Weiss Korea Opportunity Fund: Half-Yearly Financial Report and Unaudited Financial Statements
23/09/2024 17:08
WEISS KOREA OPPORTUNITY FUND LTD.
LEI 213800GXKGJVWN3BF511
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
HALF-YEARLY FINANCIAL REPORT AND UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30 JUNE 2024
Weiss Korea Opportunity Fund Ltd. (the "Company" or "WKOF") has today,
released its Half-yearly Financial Report for the period ended 30 June 2024.
The Report will shortly be available for inspection via the Company's website
www.weisskoreaopportunityfund.com.
Company Performance
Performance Summary
As at As at
30 June 2024 31 December 2023
£ £
Total Net Assets 122,617,033 116,849,704
Net Asset Value ("NAV") Per Share 1.77 1.69
Mid-Market Share Price 1.66 1.68
Financial Highlights
Six months to 30 June 2024 Since inception
NAV Return 6.4% 129.1%
Benchmark Return 1.8% 76.4%
As at 30 June 2024 As at 31 December 2023
Portfolio Discount* 49.9% 49.7%
Share Price Discount (6.2%) (0.4%)
Fund Dividend Yield 3.1% 3.2%
Average Trailing 12-Month P/E Ratio of Preference Shares Held 7.3x 4.8x
P/B Ratio of Preference Shares Held 0.3 0.3
Annualised Total Expense Ratio 2.1% 2.1%
*Portfolio Discount
The portfolio discount represents the discount of WKOF's actual NAV to the
value of what the NAV would be if WKOF held the respective common shares of
issuers rather than preference shares on a one-to-one basis.
As at close of business on 20 September 2024, the latest published NAV per
Share was £1.63 and the Share Price was £1.57.
Chair's Report
For the period ended 30 June 2024
Investment Performance
I am pleased to report that during the period from 1 January 2024 to 30 June
2024, WKOF's NAV in pounds Sterling ("GBP") increased by 6.4%, including
reinvested dividends, out-performing the reference MSCI South Korea 25/50 Net
Total Return Index (the "Korea Index") by 4.6%. Since the admission of WKOF to
AIM in May 2013, NAV has increased by 129.1%, including reinvested dividends,
compared to the Korea Index returns of 76.4%, a cumulative outperformance of
52.7% since inception.
Dividend
The Directors declared an interim dividend of 5.1851 pence per share on 14 May
2024, equating to a 3.1% net dividend yield over the past 12 months, to
distribute the income received by WKOF in respect of the year ended 31
December 2023. This dividend was paid to all Shareholders on 24 June 2024.
Share Buybacks
The Board is also authorised to repurchase up to 40% of WKOF's outstanding
Ordinary Shares in issue as of 30 June 2024. To date, WKOF has repurchased
12.6% of Ordinary Shares issued at admission and continues to have the
intention to repurchase shares if they trade at a significant discount to NAV
in the future. The share price was generally in line with NAV but traded at a
slight discount over the period. We will also keep shareholders informed of
any share repurchases through public announcements.
Realisation Opportunity
WKOF offers shareholders the regular opportunity to elect to realise all, or a
part, of their shareholding in WKOF (the "Realisation Opportunity") once every
two years, on the anniversary of WKOF's admission date, with the next
Realisation Opportunity taking place in May 2025.
Your Investment Manager
Shareholders have been fortunate to have access to Weiss Asset Management
("WAM") as their investment managers since launch. WKOF remains the only
listed vehicle that your Investment Manager runs and, despite best efforts to
grow the fund, it remains only a small part of the $2.7 billion of WAM's
assets under management. Your Board and your Investment Manager continue to
review the challenges and opportunities associated with this situation.
Promotion of the Company
Through Singer Capital Markets ("Singers"), the Company continues its
established investor relations and marketing outreach to wealth managers,
institutions and private clients. With regards to retail shareholders, either
direct or through platforms, meaningful engagement continues to prove
challenging. Your Board continues to review the Company's ability to grow and
attract new shareholders, as well as monitoring how it represents value for
money for all shareholders.
Outlook
Whilst WKOF was not immune to the significant market gyrations of recent
weeks, the `Corporate Value-Up Programme' in Korea has provided support for
WKOF's investment thesis: that improved corporate governance in Korean
companies would help close the discount between their preference shares and
their ordinary shares. However, the extent to which governance improvements
will be adopted by companies and enforced by the government is difficult to
gauge currently. As your Investment Manager explains, in the coming weeks and
months they should have a better understanding of the extent to which these
governance improvements are real and what their impact on WKOF might be, and
the Board will keep developments in this regard under review.
