Monday, February 27, 2012

Corporate Shenanigans Explain South Korea's Low P/E Ratios

The Economist highlights the problems with South Korean companies' corporate governance. The Korean chaebols (conglomerates) are run like family fiefdoms with cross-shareholding schemes giving the head family disproportionate control over the entire emapire. Two pracetices are mentioned. Tunneling is awarding contracts to copmanies controlled by family members, like the 2007 $1.4 billion Hyundai chairman's contract to his son's Glovis. Propping is giving financial support to non-viable sister companies. So the problem with Korea is not the threat from the North or risky export-driven economic model, but shady business practices at the highest level.
Korea's KOSPI index trades at less than 10 P/E, while Singapore trades at 15. The sad part is that the largest chaebols are world-renowned efficient producers (Hyundai, Samsung). Too bad investing in them means perhaps being stolen from.

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