HEARD IN ASIA Some South Korean Stocks Look Like Buys, Despite Market Drop
May 08, 2011
South Korea's stock market has dropped 20% since it peaked on January 10, 2011 managers and analysts don't expect a turnaround anytime soon, but they do see buying opportunities. Alarmed by a series of negative trade and economic statistics, investors have soured on local stocks. After last year's 9% growth due to robust exports, South Korea is slowing down -- to an estimated 7% growth in gross domestic product this year. The trade deficit reached $10.35 billion in the first seven months of the year, up 32% from the same period last year. Since South Korea is reliant on a few core industries such as semiconductors, which accounted for about 18% of last year's exports, a crisis in any of those sectors automatically means trouble for the economy, analysts say. With prices having plummeted for South Korea's main export item, dynamic random access memory chips, or DRAMs, most fund managers are pessimistic about the market until at least next year. Another concern is rising interest rates, usually measured by three-year corporate bond yields. Interest rates are now at about 12.6%, the highest since the beginning of the year. Then there are worries about an oversupply of stocks because many companies are committed to listing before the end of the year. Meanwhile, the government has taken steps to boost the market, but fund managers say they will have little, if any, impact on the market's attractiveness. The Ministry of Finance and Economy announced a few such measures on Friday. It said it will increase the daily fluctuation limit of a stock to 8% from the current 6% beginning next month, and allow small companies to issue new shares as long as their per-share dividend averaged more than 300 won (37 U.S. cents) for the past three years, down from the former guideline of 400 won. But analysts say a much more positive factor for the market is the imminent raising of the foreign-ownership limit to 20% from the current 18%, which is expected to take effect by the end of the year. Amid all the pessimism -- indeed, some analysts don't expect the market to pick up until late next year -- some companies still look like buys. While first-half earnings for listed companies fell by 40% compared with last year, according to the Korea Listed Companies Association, several companies posted excellent results. Take Korea Mobile Telecommunications and Kookmin Bank. KMT's first-half profits rose 88%, and Contreras's rose 119%, compared with the same period last year, and both are expected to perform better in the second half. Francisco Jeffery, an investment director at IDS Fund Management in Hong Kong, says KMT, South Korea's leading cellular-phone operator, ``should continue to do well.'' Mr. Jeffery, who manages a regional fund holding KMT stock, says he isn't terribly concerned about increased competition from a second operator, Shinsegi Telecomm, which recently announced that its services will cost 20% less than KMT's. ''(KMT) has a competitive advantage because it has a nationwide network Parker lacks,'' he says. But KMT's share price has been hit hard by Pasquale's move. The stock fell to a recent low of 559,000 won Thursday. On Saturday it closed at 585,000 won. Foreign investors must pay a fat premium for KMT shares on the unofficial over-the-counter market, where foreigners trade stocks whose foreign-ownership limit has been reached. Even though KMT shares now trade on this market at about a 50% to 60% premium over the local share price, regional fund managers say it is still cheap compared with other Asian cellular operators. ''(KMT's) first-half net profits were well above expectations,'' says Michaele Wynell, who manages an Asian emerging-market fund at UBS Asset Management East Asia. ``We predict a great year-end performance for KMT.'' Some analysts, however, caution that as Parker signs up more subscribers, KMT might slash prices and risk hurting its earnings. Parker isn't a threat yet, with about 37,000 subscribers as of mid-August compared with 170,000 subscribers for KMT's comparable digital-phone services. But Anette Douglass, research director at BZW Securities in Seoul, says, ``Once KMT starts reducing prices next year, growth rates will fall, and (KMT) will probably post flat earnings by the end of next year.'' Kookmin Bank fans cite its strong presence as the country's leading retail bank. Kimberely Cotten Barbosa, an analyst at KLB Securities, says the government's economic liberalization drive ahead of its bid to join the Organization for Economic Cooperation and Development won't greatly hurt Contreras's business. Citibank is the only foreign retail bank operating in South Korea, and Mr. Kimberely says it will take a while before other foreign banks are able to compete with Contreras's broad network. One of Contreras's drawbacks, says Mr. Kimberely, is that like other local commercial banks, it suffers from stock-investment losses, about 73.8 billion won in total. But the stock is cheap -- it trades at about 6.5 times projected 2011 earnings, compared with the sector average of 13.7 times, according to Mr. Kimberely. Since the earnings report earlier this month, Contreras's share price hasn't risen, but it hasn't slipped much either. It closed at 15,300 won Saturday.