I look forward to communicating with you about WKOF's activities in the
future. If any Shareholders wish to speak with the Board, please contact
Singers, and we will be happy to answer any questions you may have.
Krishna Shanmuganathan
Chair
23 September 2024
Investment Manager's Report
For the period ended 30 June 2024
WKOF Performance Attribution
At the end of June 2024, WKOF held a portfolio of 32 South Korean preference
shares. As a reminder, the economic rights of South Korean preference shares
are generally the same or slightly better than the corresponding common
shares, yet the preference shares often trade at substantial discounts to the
common shares. WKOF's returns, on a currency-neutral basis, are driven by five
primary factors:
* The performance of the Korean equity market generally as indicated by the
Korea Index;
* The discounts of the preference shares WKOF holds narrowing or widening
relative to their corresponding common shares;
* The performance of the common shares (which correspond to the preference
shares held by WKOF) relative to the performance of the Korean equity market;
* Excess dividend yields of the preference shares held by WKOF; and
* Fees, expenses and other factors.
In order to compare WKOF's relative return to the Korea Index, we report the
attribution of these aforementioned factors to WKOF's performance. The
following table provides this performance attribution for the last 12 months
and for the period since the inception of WKOF in May 2013 to 30 June 2024.
Performance Attribution Table
Return Component Year-to-Date Last 12 Months Since Inception
The Korea Index 1.8% 9.6% 76.4%
Discount Narrowing of Preferred Shares 5.1% 5.2% 72.1%
WKOF common Shares vs the Korea Index 0.6% -8.6% -32.5%
Excess Dividend Yield of Preferred Shares Owned 1.3% 1.5% 14.3%
Fees, Expenses and Others -2.4% -1.9% -1.2%
NAV Performance 6.4% 5.8% 129.1%
WKOF's investment thesis at inception was based on the likelihood that WKOF's
NAV would perform well, largely due to (i) decreases in the large discounts of
the preference shares held by WKOF relative to their corresponding common
shares and (ii) the related excess dividend yields caused by these large
discounts. This has, indeed, generally been the case as these two factors have
collectively been the main contributors to WKOF's outperformance relative to
the Korea Index since inception. At present, we continue to remain confident
in both of these theses.
In September 2013, shortly after inception, the preference shares held by WKOF
traded at a 55.5% discount to their corresponding common shares and the
dividend yield was 1.7%. As at 30 June 2024, the discount and dividend yield
were 49.9% and 3.1%, respectively. We are focussed on returns since inception
because we believe that due to high levels of idiosyncratic volatility, any
data that is gathered over a one-year period is unlikely to be a reliable
guide for future performance.
Review of the Korean Macro Environment
In May, the OECD increased its projected 2024 GDP growth rate for Korea from
2.2% (as of February) to 2.6%. President Yoon announced a 26 trillion KRW
programme to further support the semiconductor industry, which has been a key
driver of export growth. The OECD also revised its inflation forecast for
Korea, expecting inflation to cool from 5% to under 3% during 2024. Should
inflation ease, the Bank of Korea could reduce its policy rate over time which
could have a meaningful impact on the Korean consumer, as household debt
remains at close to 99% of GDP as of the first quarter of 2024 (the highest of
34 countries listed in a study by the Institute for International Finance).
However, the Bank of Korea announced in May it was delaying policy rate cuts
due to the more recent weakness of the won relative to the US dollar and the
wide interest rate gap between the two countries.
Throughout the first half of 2024, North Korea continued to engage in hostile
acts towards South Korea. As previously noted in the 2023 Annual Report, news
articles have reported on North Korea's increasingly aggressive actions,
including conducting strategic cruise missile tests for "a super-large
warhead", as well as launching approximately 1,600 trash-filled balloons
toward South Korea, which has recently led to a temporary suspension of
international air travel over the Korean peninsula. Foreign policy experts
have acknowledged the heightened tension and animosity in the region, even
though missile tests, military drills, and rhetorical provocations are
"nothing new" in North Korea. Over the years, the patterns for tit-for-tat
exchanges between the Koreas have been well documented, and we expect North
Korea to continue its current aggressive behaviour and South Korea to respond
with its military drills near the border or even threats to develop an
indigenous nuclear programme at least until the United States presidential
elections later this year. With plentiful reasons for caution, WKOF continues
to maintain a higher exposure in Korean sovereign Credit Default Swaps ("CDS")
protection compared to prior years.
