Activist investors smoke out South Korea’s undervalued companies

Ginseng is renowned in Asian medicine for its health-giving properties — but a prominent South Korean activist investor thinks his top target would help shareholders by giving it up.

Lee Sang-hyun, the chief of South Korean activist fund Flashlight Capital Partners, has been pushing for the country’s largest tobacco producer KT&G to spin off its ginseng unit and appoint two renowned independent outside directors. He thinks ginseng can be better marketed and attract more long-term investors as a standalone business.

KT&G has rebuffed the fund, which holds a 1 per cent stake in the company. But Lee is ready for a showdown at the company’s general meeting on Tuesday where he hopes to win over other shareholders.

“KT&G is like a naked orphan on the street, ignored by passers-by,” said Lee, who led Carlyle Group’s Korean business before starting his fund. “Usually, shareholders get angry when a company does something wrong. But in this case, we are angry because it is not doing anything to boost its value.”

A rising number of activist investors are targeting Korea, with domestic players taking on the old guard to unlock higher share prices. The country’s companies are among the cheapest in the world, with the Korea Composite Stock Price Index trading at a price-to-book ratio of about 0.85 times, close to a 20-year low.

The number of companies targeted by activist investors increased six-fold over the past three years to 47 in 2022, according to analytics company Insightia. That makes Korea the fifth-largest activist market in the world.

“There are so many undervalued companies due to poor governance. We are just targeting low-hanging fruits first,” said Changhwan Lee, the head of Seoul-based activist fund Align Partners.

Align scored a decisive victory over K-pop agency SM Entertainment’s founder and then controlling shareholder at the annual meeting in March last year.

With the support of other investors, Align succeeded in getting a new independent auditor on SM Entertainment’s board and won other concessions from the agency, such as ending its unprofitable business deals with its founder. Partly in response to these changes, SM’s stock price has nearly doubled from its 2022 low.

“In just one year, Align has managed to weaponise its nearly one per cent equity stake in SM into almost 100 per cent growth,” said Bernie Cho, president of DFSB Kollective, a digital media marketing and distribution agency based in Seoul and Los Angeles.

In the past, foreign hedge funds waged battles in Korea with mixed results. Elliott Management’s founder Paul Singer was castigated as a vulture several years ago due to his failed fight with Samsung’s ruling family. The fund later succeeded after putting pressure on Hyundai to drop a controversial plan to merge two of its units.

The new generation of domestic activist investors wants to shake up Korea’s staid corporate culture. Their campaigns resonate with the country’s 14mn retail investors, who have emerged as a force in the country’s $2tn stock market and are warming to campaigns that target the “Korea discount”.

“Disgruntled investors, sick of decades of trapped value, are finally awakening to shareholder activism,” said Kang Sung-boo, the head of KCGI, who pioneered local activist campaigns against companies including Hanjin Kal, the family-run conglomerate, and Osstem Implant, a dental equipment maker.

KCGI, with a 6.6 per cent stake in Osstem, had called for the resignation of the company’s chair, helping private equity funds MBK Partners and Unison Capital take over the company through a tender offer in 2023.

Activists say the chances of local agitators winning their battles are growing, with signs that institutional investors such as the National Pension Service are also becoming more aggressive in asserting their rights.

Ahead of its general meeting, KT&G said it has “carefully reviewed and considered the recent shareholder’s proposals” and that it will “strive to make the best decision for the company and the shareholders.”

Lee vowed to continue his fight until his demands were accepted, regardless of the annual meeting’s results.

“This is just the beginning. The company remains one of the cheapest in the world. Our fight will continue as long as they ignore shareholders,” he said.