KG INICIS +231.9%

100%

50%

CJ O Shopping +76.3% KOSPI -1.5%

5/31/12 6/30/12 7/31/12 8/31/12 9/30/12 10/31/12
2

0%

-50% 4/30/12

11/30/12

12/31/12

1/31/13

2/28/13

3/31/13

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Table of Contents
I. II. Korea Overview Types of Mispricing Opportunities in Korea

III. Value Investing Opportunity 1: Sebang

IV. Value Investing Opportunity 2: Daechang Forging V. Conclusion

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I. Korea Overview

Country Overview

Country Name: Republic of Korea (South) Area: 100,140 km2 Population: 50 million (2012) GDP: US$1,164 billion (2011) 15th in the world GDP per Capita (PPP): US$31,753 (2011) 25th in the world Average GDP Growth: 5.0% (Since 1999) Foreign Exchange Reserves: US$327 billion (as of December 31, 2012) 8th in the world Inflation (CPI): 4.3% (2012) Unemployment Rate: 2.8% (2012) Trade Surplus: US$30 billion (2012) Total Equity Market Cap: US$1,189 billion (as of December 31, 2012) 13th in the world

Source: International Monetary Fund, The World Bank, Statistics Korea

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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, have recently upgraded Korea to its highest ratings since the country was first rated in 1986

Koreas level of sovereign debt (33.4% of GDP) is one of the lowest amongst developed economies

Sovereign Debt to GDP Ratio

Korea 33.4 84.0 94.4 119.0 142.8 220.0 0 50 100 150 200 250

Germany

AA+

US Italy Greece

AA

Japan

AA-

The Korean government had a budget surplus in 10 of the past 11 years

Budget Balance (% of GDP)

A+

Korea Germany Italy -2.9 -7.6 -7.6

0.6 0.1

US Greece Japan -9.1

ASource: Fitch, S&P, Moodys

-10

-8

-6

-4

-2

Source: International Monetary Fund (2011)

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Balanced Industry Structure

The Korean industry structure is well diversified while most emerging economies are disproportionately concentrated in few dominant industries
Industry Structure by Country
Korea vs. World China Taiwan Brazil

Utilities Telco IT Financials Healthcare Con. Stp. Con. Dis. Industrials Materials Energy -

1.7 4.4 2.8 5.0 28.0 11.6 16.3 21.3 0.5 8.7 4.9 10.1 13.3 9.5 15.1 10.4 14.9 8.5 2.5 10.6 5 10 15 20 25 30 Korea AC World

Utilities Telco IT Financials Healthcare Con. Stp. Con. Dis. Industrials Materials Energy -

2.0 13.2 5.0

Utilities 0.0 Telco IT

37.9 Financials

Utilities Telco 2.5 2.0

5.6

4.5 58.5 15.5

IT Financials

25.8

0.9 6.2 5.4 7.7 5.3 16.4 10 20 30 40

Healthcare 0.0 Con. Stp. Con. Dis. Industrials Materials Energy 0.7 20 40 60 1.8 3.0 3.5 12.5

Healthcare 0.0 Con. Stp. Con. Dis. Industrials Materials Energy 20.7 10 20 30 5.3 3.3 26.1 8.8

80

Source: Bloomberg, Institutional Brokers' Estimate System

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Growing Exposure to Emerging Markets

Korea is strategically positioned geographically and industrially to benefit considerably from the robust growth in emerging markets
Exports Exposure

Developed Countriees 100%

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1% 1990
Source: Statistics Korea

Other Emerging Countries

China

26% 47% 64%

50%

43% 35% 25% 11% 2000 2012

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Korean Economic Achievements

Korea is the largest mobile phone manufacturer in the world with Samsung Electronics being the largest mobile phone manufacturing company Korea has become an epicenter of Asian culture/entertainment; for example, Psy, a Korean rapper has successfully entered into global markets with an immensely popular hit song Gangnam Style, reaching over 1.5 billion YouTube views Amore Pacific is becoming one of the leading cosmetics companies in the world thanks to its increasing market shares throughout Asia, benefiting from rise in popularity of Korean culture, including Korean movies, dramas and K-pop songs

