Despite a jailed leader and fallout from THAAD, Samsung shares are on a tear

Investors go wild for a handcuffed corporate mogul.
Investors go wild for a handcuffed corporate mogul.
Image: Reuters/Kim Hong-ji
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Samsung is surrounded by bad news—but its investors aren’t the least bit bothered.

On Mar. 8 shares in the company closed at 2.01 million won ($1,754.73), marking a record high. That’s the stock’s thirteenth such record closing in 2017, according to Factset, and the continuation of a longer rally that lasted throughout 2016.

If you looked at what Samsung was up against, however, you might think its investors are crazy.

For one thing, the company faces turmoil at the very top. On Feb. 17, Korean authorities arrested Samsung’s de-facto leader, Lee Jae-yong. Prosecutors charged him with bribery and embezzlement related to a larger scandal surrounding South Korean president Park Geun-hye. Lee’s trial is set to begin Thursday, and he is expected to deny the charges. Yet since the date of his arrest, Samsung Electronics shares have climbed 6.25%, according to Factset.

In contrast, other global Korean conglomerates have taken a beating on the market in recent weeks. That’s because of China’s opposition to THAAD, a missile defense system that South Korea has started to deploy with the help of the United States. China views THAAD’s surveillance capabilities as a threat to its military security, even though the system’s main purpose is to destroy missiles fired from North Korea. In response, over the past several months, Beijing has thrown hurdles at South Korean businesses operating in China. Since Feb. 17 shares in Lotte Shopping, a sub-unit of the Lotte Group (which has direct ties to THAAD) have fallen 11%.

Amorepacific, a major makeup brand that Beijing recently banned imports of, has lost 5.7% of its share price value since Feb. 17.

Hyundai Motor has also endured a share price plummet—its stock is down 4.3% since Feb. 17. While neither Beijing nor Seoul have announced any public or presumed restrictions on Korean autos, in China, Hyundai recently announced it would delay the launch of an upcoming electric vehicle in China by one year, and some of China’s anti-THAAD protestors have acted out by smashing Hyundai cars.

Hanatour, a Korean travel company that arranges tours across Asia, has fallen 12.1% between Feb.24 and its most recent close. The drop brought a halt to a quarter-long rally that saw its share price rise more than 40% since January. 2. The fallout coincides with reports that Beijing placed restrictions on Chinese tour groups heading to South Korea.

Samsung Electronics, like those other companies, does plenty of business in China. In addition to selling smartphones and other consumer electronics, it supplies components for these devices to domestic Chinese electronics vendors, who place them in phones and gadgets bearing other brand names.

What explains the soaring price, amid geopolitical and corporate uncertainty?

First, it signals that Lee’s detention has not eroded investors’ faith in Samsung. In fact, the opposite might be true. Shareholders are so fed up with Samsung’s opaque corporate ownership structure that they hope his trial might pave the the way for reform.

Many investors believe that Korean conglomerates, including Samsung, are undervalued (paywall) and deliver inadequate returns to their current shareholders. Part of their frustration stems from byzantine corporate ownership structures, which prevent financial transparency and pave the way for endemic corruption.

Korean courts in the past have dealt with corrupt businessmen with a light touch. But the detention of Lee, who oversees the country’s largest conglomerate by revenue, and his upcoming trial provides hope for Koreans who are tired of the country’s business moguls running their businesses like their personal pocketbooks—as well as for aggrieved Samsung investors who insist the same system enabling corruption is also squeezing returns.

The rising share price also reflects confidence in Samsung’s components business. The company remains a leader in OLED screens and memory chips, and analysts expect profits from phone guts to exceed profits from its smartphones in 2017. If Chinese smartphone makers hope to release high-end devices and stay competitive, they’ll have to look to Samsung for screens and chips. That suggests that even as Chinese authorities shut down Korean supermarkets and cut off tourism to Korea, Samsung investors seem to believe that technology will be spared.