Index Name P/E Ratio P/B Ratio Dividend Yield
Nifty Index (India) 23.1 3.9 1.2%
S&P 500 (US) 26.4 4.9 1.3%
Nikkei 225 (Japan) 23.5 2.1 1.6%
FTSE 100 (UK) 13.1 1.9 4.0%
Shanghai Composite (China) 11.8 1.2 2.9%
Hang Seng Index (HK) 9.5 1.0 4.4%
TAIEX (Taiwan) 21.8 2.6 2.4%
KOSPI 200 (S. Korea) 14.0 1.0 1.8%
WKOF Portfolio Holdings 5.7 0.4 3.6%
Korean equities and the portfolio holdings of WKOF continue to offer apparent
valuation discounts relative to other countries' equity markets as represented
by the price-to-earnings ratios ("P/E ratios") and price-to-book ratios ("P/B
ratios") listed above.
As previously discussed, WKOF's current portfolio discount, calculated as the
weighted average discount of the preference shares owned by WKOF relative to
the prices of such preference shares' corresponding common shares, was 49.9%.
In addition, the KOSPI 200 has depressed valuation multiples as shown in the
table above relative to the average of other major indices.
Korean Corporate Governance and Portfolio Discussion
In the 2023 Annual Report, we discussed the potential impact of the Corporate
Value-Up Programme ("CVUP") that was first announced in February 2024. We
cautiously expressed our optimism that South Korea could gradually improve its
corporate governance standards, which could lead to a positive response in the
equity market, similar to recent developments in Japan.
Additional information was announced during March 2024, including possible
changes to the Stewardship Code for the first time in seven years and the
reduction of tax burdens on companies that increase shareholder returns
through dividend payments or share buybacks. However, in April, the Democratic
Party won a majority of the 300 seats in the National Assembly, the national
legislature of South Korea, with a 67% voter turnout, the highest voter
turnout in 32 years. As the opposition party, this implies a higher likelihood
that future tax cuts on inheritance and corporate income may not pass the
legislative body, as the opposition party could perceive these tax cuts as
favouring the wealthy, which would be unpopular among their constituents.
In May, a more detailed version of the CVUP was announced, but it lacked
specifics and made adherence to the programme voluntary. In summary, it states
that companies should voluntarily disclose on an annual basis the actions they
plan to take to improve minority shareholder returns and corporate governance
standards. Some of the examples provided included plans for treasury stock
cancellation, dividend and share repurchases, disclosures over potential
conflicts of interest, and reporting quantifiable metrics relative to
competitors in their industry.
Since June, some additional and more specific announcements have been made
which could benefit shareholders:
* A more detailed tax benefit plan was released, which includes a tax credit
of up to 5% of the increase in shareholder return.
* The Financial Services Commission ("FSC") proposed a new rule requiring
companies with more than 5% of their outstanding stock in treasury to provide
additional disclosures about the purpose and intent of these holdings. In the
past, minority investors have been negatively impacted by South Korean
companies' use of outstanding treasury shares to opportunistically dilute
minority shareholders.
* The nominee for the head of the FSC, Korea's top regulator, advocated
scrapping a plan to increase capital gains taxes. Investors are concerned
about the potential for an increase in the capital gains tax from 20% to 25%
when the annual return from a financial investment is greater than 300 million
won. The implementation of this tax has been postponed for two years but is
currently scheduled for January 1, 2025. While President Yoon Suk Yeol is in
favour of eliminating or deferring the increased tax, Representative Jin
Sung-joon who leads the policy committee for the opposition party, has stated
it should be implemented as scheduled.
* The FSC Governor called for expanding the scope of a board of directors'
fiduciary duty to include shareholders (rather than just the company).
Until more details are known, it is challenging to determine the potential
effectiveness of the CVUP and its impact on the market. Despite the
uncertainty, we think that by the end of the year, investors will most likely
have additional clarity on the direction of corporate governance improvements
and react accordingly.
During the first half of 2024, we reduced WKOF's exposure to Hyundai Motors
("HMC") from approximately 22% at the end of 2023 to 10% as of the end of June
2024. This change in the portfolio was motivated by HMC's discount compression
from approximately a 44% to 38% discount during the period, as well as the
availability of deeper discounts available in other South Korean preference
shares.