Hyundai Motor along with Kia Motors is the worlds fastest growing and 4th largest automaker and has more than 10 percent of the global market share

Korea's Big Three shipbuilders Daewoo Shipbuilding and Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries dominate the global shipbuilding industry with over 50 percent of the global market share

The South Korean city of Pyeongchang has been awarded the 2018 Winter Olympics, the first city in Asia outside of Japan to host the Winter Olympics; hosting the Winter Olympics will directly add US$20 billion to the Korean economy

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Positive Regulatory Changes

Improving corporate governance

The Korea government is introducing a new bill on corporate governance of financial companies; the Ministry of Justice is working on another amendment to the Korean corporate law to better define the role of outside director

The recent Korean corporate law amendments require super-majority board approval for transactions

between the company and its director(s) and impose personal liability on director(s) for such decisions

Economic democratization

The newly elected Park administration has pledged to promote free-competition economy that protects the market and smaller companies as well as consumers from unfair business practices

The Korean government is set to enact regulations restricting the cross-holding ownership structure of chaebols and prohibiting inequitable business transactions with affiliated companies

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10

Introduction to Korean Stock Market

The Korean stock market has approximately 2,000 companies with total market capitalization of US$1,189 billion, the 13th largest in the world (as of December 31, 2012)
Sector Breakdown Number of Listed Companies by Market Cap

Others 16% Technology 27%

Large Cap
(>2 trillion Won)

105

Metals 5% Retail 5%

Mid Cap
(2 trillion ~ 200 billion Won)

392

Chemical 9%

Auto & Auto Parts 13%

Services 11%

Small Cap Financials 13%

(<200 billion Won)

1,427

0
Source: Korea Stock Exchange Source: Korea Stock Exchange

500

1,000

1,500

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11

Korean Index Performance

The Korean stock market drastically outpaced the U.S. stock market over the last decade
Trends of Stock Markets in Korea and the U.S.

(1/04/2000 = 100) 300

KOSPI

S&P 500

+161%
250

1951.6

200

150

+35% 1585.2

1172.5
100

747.7
50

0 2002
Source: Bloomberg

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

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12

Attractive Valuation

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 Warren Buffett
Attractive Valuations
Country
China Korea Hong Kong Brazil France Germany U.S. India Taiwan Mexico Japan Shanghai Comp KOSPI Hang Seng Bovespa CAC 40 DAX 30 S&P 500 Sensex TWSE Mexican Bolsa Nikkei 225

Index

P/E
10.0 10.6 10.8 11.1 11.3 11.8 14.0 14.4 14.7 16.3 24.1

P/B
1.7 1.2 1.5 1.1 1.2 1.5 2.2 2.6 1.7 3.0 1.5

Source: Bloomberg (as of March 31, 2013)

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13

Korean Stock Market in 2013

KOSPI index is underperforming most other indices in year 2013, a sharp contrast to other major equity markets
Nikkei 225

S&P 500

FTSE 100

CAC 40

DAX 30

Hang Seng

Shanghai Composite

KOSPI -5%
Source: Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

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14

Weakening of Japanese Yen (I)

The Japanese Yen has significantly weakened in the past few months; however, it is still relatively overvalued compared to its level against the Korean Won before the global financial crisis in 2008

(Won) 1,700 1,600 1,500

Korean Won/100 Japanese Yen

1,400
1,300 1,200 1,100 1,000 900 800 700 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Bank of Korea

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15

Weakening of Japanese Yen (II)

The Korean stock market may have overreacted to the weakening of the Japanese Yen; so far, its effect on the Korean exports and imports has been minimal
(billion US$) Exports (LHS) Imports (LHS) 50 Trade Balance (RHS) 6 45 5 4 3 35 2 1 25 8 55

(billion US$)

JPY

40

30

-1
-2 -3

20

15 -4 10 Jan/12 Feb/12 Mar/12 Apr/12 May/12 Jun/12

Source: Bank of Korea

-5 Jul/12 Aug/12 Sep/12 Oct/12 Nov/12 Dec/12 Jan/13 Feb/13 Mar/13

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16

II.

