Picking winners and losers via long-short investing

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Sunny Bangia: What we find quite interesting is that a country like China that has GDP per capita five times larger than India has life insurance penetration lower than India. So, it's quite an aberration. So, life insurance as an industry in China has significant long-term tailwinds. As the middle class rises in terms of wealth, they want to protect that wealth. So, we see a very, very positive long-term opportunity in life insurance in China and we think of it as actually more akin to a consumption product than a traditional financial type business model.

So, we like a company there, Ping An Insurance. Ping An is China's largest privately-owned life insurance business. It's benefiting from these industry tailwinds. So, we've done a lot of work at the industry level to be positive at the industry side. But at a company-specific level, why Ping An? Firstly, it's a privately-run organisation competing against largely state-owned companies. So, we think a private management team is going to be more highly incentivised that have significant equity in their business to drive shareholder value versus a state-run business that might be a bit more bureaucratic whose management incentives may not be fully aligned to shareholders.

Secondly, Ping An has spent huge amount of money investing in technology. Because in China you don't wake up and buy life insurance. You need to be convinced that you need life insurance. So, they have 1.6 million life insurance agents in the field. And Ping An over the last decade has spent a lot of money building big tech ecosystem trying to understand and map out where the middle class consumers sit, which ones they should target. Ping An also operates a bank and an auto insurance business. So, where they can use the tech to their advantage is cross-selling. So, the average life insurance agent in China sells life insurance. A Ping An life insurance agent sells up to 16 to 17 financial service products. So, that cross-selling opportunity is huge. So, that customer acquisition cost for each new product is nil and that goes straight down to the bottom line in terms of profit. So, that's a huge competitive edge that Ping An has over its peer group.

What we found is the market is quite skeptical on telecommunication stocks all over the world as these are businesses that have to deploy a huge amount of capital to build the network and then they don't earn a decent return on capital. But we have a different view on this approach. We don't think all telco markets are built equally. Densification of a telco market is very important. The more dense your telco market is and if you've already done all the CapEx in a dense market, the future CapEx requirements will be quite low. KT specifically after doing the industry work strikes us as a remarkably interesting opportunity. I mean, Korea has been a cheap market and a market that Antipodes Partners has done quite well finding unloved, high-quality businesses and we think KT is another one of those. The past examples have been KB Financial and Samsung Electronics.

KT Corp is Korea telco. It's like your Telstra of Korea. They have a very strong dominant market position. It's an oligopoly, which is a fantastic industrial structure to have. And the Korean telco market is very dense. So, we think the market is worried about 5G CapEx, which we think will be actually very low, very CapEx-light. So, cash flow generation will be very high. We think the free cash flow yield for KT Corp could be 14 per cent to 16 per cent, which will be an incredibly high free cash flow yield. And that will get paid out through dividends. And there is a very strong correlation as dividend payout ratios go up, valuations go up. Today, we are buying KT Corp at a huge margin of safety, 2.5 times enterprise value to cash flow. We think the multiple ways to win will be a higher payout ratio, very low CapEx requirements with the market is probably overstating, and finally, they have a very large real estate portfolio. So, a bit like Telstra that had legacy government property assets, so does KT Corp. And KT Corp is going to monetise these assets through asset sales and development which will also unlock value, also generate higher earnings which we think we are getting for free in the price. So, we can see multiple ways to win, a huge margin of safety and it comes through our big work done on global telcos.

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