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Hopes of Korean peace treaty lift SKAGEN Focus' cement producers

Hopes of peace on the Korean peninsula have begun to emerge following the meeting between North Korean leader Kim Jong-Un and South Korean President Moon Jae-In in the demilitarised zone. The meeting took place just four months after they stood on the brink of armed conflict.

Boost for construction and transport

In connection with the historic meeting, both parties have signed a joint statement to aim for peace between the countries and strive for total nuclear disarmament. Although the road to peace remains long and many difficult questions remain, the outcome of the meeting may also have far-reaching consequences for the economies of both countries.

If South and North Korea decide to cooperate, this may result in a rebound for the building and transport industry in South Korea in particular. It may also be important for nearby regions, which have been negatively affected by the geopolitical unrest previously.

Dynamic cement duo in South Korea

Prior to the meeting between the leaders, the equity fund SKAGEN Focus' positions in South Korean Hanil Cement and Asia Cement rose by 35 and 34 percent, respectively, as measured in local currency. There is a chronic shortage of cement in North Korea, with a production corresponding to a tenth that of its neighbouring country. Very few investments have been made in North Korea's cement industry since the beginning of the millennium, and production currently suffers from lack of equipment and electricity.

"We own a dynamic duo through two of the leading cement producers in South Korea, both of which are trading at a significant discount to our price target which is based on the underlying value and comparable global companies. They are in an industry which has recently been consolidated through mergers. We believe that this will create a better operational environment for the remaining players and at a more rational price level," says Jonas Edholm portfolio manager of SKAGEN Focus.

Free option

"Both Hanil Cement and Asia Cement are trading at a significant discount to their current earnings. Any infrastructure projects between North and South Korea may lead to greater demand for cement, which would be favourable for the industry. However, this is a free option that we have through these investments and not something we built our original investment thesis on," adds Focus colleague David Harris.

In South Korea, the cement industry has been through a period of restructuring and the number of players has fallen. When the SKAGEN Focus portfolio managers first bought into Asia Cement and Hanil Cement in the autumn of 2017, the companies' share prices were low and they were both trading at a large discount to the global cement sector.

The fund has reduced its positions in both Hanil Cement and Asia Cement following the surge in share price.

The North and South Korean leaders have met on two previous occasions in the recent past. The previous meetings took place in Pyongyang in 2000 and 2007 and led to a number of economic and military agreements, but no practical consequences ensued.

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