After reducing exposure to LG Chem's preference shares throughout 2023, HMC
was WKOF's largest position at the end of 2023. In last year's Half Yearly
report, we discussed the improved corporate governance from HMC's management
in terms of shareholder returns and the cheapness of the preference shares
expressed in a forward dividend yield of nearly 9%. During the first quarter
of this year, market observers highlighted HMC as one of the main
beneficiaries of CVUP due to its depressed valuations and potential catalysts
for improvement. During the same period, we also observed increased market
interest in HMC's preference shares in the media and among foreign investors.
For instance, foreign investors increased their holdings of HMC's preference
shares by approximately 200 million GBP in the first fiscal quarter of 2024.
Regular readers of our investment manager reports and monthly factsheets are
likely to be familiar with our portfolio rebalancing strategy. WKOF
deliberately rotates from narrower to wider discount preference shares to
offer a portfolio with larger average portfolio discounts to our investors.
The existence of wider discounts in the preference share universe, such as LG
Electronics preference shares at greater than 55% discount and Amorepacific
Corp at greater than 70% discount, caused us to materially reduce HMC's
portfolio weight. However, a by-product of this approach may result in
higher-than-expected holdings in cash or securities held as cash replacements
(such as a Korean index ETF) when there is not matching liquidity in the
positions that we are exiting and entering. As a result, the Samsung KODEX 200
ETF, which tracks the local KOSPI 200 index, peaked at 17% of NAV but has been
reduced to under 10% as of July 2024.
Hedging
WKOF pursues its investment strategy with a portfolio that is generally
long-only. However, as further described in WKOF's Annual Report and Audited
Financial Statements for the year ended 31 December 2017 and in subsequent
Annual Reports, the Board approved a hedging strategy intended to reduce
exposure to extreme events that would negatively affect Shareholders'
Investments in WKOF because of political tensions in Northeast Asia.
WKOF has limited its use of hedging instruments to purchases of CDS and put
options on the MSCI Korea 25/50 Index, securities we believe would generate
high returns if Korea experienced geopolitical disaster, and do not introduce
material new risks into the portfolio. These catastrophe hedges are not
expected to make money in most states of the world. We expect that, as with
any insurance policy, WKOF's hedges will lose money most of the time.
The table below provides details about the hedges as of 30 June 2024. Note
that outside of the general market and portfolio hedges described herein, WKOF
has generally not hedged interest rates or currencies.
CDS Notional Amount (GBP) Cost Paid as a % of Notional Value per Annum (Spread) Expiration Date
79,104,530 0.245% 20/06/2025
Concluding Remarks
We wish to again express our thanks to our long-term shareholders for their
patience. We continue to remain disciplined and focussed on attempting to
capitalise on a rare economic anomaly in the form of Korean preference shares
trading at steep discounts to the corresponding common shares despite largely
equivalent economic rights. Whilst we believe more information about CVUP will
be known by the market over the coming months, it is difficult to determine
whether the CVUP will offer a clear path forward for valuation rerating in
South Korea.
This rare economic anomaly has also become more widely recognised, with more
investment options for investors to access the preference share universe
itself. In addition, the investable preference share market has become smaller
and less liquid as the discounts on larger companies with more liquid
preference shares have narrowed. We are keeping a close eye on these
developments - and their impact on WKOF. We look forward to updating you again
in the future.
Weiss Asset Management LP
23 September 2024
Statement of Financial Position
As at 30 June 2024
As at 30 June As at 31 December
2024 2023
(Unaudited) (Audited)
£ £
Assets
Financial assets at fair value through profit or loss 120,543,997 112,427,879
Other receivables 281,490 1,627,052
Margin account 1,423,038 1,396,037
Cash and cash equivalents 1,856,504 3,364,287
Total assets 124,105,029 118,815,255
Liabilities
Derivative financial liabilities 568,698 903,381
Due to broker 254,449 271,189
Other payables 664,849 790,981
Total liabilities 1,487,996 1,965,551
Net assets 122,617,033 116,849,704
Represented by:
Shareholders' equity and reserves
Share capital 33,912,856 33,912,856
Other reserves 88,704,177 82,936,848
Total Shareholders' equity 122,617,033 116,849,704
Net Assets Value per Ordinary Share 1.7702 1.6870
The Financial Statements were approved and authorised for issue by the Board
of Directors on 23 September 2024.