Types of Mispricing Opportunities in Korea

Mispricing Type 1: Net-Net

There are still many publicly listed Korean companies which can be categorized as Net-Net as defined by Benjamin Graham, the Father of Value Investing
(Unit: million Won)

Company
KCC Engineering & Construction Dongwon Development

Net-Net Value
209,110 230,121

Market Cap
142,970 142,569

Dongil Industries
Shinyoung Wacoal Hanshin Construction HNK Machine Tool Keyang Electric Machinery Choil Aluminium Kyeryong Construction Samyang Tongsang

157,788
95,262 176,217 107,779 86,859 83,122 101,839 117,116

137,752
94,500 88,409 81,435 80,312 78,300 76,806 75,300

Man Ho Rope & Wire

Taegu Broadcasting Corporation Sam Sung Climate Control Hwa Sung Industries Nam Kwang Engineering & Construction Moatech Pang Rim Young Poong Paper

85,795
64,724 133,565 103,061 87,769 76,178 87,401 53,122

62,458
61,500 60,541 59,639 57,110 54,172 50,142 48,840

Seung Il
Keum Kang Steel

51,775
67,192

47,217
46,894

. . .
Source: Petra analysis

. . .
18

. . .

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Mispricing Type 2: Preferred Stocks

Many Korean preferred stocks trade at about 40% of the value of the equivalent common stocks; the gaps have been widening over the past decade
Preferred Stock Price in % of Common Stock Price

80% 70% 60% 50% 40% 30% 20% 10% 0%

37.7% 39.9% 40.5% 43.0% 38.2% 39.7% 35.3% 59.2% 66.9%

57.4%
46.5% 40.1% 34.1% 34.7%

Average: 38.8% Median: 37.9%

31.5%
27.4% 21.6%

32.9% 25.0%

24.8%

Source: Bloomberg

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19

Mispricing Type 3: Holding Company Discounts

Increasing number of Korean public companies are transforming into a holding company structure by spinning off the business operation; however, many holding companies are unreasonably, significantly discounted by the market compared to the value of their subsidiaries
Company
Company A
Hanjin Heavy Industries & Construction Holdings
S&T Holdings Iljin Holdings Dongwha Holdings SK Holdings KISCO Holdings SeAH Holdings

P/B
0.1x
0.1x 0.2x 0.2x 0.2x 0.2x 0.2x

Subsidiary

KPX Holdings Pyung Hwa Holdings

KEC Holdings Hite Jinro Holdings CS Holdings Chinyang Holdings Poongsan Holdings Daesung Holdings Noroo Holdings Kolon CJ Humax Holdings Hanjin Shipping Holdings Nongshim Holdings JW Holdings Corporation

0.2x
0.2x 0.2x 0.2x 0.2x 0.3x 0.3x 0.3x 0.3x 0.4x 0.5x 0.5x 0.5x 0.6x 0.6x

Source: Petra analysis

. . .
20

. . .

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Mispricing Type 4: Shareholder Activism Targets

Current valuations of many stocks in Korea are reminiscent of the valuations of companies in the U.S. that attracted activists and LBO buyers in the late-1970s and early-1980s; the corporate governance and rule of law have improved significantly in Korea, creating a more favorable environment for shareholder activism

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21

III. Value Investing Opportunity 1: Sebang

Sebang (004360) Snapshot

Stock Price (4/19/2013) EPS P/E BPS P/B

US$1 = 1,100 Won (Won) 20,000

17,600 Won

Industry Market Cap Sales (2012) EBIT (2012) Dividend Yield

Industrial

2,356 Won
7.5x 36,415 Won 0.5x

296 billion Won*

718 billion Won 34 billion Won 0.9%
* US$269 million

18,000

16,000

14,000

12,000

10,000 12/31/09

6/30/10

12/31/10

6/30/11

12/31/11

6/30/12

12/31/12

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23

Investment Thesis

The Company is one of Koreas leading regional port operating companies that provides integrated logistics services, including harbor stevedoring, transportation and storage

Sebang

The port stevedoring business has a high entry barrier in Korea because only a few companies are granted with a port operating license by the government

