| MICHAEL D. SEO, CFA Director of Equity Research 212.549.5232 [email protected] Investment opportunities in the changing South Korean landscape outh Korea has grown over the last 50 years froma poor traded corporations are common, if not expected, in Korea. mostly agricultural economy to a powerful exporter with Throughout its history, the nation’s gyrating politics and the 11th highest GDP in the world. Its growth has been _ powerful businesses maintained a symbiotic relationship that built on the back of its chaebol system - conglomerates of | propelled tremendous GDP growth while tarnishing the companies that are family-controlled, often spread across __ political reputation of a nation. The cultural and regulatory multiple industries. While this structure has served Korea well disregard of misconduct is at the root of Korea’s corporate in terms of rapidly developing its industrial base, it has also —_ governance, especially among the chaebols. been associated with ongoing governance issues. The risks The five most recognizable chaebols as shown in CHART 1 associated with investing in Korea have historically resulted (Samsung, Hyundai, SK, LG, and Lotte) collectively represent from its stock market having a much lower valuation than those over 50% of the market capitalization of the Korea Composite of comparable economies. Stock Price Index (KOSPI) and 47% of its revenues. Samsung As an example of recent governance issues, consider that Chey _ Electronics alone represents a 21% share of the KOSPI market Tae-Won, chairman of the SK chaebol, had been serving afour- _ capitalization and 21% share of employees which is emblematic year prison sentence for embezzling $40 million from the SK __ of the chaebols’ influence in Korean society. companies. He was pardoned by former P resident Park Geun- During Park Geun-Hye’s 2012 presidential election campaign Eyes the summer of 2015 and soon found himself back in the and political career, Ms. Park had been critical of past p