Inside Korea’s reform drive: Takeaways from our trip to Seoul

At Scottish Oriental, we believe the best way to understand a business is to sit across the table from the people who run it. That’s why our investment process is based on visiting companies on the ground.

When you meet a management team in person, you notice small but significant details you simply can’t get from a slide deck or quarterly earnings report. For example, if the CEO’s office is decorated with photographs of top executives riding on luxury yachts or private jets, that tells you something about their priorities.

During our in-country visits, we try to meet with a company’s customers, suppliers and distributors to get a sense of its reputation. After all, if it treats these stakeholders fairly, there’s a good chance it will treat minority shareholders fairly too.

On a broader level, such trips also allow us to take the pulse of the economies and societies in which these companies are embedded.

Beyond the AI boom

One of our most rewarding recent research trips took us to South Korea.

In Seoul, it was impossible to ignore the excitement around artificial intelligence (AI). The country’s chipmakers, like Samsung Electronics and SK Hynix, are benefiting from surging demand for high-performance memory chips amid rising investment in AI infrastructure.

But our meetings with companies across different industries – from telecoms to cosmetics, carmakers to banks – also offered a reminder of the important structural changes taking place in Korea.

Shareholder-friendly reforms, collectively known as the “Corporate Value-Up Program”, are gathering momentum. This initiative may seem less exciting than the AI boom, but it is just as important for investors. The aim is to encourage companies to improve return on equity and adopt more transparent governance practices.

Value-Up

Concerns about corporate governance in Korea have been around for a long time. As far back as 2001, Scottish Oriental’s annual report was bemoaning the slow pace of reforms among the chaebol, Korea’s family-controlled conglomerates. But our recent visit gave us cause for optimism.

The Value-Up reforms were introduced by President Yoon Suk Yeol before he was removed from office. They are now being taken forward under Lee Jae Myung, whose Democratic Party administration has launched a commission to improve market valuation metrics.

One reason politicians from across the spectrum agree on the need for corporate reform is that more retail investors are now participating in Korea’s equity market. This means the interests of politicians, citizens and foreign shareholders are increasingly aligned.

Around 80% of the companies we met on our trip indicated that they are working on improving shareholder return. While progress is gradual, we are now more confident Korean companies will bring in helpful reforms, like clearer policies on dividend payments, and ensure their boards are more accountable.

A new investment: Hansol Chemical

Among the dozens of companies we met, one stood out: Hansol Chemical.

Hansol started in 1980 as a producer of hydrogen peroxide for paper and textile applications. Since 2010, it has repositioned itself as a key supplier of speciality chemicals for the semiconductor industry. It is also expanding into new areas such as binding materials and adhesive tapes used in battery manufacturing.

Visiting the company gave us the opportunity to gauge the quality of its culture and the transparency of its management team. We were impressed on both counts.

Hansol’s executives were happy to engage with our questions about shareholder alignment, for example. The company has an employee share ownership plan – a rarity in Korea – and a track record of consistently returning cash to shareholders through dividends and buybacks. Its target payout ratio is around 20%.

Combined with the firm’s strong profitability and attractive valuation, these factors led us to buy a stake in Hansol.

We expect to return to Korea over the coming months to explore further opportunities among the country’s most promising smaller companies. We’ll continue to focus on governance standards and shareholder return – and of course, the subtle details you can only pick up when you’re in the room with management.

How to invest

You don’t have to be an expert in Asian smaller companies to invest in them – Scottish Oriental can make it easy for you.

How to invest

Risk factors

Capital at risk. The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.

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How to invest

You don’t have to be an expert in Asian smaller companies to invest in them – Scottish Oriental can make it easy for you.

Risk factors

This material is a financial promotion for The Scottish Oriental Smaller Companies Trust Plc (the “Trust”) intended for those people resident in the UK for tax and investment purposes.

Investing involves certain risks including:

The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than or none of the original amount invested.
Emerging market risk: Emerging markets tend to be more sensitive to economic and political conditions than developed markets. Other factors include greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.
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Smaller Companies Risk: investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.
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