The Companys subsidiary, Sebang Global Battery, is Koreas leading manufacturer of automobile batteries with a domestic market share of 43% The value of the Companys equity stake (37.9%) in Sebang Global Battery (also listed on the Korea Stock Exchange) is not properly reflected in the stock price of the Company

Subsidiary: Sebang Global Battery

The Company is a good example of holding company discounts in Korea as the Company is trading at an unreasonable, excessive discount compared to the sum of the value of its business operation and publicly-traded subsidiary The Companys liquidation value far exceeds its market cap

Attractive Valuation

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24

Sebang (004360) Overview (I)

The Company was established in 1965 and is currently owned 38.3% by the founding family and 16.2% by institutional investors

The Company is one of Korea four major regional integrated logistics companies with a portoperating license

The Company is a controlling shareholder (37.9%) of Sebang Global Battery, Koreas leading provider of automobile batteries, which it had acquired in 1978
(Unit: million Won)

Category
Integrated Logistics Services

Sales (2012)
688,833

%
95.9

Sebang (004360)

Construction

5,523

0.8

37.9%

Battery

23,643

3.3

Total

717,999

100

Sebang Global Battery (004490)

Source: Sebang

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25

Sebang (004360) Overview (II)

The Company provides fully integrated logistics services, including harbor stevedoring, transportation and storage

The Company operates in several major ports in Korea, including Busan, Gwangyang, Masan and Pohang, and offers transportation services of containers and bulk cargo from harbors to logistic centers

The Company has a strong bargaining power as only a few selected operators are permitted to conduct stevedoring services in each port
Integrated Logistic Services Breakdown by Services
5.2% Transportation 41.3% 53.5% Harbor Stevedoring Storage

Harbor Stevedoring
Source: Sebang

Transportation

Storage
26

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Sebang (004360) Overview (III)

The Company is poised to benefit from increasing port traffic in and out of Korea
Port Traffic Growth Market Share*
Company 2010 2011 2012

(million Ton) 1,400

Hanjin 21.9% 23.5% 21.1%

1,300

CAGR 4.0%
1,200

CJ Korea Express

14.9%

18.1%

15.9%

Dongbang

8.5%

9.4%

8.0%

1,100
Sebang 7.8% 8.2% 7.1%

1,000

Dongbu

1.5%

1.5%

1.3%

900

KCTC

0.8%

0.9%

0.7%

800 2007
Source: Sebang

Others

44.7%

38.4%

45.9%

2008

2009

2010

2011

2012
* Market share in terms of port traffic in Koreas 23 major ports

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27

Sebang (004360) Financials

Income Statements
2008 2009 1,173,681 -1.57% 944,211 80.45% 229,470 19.55% 85,457 7.28% 144,012 17.10% 146,197 12.46% 95,425 8.13% 2010 1,394,503 18.81% 1,152,414 82.64% 242,088 17.36% 91,218 6.54% 150,870 19.80% 153,070 10.98% 105,697 7.58% 2011 764,646 -45.17% 691,627 90.45% 73,019 9.55% 32,130 4.20% 40,890 20.10% 42,461 5.55% 54,818 7.17% 1,192,435 959,359 80.45% 233,076 19.55% 86,682 7.27% 146,394 15.60% 149,331 12.52% 94,165 7.90%

(Unit: million Won) 2012 717,999 -6.10% 649,510 90.46% 68,489 9.54% 34,050 4.74% 34,439 22.60% 36,252 5.05% 54,088 7.53%

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: million Won; thousand US$) Won US$ 24,827 10x 248,273 27,310 10x 273,100

Normalized Earnings Multiple Equity Value

* From year 2011, financials are prepared in accordance with K-IFRS

US$1 = 1,100 Won

Source: Sebang, Petra analysis

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28

Subsidiary: Sebang Global Battery (004490)

Established in 1952, Sebang Global Battery (the Subsidiary) manufactures a wide range of automobile and industrial batteries

GS Yuasa of Japan, one of the worlds leading manufacturers of automobile and motorcycle
batteries, owns 16.0% of the Subsidiary

The Subsidiary boasts a strong balance sheet with little debt and is also significantly undervalued, trading at 7.3 times its earnings
(Unit: million Won)

