By Martin Hutchinson
Contributing Editor
Amid all the gloom investors are feeling right now, South Korea has produced some sunny rays. On April 9, the Asian Tiger suggested that its economy could accelerate and that its stock market could take off.
The splendidly named Grand National Party, allied to the new President Lee Myung-bak, won a majority in the local legislature, taking about 153 of the 299 seats itself and having allies and friendly independents that hold roughly another 40 seats. The center-left opposition - in power both presidentially and legislatively until last December - was reduced to around 70 seats.
You may reasonably ask why you should care. There are, after all, about 183 countries in the world, perhaps 100 of which are more or less democratic in nature, which gives you roughly 30 elections a year to worry about. Figuring out who are the "good guys" in that number of races is absolutely impossible - even in Korea, which is one of our more-important trading partners.
Every now and then, however, an election brings a change that is truly significant, either politically or economically. In Korea, this election has brought significant positive economic change.
Since the Asian crisis of 1997, Korea has been run by the center-left. That group didn't do too bad a job: Economic growth ticked along at an average annual rate of between 4% and 5%. The per-capita growth rate is about the same, given that Korea has only 0.4% per annum population growth. There's a budget surplus, and the country also boasts a balance of payments surplus. Overall inflation is only 2.5%. The stock market is around double its 2003 level, which is when the previous [and now-outgoing] government came into power.
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As nice a job as the outgoing government managed to do, its policies also included a few that held back growth. For instance, government spending rose from 21% of Gross Domestic Product (GDP) to 28% over the decade the left was in power. That increase in government outlays saps resources from the private sector by diverting the resources into less-productive public sector uses - reducing the economy's overall productivity growth.
The outgoing government also imprisoned the chairmen of three of Korea's top six chaebol conglomerates, and placed severe restrictions on their expansion. SK Telecom Co. Ltd. (SKM), for example, part of the Sunkyong Group, was not permitted to increase its cell-phone market share significantly above 50%. Only after Lee's presidential election victory in December did restrictions start to relax. In February, SK Telecom was permitted to acquire 44% of its competitor, Hanarotelecom.Inc. (OTC: HANAY).
However, President Lee's more free-market approach seems likely to ratchet Korean growth up a notch. He ran for election on the platform that Korea should expect a growth rate of 7% - not 5% - and with a budget surplus and low inflation rate he is well positioned to deliver his goal. Lee has promised both corporate and individual tax cuts, and a major program of privatization, starting with three state-owned banks - including the Korea Development Bank.
He is also likely to take a tougher stance toward the potentially volatile leadership in North Korea, cutting back on handouts and adopting a harder line against its northern neighbor's alleged nuclear-weapons programs. This newfound aggressiveness by the South Korean leadership will save money both for the government and for the big conglomerates, since they had been expected to undertake unprofitable prestige projects in the North.
There are five Korean stocks that have American Depository Receipts (ADRs) that are fully listed on the New York Stock Exchange and that trade in reasonable volume. Some of these are more attractive than others-Kookmin Bank and SK Telecom in particular seem especially good bargains. Let's take a look at each of the five, starting with an overview and including an investment rating on the shares:
- Kookmin Bank: (KB): The largest bank in Korea, KB has been hit by investor disillusionment with the financial services sector; at one point it was down 50% from its 2007 high. However, the stock has rallied recently. The bank's earnings have continued to make steady progress and it has no exposure to the U.S. subprime mortgage market. Kookmin's shares are trading at a Price/Earnings ratio of only 7.5 on trailing 12 months' earnings, and its P/E on projected earnings for the next 12 months is a staggeringly low 6.6. Those earnings are expected to increase in a big way. One last benefit: Kookmin's shares feature a dividend yield of 4%, which is more than you'll get out of Treasuries these days. Rating: "Strong Buy."
- Korea Electric Power Corp.: (KEP): Shares of the Korea's electric power company are up slightly from where we recommended them back in December. The shares feature a P/E of 11 on projected earnings, and a dividend yield of 2.4%. KEP's steady growth should benefit from any acceleration in Korea's economic growth rate, but it is forced to buy coal from overseas, which has doubled in price in the past year. With an election in the offing, it suffered from price controls in the latter part of 2007, but should presumably have more freedom to raise its tariffs going forward. Rating: "Hold."
- KT Corp.: (KTC): Formerly Korea Telecom, KT is now Korea's leading "fixed-line" telecommunications provider, which was privatized in 2002. While the P/E ratio on trailing earnings is less than 9, its forward P/E is 11.5 as its margins are under assault from the hyper-competitive Korean telecom market. It has a dividend yield of 4%. Rating: "Hold."
- Posco: (PKX): Korea's largest steel company, and the world's most-efficient steelmaker, Posco's shares sport a Price/Earnings ratio of about 11, and a dividend yield of 2%. The company is a major exporter into China, making it a key participant in that country's explosive growth. The company does buy its iron ore from Brazil's Vale (RIO), and was socked with a 65% price increase in this crucial raw material. But don't forget that investment guru Warren Buffett made Posco one of the 20 Korean companies he invested in last year. If nothing else, that's a reminder that Posco will become very attractive when the commodities bubble deflates, even though it may be a tad early to make your move right now. Rating: "Buy/Hold."
- SK Telecom: (SKM): It's Korea's largest mobile phone company, with operations in China and Vietnam. The stock is now trading at only 8.7 times estimated 2008 earnings, and has a hefty 4.9% dividend yield - so income investors do well from it, also. For many years, its market share in Korea was capped at 50%. But now the shackles are coming off; in fact, SKM recently got the green light to buy 44% of Hanarotelecom, Korea's second-largest cell phone company. In 2006, SKM invested in a $1 billion convertible offering for China Unicom, Mainland China's No. 2 mobile-phone company; in August 2007, the bonds were converted into a 6.6% in China Unicom with a current value of almost $2 billion. In Vietnam, SKM's 73% owned Vietnamese subsidiary had 3.5 million subscribers in 2007, and it's now aiming for 5 million in 2008. Only its U.S. operations are showing losses, but even those could turn around. Rating: "Buy."
News and Related Story Links:
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Wikipedia:
Lee Myung-bak.
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VarietyAsiaOnline.com:
Korea Clears Hanaro Telecom Takeover.
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Wikipedia:
American Depository Receipts (ADRs).