Korean Small Cap Stock Pitch by Dan Rupp (Parkway Capital)
Interview #136 - Discusses background, finding value in Asia, and pitches a South Korean small cap.
For this edition we welcome Dan Rupp from Parkway Capital Limited.
(Disclaimer: This interview is for informational and educational purposes only, and should not be seen as investment advice. Please do your own research before investing in any company mentioned).
Thanks so much for taking the time to do this interview.
Can you please tell readers about your background, and how you got involved in investing?
I grew up in the mountains of North Carolina in a large family. My three brothers and I all worked summer jobs to make some money, and at some point we started pooling that money to invest.
My oldest brother was the fund manager, and we bought a handful of stocks. While the analysis may have been limited, it got me excited about the stock market and drew my attention to the business section of the local newspaper – the Winston-Salem Journal. Before those summers, I turned first to the sports section.
After I graduated college, I taught in math and science in Cameroon as part of the Peace Corps and then spent time in Japan with the JET program.
After those experiences learning about the world, I returned to earn my MBA at Yale where I studied finance and investing. That jumpstarted my career as a professional investor when I was introduced to Overlook Investments.
Can you provide readers with a brief overview of your investment style and strategy - what type of businesses and situations do you like to invest in?
I spent nearly two decades at Hong Kong-based Overlook Investments, which manages around $8 billion and has one of the most successful track records of investing in Asia.
After studying the art and science of investing in Asia from my mentors – Richard Lawrence and James Squire – I wanted to embrace my entrepreneurial spirit and build my own firm focusing on small, growing businesses that wouldn’t move the needle for a larger fund.
Parkway is a pan-Asia (excluding India) long-only equity fund, primarily investing in compounders with a focus on value.
I founded Parkway in the summer of 2023, a time when some were calling China ‘uninvestible.’ It was a great time to launch a fund focused on value in Asia because we had many attractive opportunities available.
We split Asia into three geographies: North Asia (Taiwan, Japan, Korea), China + HK, and Southeast Asia.
We aim to have some balance across these three regions. Our objective is to deliver a portfolio with at least 10% earnings growth and at least 3% dividend yield. We call this the 10+3 Framework.
While 10% growth may sound easy, since its 2006 inception our benchmark has delivered 3% earnings growth and the S&P 500 has delivered 6% earnings growth over that period.
In addition to superior through-cycle growth, value is core to our investing style. Our mantra is to be ‘higher-quality and cheaper’ than the passive alternative.
Our investible universe across Asian markets is about 10,000 companies. We categorize companies as compounders, defensive, or deep value. We aim to keep most of the portfolio in compounders, whose primary function is to help us achieve at least 10% earnings growth for the fund.
We underwrite compounders for holding periods of at least 2-3 years, and I think in the fund today we have a handful of companies that we can hold for a decade or more.
Joining me on the team is our Chief Operating Officer Tom Royds and three wonderful analysts. One of our analysts brings more of a quant background and has created several useful tools that I use in managing the portfolio.
We keep the Parkway scorecard, which is a great way to quickly reduce our investible universe to a more manageable number of ideas.
Visiting companies and meeting management teams is crucial to our investment process, and collectively we meet about 300 companies each year.
The scorecard gives us a snapshot of a company’s financial history and current valuation, and we use the company meetings as a chance to learn more about the short- and medium-term outlook.
We don’t invest in companies just because they are cheap. There are hundreds of statistically cheap companies across Asia.
We also need the business to be high quality and managed by trustworthy executives who are taking clear steps to improve the business and grow shareholder value.
We look at capital returns very carefully, and the portfolio currently has a dividend yield of 4.4% and a buyback yield of 1.9%.
Where in Asia are you finding some of the most compelling opportunities? Is there any country or industry you will avoid?
Within North Asia, we are most keen on Korean small and mid-cap companies.
A lot of great companies that have little to do with artificial intelligence are being ignored by local retail investors piling into Samsung Electronics and SK Hynix. That has created a lot of temporary dislocations and great buying opportunities.
Similarly, many Chinese “old tech” companies are currently unloved. The Hang Seng Index fell almost 20% over a six-month period this year as investors rushed to buy into hot AI-related IPOs.
Several of the highest-quality Chinese tech companies are now trading at single-digit multiples, sitting on tons of cash, and are actively buying back a meaningful amount of their own stock.
We think a lot of the more established Chinese tech companies are undervalued, and we want to be invested in a select few of these companies where management is most aggressively taking advantage by reducing their share count at attractive prices.
Finally, in southeast Asia we continue to like Indonesia and the Philippines. While the Iran war has created some obvious short-term fiscal headwinds for these countries due to their energy imports, the companies we own there tend to have fortress balance sheets and offer a great combination of growth and yield.