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Li Lu (Index)

Amorepacific
KRX:090430
2012-2016
Industry: Korean Cosmetics & Skincare
Category: Special Situation

Context
Amorepacific owns all the top domestic brands in Korea.
They have 3x the market share over the next player
A very appealing business, with mid-teens growth, high ROE, no net debt, international growth, etc

Why the Company is Mispriced
The company has common equity and preferred equity.
The common had 5.8m shares, at 1,180,000 won/sh, market cap of 8b USD
The preferred had 1.1m shares, at 275,000 won/sh, market cap of 2b USD
The company has net income of 327m USD, shareholder equity of 2.2b USD
The company paid 6,500 won to the common and 6,550 to the preferred in dividends

Alternative View
The market thinks that the preferred does not have the same rights to the earnings as the common, hence the preferred is priced at 1/4 of the common
Even in the income statement, the accountants treat the preferred as a debt rather than an equity

However, the preferred is entitled to a 50 won/sh higher dividend than the common
Effectively, the preferred is an even better version of the common, but the market is trading it at 6x earnings, while the common is trading at 25x

Li Lu showed Samsung's preferred, which did treat the preferred as a pro-rata interest of the earnings

Result
The preferred shares went 10x from 2012 to 2016, a 60% CAGR
Meanwhile the common went 4x over the same period, a 30% CAGR

Notably
Li Lu did this as a live case study, any of the students could have bought the stock and made 10x their money