Category
Automobile Batteries

Sales (2012)
645,461

%
76.3

Financial Summary
Share price (4/19/2013) Market cap 50,800 Won 711 billion Won 6,991 Won 7.3x 41,823 Won 1.2x

Industrial Batteries

198,530

23.5

EPS P/E BPS

Motorcycle Batteries

2,339

0.2

Total

846,330

100

P/B

Source: Sebang, Korea Stock Exchange

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29

Subsidiary: Sebang Global Battery (004490) (Contd)

The Subsidiary is the largest manufacturer of automobile batteries in Korea with a market share of 43.4% and the worlds 5th largest manufacturer

The Subsidiary benefits from declining lead price which will reduce its raw material costs,
improving gross profit margin

The sale of automobile batteries in the aftermarket is a big plus as the Subsidiary is less likely to be affected by the economic downturn

Global Market Share

Company
Johnson Controls Exide GS Yuasa East Penn Sebang Global Battery AtlasBX Others
Source: Petra analysis

Profitability
2012
34% 10% 8% 7% 4% 2% 35%
2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 2010 2011 2012

(US$/ton)
3,000

Gross Profit Margin (RHS) Lead Price (LHS)

30% 25% 20% 15% 10% 5% 0%

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30

Subsidiary: Sebang Global Battery (004490) Financials

Income Statements
2008 2009 627,174 0.41% 479,404 76.44% 147,771 23.56% 53,774 8.57% 93,996 17.10% 94,628 15.09% 70,290 11.21% 2010 790,200 25.99% 622,217 78.74% 167,983 21.26% 61,733 7.81% 106,251 19.80% 106,842 13.52% 79,210 10.02% 2011* 953,872 20.71% 752,482 78.89% 201,389 21.11% 68,772 7.21% 132,617 20.10% 133,264 13.97% 105,375 11.05% 624,589 460,321 73.70% 164,268 26.30% 54,361 8.70% 109,907 15.60% 110,517 17.69% 75,369 12.07%

(Unit: million Won) 2012 846,330 -11.27% 655,118 77.41% 191,213 22.59% 68,067 8.04% 123,146 22.60% 124,252 14.68% 97,869 11.56%

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: million Won; thousand US$) Won US$ 83,127 10x 831,273 181,371 1,012,643 384,298 307,439 91,440 10x 914,400 199,508 1,113,908 422,728 338,182

Normalized Earnings Multiple Operation Value Cash & Investments Equity Value Share of Sebang (37.9%) Intrinsic Value (20% Discount)

* From year 2011, financials are prepared in accordance with K-IFRS

US$1 = 1,100 Won

Source: Sebang Global Battery, Petra analysis

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31

Valuation

Operation

273 billion Won

655 billion Won (US$595 million)

Sebang Global Battery 338 billion Won

Market Cap

296 billion Won (US$269 million)

Other Subsidiaries
US$1 = 1,100 Won Source: Petra analysis

44 billion Won

Market Cap
32

Intrinsic Value

Strictly Confidential

Liquidation Value

The Company trades at 50% of its book value; we think that the book value fairly reflects the Companys liquidation value
(Unit: million Won)

Book Value Liquid Assets Cash & Equivalents Account Receivable Other Receivables Investments Sebang Global Battery Other Subsidiaries Other Investments PP&E Land Building Other PP&E Investment Property Land Building Other Assets Total Assets Total Liabilities plus Non-Controlling Interest Liquidation Value
Source: Sebang, Petra analysis

Appraisal Value 96,180 67,723 4,177

Market Cap

96,180 135,447 8,353

226,116 50,930 4,528

277,305 35,651 3,170

116,366 65,471 34,774

174,549 65,471 17,387

64,075 67,654
33,297 903,191

96,112 67,654
16,648 922,028

293,228
609,964

293,228
628,800 296,000

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IV. Value Investing Opportunity 2: Daechang Forging

