Smaller companies: the secret of South Korea’s success

Gabriel Sacks, Lead Manager of Aberdeen Asia Focus plc

The Korea Composite Stock Price Index (KOSPI) marked a notable milestone in early May, hitting 6,900 for the first time. This reflected South Korean equities’ general outperformance of their counterparts elsewhere in Asia.

Numerous factors were cited as contributing to the record high. Perhaps most eye-catchingly, they included the settling of the Samsung family’s monumental inheritance tax (IHT) bill – which, at around $8 billion, was the largest in the country’s history.

Many investors had been closely monitoring this saga ever since Samsung co-CEO Lee Kun-hee passed away in 2020. He left assets worth approximately 26 trillion won – roughly $17 billion – of which his beneficiaries were required to pay 50% in IHT. Sobering stuff.

Fears that this could somehow impact the ownership and control of the Samsung empire proved unfounded. The company remained South Korea’s biggest family-owned business – known as a chaebol – and the market soared in celebration.

Yet it would be blinkered to suppose South Korea’s success depends exclusively on the fortunes of a single enormous conglomerate. Crucially, it would also be blinkered to suppose it depends on the fortunes of several enormous conglomerates. The chaebols count for an awful lot – but not for everything.

A wealth of data from multiple nations and regions shows smaller companies are often key drivers of a market’s long-term performance. Their superior agility, capacity for innovation and potential for growth over time can give them a valuable edge in this respect.

Our own efforts to identify the brightest prospects in South Korea – and in Asia as a whole – are rooted in this reality. The South Korean stocks in our portfolio are to be found towards the lower end of the market-capitalisation spectrum.

We believe more members of the investment community would adopt a similar approach if they had a firmer grasp of two critical considerations. The first is why these businesses are attractive. The second is how to find such opportunities.

As it happens, Samsung can tell us something about the former. Despite the company’s magnitude, much of its current investment appeal rests in Samsung Electronics’ “picks-and-shovels” role in the AI boom.

As a manufacturer of High Bandwidth Memory (HBM) chips, Samsung Electronics can be seen as a hugely important enabler of the ongoing tech revolution. It produces equipment essential to the worldwide AI buildout, as a result of which it has increasing pricing power and an extremely healthy order book.

The same can be said of Hynix, which also makes HBM chips. The only other major player in this arena is US-based Micron Technology, which completes a triumvirate whose combined share of the HBM market is basically unchallenged.

Yet picks-and-shovels businesses come in a variety of sizes. Even these giants frequently rely on the many smaller companies that fulfil vital functions in the global supply chains at the heart of some of the most significant investment themes of our age.

Take Hyundai Marine Solution. With 50,000 purchase orders and 80,000 deliveries a year, much of its activity centres on maintaining, repairing and refitting ships. The company has distribution centres in Europe, the US and Singapore and is also establishing a presence in the Middle East.

But another string to its bow is becoming apparent. The engines traditionally used in ships are now being used for AI. Hyundai Marine Solution recently revealed it is receiving inquiries about “floating data centres” – known as FDCs – which would be based on second-hand vessels.

Hansol Chemical is another interesting example of a smaller picks-and-shovels business. It taps into the notion of what might be broadly thought of as “resilience” – that is, the kind of future-proofing derived from the energy transition, defence, security and other forward-looking concerns.

Hansol’s product range includes components for electric vehicle (EV) batteries. There may be a case for investing in EV companies themselves, of course, but we see more merit in investing in a business capable of supplying those that thrive in the face of ever-fiercer competition.

And how do we unearth these “hidden gems”, as we like to call them? Ultimately, a fund like ours relies on in-depth research, on-the-ground insight and direct engagement with companies’ management teams.

Both in South Korea and throughout Asia, we continue to regard “being there” as an indispensable element of our stock-picking process. In our view, developing a genuine understanding of places, people, policies and practices is central to generating the outperformance that investors expect from some of the most exciting economies on Earth.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

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• Past performance is not a guide to future results.
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Other important information:

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction. Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use with Aberdeen. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Aberdeen, or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

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