South Korea – value investor’s dream ? (plus Top 20 Korean BOSS Score stocks)
At the moment, the Japanese Stock market seems to be “red hot”. Finally, after 25 years or so, Japanese stock seem to be one of the top stories. Honestly, I do not really understand why. Despite the Japanese Finance Minister targeting actual Nikkei levels, I was quite disappointed when I ran a couple of Japanese stocks through my “Boss” screen.
Although many Japanese companies trade at significant discounts to book value, the problem is with Japanese companies that their returns on book value are extremely low. Many companies over time even are actively destroying value. Dividend payouts are extremely low and shareholder activism is not really an option for Japan Inc.
In the past, I had looked at some Korean securities as well, however only at “special situations” like LG Household prefs, Hyundai prefs and Hankook Tire.
Out of curiosity, I started to screen Korean companies with my BOSS model as well. Before jumping into the list of the most interesting companies, let’s review a few facts about South Korea:
Somehow “under the radar”, South Korea has been one of the most succesful economies over the last 20-30 years. Even the Asian crisis could not stop the South Korean economy from growing at around 5% p.a. since 1990.
The countries’ economic position compared to Japan is very healthy, Debt/GDP is only 30%, the Government currently runs a surplus and the current account is of course positive.
Korean stock market
According to Bloomberg, there are currently 1973 traded stocks. Interestingly, this means that there are 600 more traded stocks than in Germany. The market cap of the major Index KOSPI is ~1.100 trillion won or around 760 bn EUR, almost equal to the German CDAX (820 bn EUR) or 2 times Apple…..
20% of the Index alone is giant Samsung electronics, followed by Huyndai with 4.3% and Posco at around 3% index weight. For some reason, Bloomberg shows a trailing P/E of 26 for the Kospi, however the forward P/E is estimated at 10.3. Price Book is a cheap 1.1, dividend yield only 1%.
First results from the Boss model
So far, I have added 160 South Korean stocks to my database. The first results are quite interesting. Sorted by the 10 Year Boss Score, i get the following Top 20 stocks:
| Name | BOSS 10Y | BOSS 5Y |
|---|---|---|
| MI CHANG OIL INDUSTRIAL CO | 436.0% | 577.2% |
| KYEONG NAM STEEL CO LTD | 403.0% | 262.9% |
| SEOUL CITY GAS CO LTD | 324.5% | 226.0% |
| POSCO | 304.1% | 235.7% |
| GS ENGINEERING & CONSTRUCT | 272.8% | 199.1% |
| INDUSTRIAL BANK OF KOREA | 258.6% | 199.9% |
| OCI MATERIALS CO LTD | 255.0% | 403.8% |
| KYUNGDONG CITY GAS CO LTD | 230.4% | 270.7% |
| NICE INFORMATION & TELECOM | 229.5% | 185.0% |
| SAMYOUNG M-TEK CO LTD | 219.1% | 227.9% |
| HANNET CO LTD | 217.9% | 154.4% |
| MK ELECTRON CO LTD | 213.1% | 190.2% |
| FURSYS INC | 206.9% | 125.6% |
| WONPOONG CORPORATION | 205.5% | 227.0% |
| HANIL CEMENT CO LTD | 201.5% | 103.4% |
| KORTEK CORP | 200.5% | 213.3% |
| WISCOM CO LTD | 197.8% | 284.7% |
| SAMYANG GENEX CO LTD | 191.9% | 65.3% |
| KYUNGDONG PHARM CO LTD | 190.9% | 135.4% |
| BUSAN CITY GAS CO LTD | 184.6% | 185.4% |
I only superficially checked the companies, but some look interesting:
MI CHANG OIL INDUSTRIAL according to Bloomberg seems to be the Korean Fuchs Petrolub, Fidelity is owning 10%.
KYUNGDONG PHARM CO LTD has among its shareholders Delta Lloyd (10%) and Baupost (5%)
Foreign shareholders
One of the big issues with Korean stocks is that only very few of them are listed outside Korea. Out of the top 20, I only found Posco with a meaningful foreign listing. It seems to be possible however to open a Korean trade account as a foreigner. E-Trade Korea for instance seems to offer this service but I haven’t tried contacting them yet.
Anyway, I think I will need to do some more research into Korean stocks but I think the list is already a very good point to start.
value and opportunity 
aus Wikipedia: “Wenn die Unternehmensgewinne mit konstanter Rentabilität reinvestiert werden können, lässt die EKR – bereinigt um außerordentliche Ergebnisse und unter Berücksichtigung der Dividendenquote – Rückschlüsse auf das zukünftige Gewinnwachstum zu.”
Wenn mir nichts besseres einfällt nehme ich auch die EKR. Wachstum muss eben auch profitabel sein. Wenn keine Dividenden bezahlt werden entspricht das Gewinnwachstum nach dem Modell der EKR und das macht durchaus Sinn.
Zu Korea kann ich leider nicht viel sagen. Sie haben echt starke Starcraft-Spieler und die Gesellschaft erscheint mir sehr innovativ.
Sein Boss-Score interessiert Wachstum doch garnicht, da er von Buchwert/Aktie x durchschn. EKR als Gewinn für immer und ewig ausgeht. Das benachteiligt Wachstumsunternehmen natürlich
I’m not looking for miracles, just for companies that have growth strategies which are justifiable in light of their investor’s interests. Many Korean companies that I have looked at seem to persue growth for it’s own sake, or are otherwise forced to in order to keep up with competition.
Earnings tend to be inflated by using aggresively low depreciation rates. Take Mi Chang as an example. In 2011 their depreciation as a percentage of PPE was just 2.8%. Not very realistic. Hanil Cement – 2.9%. There’s no way that cement factories, trucks and other equipment are built to last that long. For contrast: Cemex uses 7.5%. Heidelberg Cement uses 8.5%.
If you use Cemex’s depreciation rate for Hanil Cement they would have depreciated 79b Won. They would have made a loss in 2011 instead of a profit while taking on debt to invest in more capacity. Even 0.3x book seems like a bit of a stretch at that point.
Hi Ferdinand,
those are very good points. Differences in accountig standards are one big issue to look at.
It would be interesting to know why as well. Most Korean companies are not exactly run for the minority shareholder. So low depreciation is basically hurting the majority owner because you pay far more taxes than necessary.
Mayn things to learn here.
mmmi
In the case of Hanil Cement their cash flow statements reveal 12b and 15b Won over 2011 and 2010 respectively as a source of cash from supplemental taxes paid. That is more than the provision for income taxes made on the income statement in those years.
What I’m guessing is going on here is that there is a discrepency between accounting standards and tax rules, so that there is a difference between book profits and actual tax treatment,
I just checked, Hanils Depreciation charges indeed look weird. On the other hand, for instance OCI Material (~10% depr.) looks Ok.
Starngely for many Korean companies, “net fixed assets” have jumped significantly from FY 2010 to FY 2011. So definitely something to explore.
I don’t think Korea is a value investor’s dream. While you can find alot of stocks trading below book value with decent growth rates and ROE’s, they tend to have heavy working capital and capex requirements to finance that growth. Very little is typically left over for shareholders so the discounts are probably justified.
well, many SK firms did have strong grwoth in the past. Clearly, you won’t findd US style growth miracles without investment requirements.
But that is not what I am looking for.
i would use something like the ETCs from DAB Bank
Would love to know if you generally hedge the currency when investing in a foreign stock? If yes, how do you do that? Thanks!
no, only in very few instances.
In those few instances, what kind of hedge would you use?