Daechang Forging (015230) Snapshot

Stock Price (4/19/2013) EPS P/E BPS P/B

US$1 = 1,100 Won (Won) 60,000

44,800 Won

Industry Market Cap Sales (2012) EBIT (2012) Dividend Yield

Industrial

11,345 Won
3.9x 44,222 Won 1.0x

90 billion Won*
279 billion Won 30 billion Won 2.2%
* US$82 million

50,000

40,000

30,000

20,000

10,000 12/31/09

6/30/10

12/31/10

6/30/11

12/31/11

6/30/12

12/31/12

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Investment Thesis

The Company is one of Koreas leading manufacturers of excavator/tractor parts The Company maintains strong business relationships with its global customers, including Volvo, Caterpillar and Doosan Infracore and is poised to benefit from the seeming recovery of investment activities in Asia

Daechang Forging

Catalyst: Improving Complex Ownership Structure

There exists a catalyst where the Company can improve shareholder value by reorganizing the complex ownership structure of its subsidiaries and affiliated companies

Shareholder activism can expedite the value unlocking process if the controlling shareholder (i.e., the founding family) is slow on making necessary changes

The Company is exceptionally cheap, trading at 3.9 times its 2012 earnings, implying minimal downside risk (even without activism) The Companys current market valuation is significantly discounted compared to its peers in the industry

Attractive Valuation

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36

Daechang Forging (015230) Overview (I)

Founded in 1955, the Company is one of Koreas leading manufacturers of excavator/tractor parts

The Company has a long track record in the industry as the Company is one of the first companies to manufacture excavator/tractor parts in Korea

The Company is 44.0% owned by the founding family (including its specially-related parties) and is now run by the 3rd generation son
(Unit: million Won)

Category Excavator/Tractor Parts

Sales 249,800

% 89.5

Ownership Breakdown

The Park Family

Automobile Parts

19,043

6.8

45.2%

44.0% Institutional Investors

Others

10,282

3.7 10.8% Retail Investors

Total

279,125

100

Source: Daechang Forging

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37

Daechang Forging (015230) Overview (II)

The Company manufactures excavator/tractor parts which include links, roller assemblies, track shoes, track chains, seals, pins, bushings, bolts and nuts

Known for its strong relationships with global customers, including Volvo, Caterpillar and Doosan Infracore, the Companys exports to Asian countries account for 60% of its sales

The Companys presence in the aftermarket has a stabilizing effect during the economic downturn
Main Products Customer Breakdown
Volvo 27% 40%
<Track Chains>

Hyundai Heavy Industries Doosan Infracore Caterpillar

19%
7%
<Track Shoes>
Source: Daechang Forging

Others 7%

<Links>

<Roller Assemblies>

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38

Daechang Forging (015230) Financials

Income Statements
2008 2009 164,216 -19.82% 152,804 93.05% 11,412 6.95% 4,263 2.60% 7,148 17.10% 7,228 4.40% 3,485 2.12% 2010 263,234 60.30% 243,334 92.44% 19,900 7.56% 4,915 1.87% 14,985 19.80% 15,092 5.73% 12,754 4.85% 2011* 338,129 28.45% 304,979 90.20% 33,150 9.80% 5,595 1.65% 27,556 20.10% 27,663 8.18% 19,535 5.78% 204,808 182,285 89.00% 22,523 11.00% 4,759 2.32% 17,764 15.60% 17,841 8.71% 3,989 1.95%

(Unit: million Won) 2012 279,125 -17.45% 243,823 87.35% 35,302 12.65% 5,115 1.83% 30,188 22.60% 30,289 10.85% 22,689 8.13%

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: million Won; thousand US$) Won US$ 19,000 10x 190,000 17,273 10x 172,730

Normalized Earnings Multiple Equity Value

* From year 2011, financials are prepared in accordance with K-IFRS US$1 = 1,100 Won Source: Daechang Forging, Petra analysis

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Daechang Forging (015230) Peer Comparison

The Company trades much cheaper than its peers in the heavy equipment parts industry whose valuation has been already depressed due to the recent global economic slowdown
Industry Peers Multiple
(Unit: billion Won)

Company FreeMS Dongil Metal Heungkuk Everdigm Jinsung T.E.C.