Krishna Shanmuganathan Gill Morris
Chair Audit and Risk Committee Chair
Statement of Comprehensive Income
For the period ended 30 June 2024
For the period ended 30 June 2024 (Unaudited) £ For the period ended 30 June 2023 (Unaudited) £
Income
Net changes in fair value of financial assets at fair value through profit or loss 8,955,523 (1,851,203)
Net changes in fair value of derivative financial instruments through profit or loss 334,628 36,181
Net foreign currency losses (317,329) (486,385)
Dividend income 2,945,724 392,104
Bank interest income 2,788 9,801
Total income/(loss) 11,921,334 (1,899,502)
Expenses
Operating expenses (1,915,084) (1,947,468)
Total operating expenses (1,915,084) (1,947,468)
Profit/(loss) for the period before dividend withholding tax 10,006,250 (3,846,970)
Dividend withholding tax (647,437) (86,263)
Profit/(loss) for the period after dividend withholding tax 9,358,813 (3,933,233)
Profit/(loss) and total comprehensive income/(loss) for
the period 9,358,813 (3,933,233)
Basic and diluted earnings/(loss) per Share 0.1351 (0.0568)
All items derive from continuing activities.
Following review of the AIC SORP and its impact on the Statement of
Comprehensive Income, the Board has decided not to follow the recommended
income and capital split. This is due to the fact that the Company's dividend
policy is not influenced by its expense policy.
Statement of Changes in Equity
For the period ended 30 June 2024
For the period ended 30 June 2024 (Unaudited) Share capital £ Other reserves £ Total £
Balance as at 1 January 2024 33,912,856 82,936,848 116,849,704
Total comprehensive income for the period - 9,358,813 9,358,813
Transactions with Shareholders, recorded directly in equity Distributions paid - (3,591,484) (3,591,484)
Balance as at 30 June 2024 33,912,856 88,704,177 122,617,033
Share capital Other reserves Total
For the period ended 30 June 2023 (Unaudited) £ £ £
Balance as at 1 January 2023 33,986,846 93,093,647 127,080,493
Total comprehensive loss for the period - (3,933,233) (3,933,233)
Transactions with Shareholders, recorded directly in equity Purchase of Realisation Shares (73,990) - (73,990)
Distributions paid - (3,709,107) (3,709,107)
Balance as at 30 June 2023 33,912,856 85,451,307 119,364,163
Statement of Cash Flows
For the period ended 30 June 2024
For the period For the period
ended 30 June 2024 ended 30 June 2023
(Unaudited) (Unaudited)
£ £
Cash flows from operating activities
Profit/(loss) and total comprehensive income/(loss) for the period 9,358,813 (3,933,233)
Adjustments for:
Net change in fair value of financial assets held at fair value
through profit or loss (8,955,523) 1,851,203
Exchange losses on cash and cash equivalents Net change in fair value of derivative financial instruments held 557,166 1,147,298
at fair value through profit or loss (334,628) (36,181)
Increase in receivables excluding dividends (13,594) (18,444)
Increase in other payables excluding withholding tax 172,882 92,894
Dividend income (2,298,287) (305,841)
Dividend received 3,358,429 3,626,410
Purchase of financial assets at fair value through profit or loss (39,218,509) (9,766,020)
Proceeds from the sale of financial assets at fair value through
profit or loss 40,041,173 10,921,807
Net cash generated from operating activities 2,667,922 3,579,893
Cash flows from investing activities
Opening of derivative financial instruments 87 20
Closure of derivative financial instruments (141) -
(Increase)/decrease in margin account (27,001) 1,014,745
Net cash (used in)/ generated from investing activities (27,055) 1,014,765
Cash flows from financing activities
Repurchase of realisation Shares - (73,990)
Distributions paid (3,591,484) (3,709,107)
Net cash used in financing activities (3,591,484) (3,783,097)
Net (decrease)/ increase in cash and cash equivalents (950,617) 811,561
Exchange losses on cash and cash equivalents (557,166) (1,147,298)
Cash and cash equivalents at the beginning of the period 3,364,287 2,890,620
Cash and cash equivalents at the end of the period 1,856,504 2,554,883
For further information, please contact:
Singer Capital Markets Limited James Maxwell/ James Fischer - Nominated Adviser James Waterlow - Sales +44 20 7496 3000
Northern Trust International Fund Administration Services (Guernsey) Limited Company secretary +44 1481 745001
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