Market Cap 18.1 99.5 23.2 97.7 131.7

EV 18.9 98.3 50.8 153.7 141.6

Sales 38.6 109.0 90.3 229.3 178.4

EBIT 3.2 18.7 5.5 18.7 10.2

EBITDA 3.4 18.7 9.4 22.6 11.1

Net Income 3.1 16.1 3.5 12.9 4.3

P/E EV/EBITDA 5.9 6.2 6.6 7.6 30.4 5.6 5.3 5.4 6.8 12.7

Mean Median

11.3 6.6

7.2 5.6

Daechang Forging Multiple

(Unit: billion Won)

Company Daechang Forging

Market Cap 90.8

EV 90.3

Sales 312.3

EBIT 30.7

EBITDA 34.3

Net Income 23.5

P/E EV/EBITDA 3.9 2.6

Source: Korea Stock Exchange

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Ownership Structure Current

The Companys intricate, complex ownership structure is the reason for market discount; DCF Trek, a private company controlled by the founding family, co-owns all of the Companys subsidiaries without providing any plausible explanation to shareholders
The Park Family
80%
DCF Trek

36%

8%

The Company

Daechang Trek Heavy Equipments

The Company: 70% DCF Trek: 30%

Pusan Metal Mold

Bonglim Metal
The Company: 40% DCF Trek: 46%

Najun Metal
The Company: 40% DCF Trek: 46%

Dongchang
Forging
DCF Trek: 40%

Sunway
DCF
DCF Trek: 30%

The Company: 20% The Company: 40% DCF Trek: 32% DCF Trek: 47%

Source: Daechang Forging, Petra analysis

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Ownership Structure New

The Company can improve its ownership structure by acquiring all of DCF Treks equity stakes in its subsidiaries by merging with DCF Trek, which will eventually increase the transparency and shareholder value of the Company
The Park Family
80%

36%

DCF Trek

8%

Merger
The Company

Daechang Trek Heavy Equipments

Pusan Metal Mold

Bonglim Metal

Najun Metal

Dongchang Forging

Sunway DCF

Source: Daechang Forging, Petra analysis

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Valuation

Shareholder Activism

Change of Industry Multiple

190 billion Won

(US$173 million)

Market Cap

90 billion Won (US$82 million)

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

Market Cap
43

Intrinsic Value

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Rights of Minority Shareholders in Korea

Classification and Requirements
Extraordinary shareholders meeting To hold more than 1.5% of voting shares for at least 6 months without interruption

5% Disclosure Requirements
Any shareholder who holds more than 5% of voting shares (including voting shares held by any specially-related person) A disclosure report must be submitted to the Financial Services Commission of Korea and the Korea Stock Exchange within 5 business days after the execution date Any change of more than 1% with respect to the number of voting shares must be reported within 5 business

Shareholder proposal

To hold more than 1% (0.5%)* of voting shares for at least 6 month without interruption

To hold more than 0.5% (0.25%)* of voting Request for dismissal of director/ shares for at least 6 month without interruption statutory auditor

Request for inspection of accounting books

To hold more than 0.1% (0.05%)* of voting shares for at least 6 month without interruption

Minority Shareholder Protection in Korea

The poison pill, a common defensive strategy used against corporate takeovers, is not allowed under Korean law In electing statutory auditor, voting rights of the controlling shareholder (including its specially-related parties) are restricted to 3% in aggregate Korean companies generally do not offer dual-class shares with different voting rights

Representative suit

To hold more than 0.01% of voting shares for at least 6 month without interruption

Request for cumulative voting

To hold more than 3% of voting shares and to provide a 6-weeks notice prior to the shareholders meeting

* ( ) is applicable to any public company whose shareholders equity is more than 100 billion Won at the end of the most rec ent fiscal year

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V.

Conclusion

Conclusion
Many

Korean stocks are still cheap

Korea

is strategically positioned (geographically and industrially) to benefit

from the growth of emerging markets

Korean

corporations have solid economic fundamentals

Korea

has been going through positive regulatory changes for minority

shareholders

The

Korean stock market continues to offer various mispricing

opportunities for value investors

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Contact Us
Petra Capital Management
9F, Anwon Bldg. 14-15 Yeouido-dong, Yeongdeungpo-gu Seoul, Korea 150-871 Telephone: +82-2-3774-0978 Fax: +82-2-783-0079 Email: info@petracm.com www.petracm.com Important Notice
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