Bargain Hunting in Korea
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past few days I wrote two articles: Bargain Hunting in Brazil and Bargain Hunting in France. After reflecting on those pieces, I decided that I was going to go bargain hunting in a country that would provide an interesting contrast with France. I chose South Korea mainly because it has a nice story and a healthy economy.
Fifty years ago, South Korea’s per capita GDP was comparable with levels in the poorest countries in the world. However, over the past four decades South Korea has demonstrated incredible growth and global integration. In 2004, South Korea became one of the few trillion dollar economies. That means that South Korea is currently one of the world’s 15 largest economies. The irony is that governmental intervention is what made that possible.
The South Korean government imposed restrictions on credit and imports, promoted the import of raw materials and technologies at the expense of consumer goods, and encouraged savings over consumption. Plus South Korea learned a great deal during the Asian financial crisis. As a result, South Korea became more open to foreign investment and imports. Today the economic environment (infrastructure, regulatory institutions, education, and culture) in South Korea is among the most favorable in the world -- after all, interest rates are low, exports are growing, and the country is developing its domestic-oriented sectors such as services.
Yet South Korea still has one major issue: its economy is very reliant on exports.
Then again, that just means that South Korea will benefit when the global economy picks up.
What’s more, South Korea’s inflation rate is hovering around 2%, its unemployment rate is around 3.5%, and its per capita GDP has increased from around $30,800 to $32,400 over the past two years.
For those and many other reasons, South Korea looks pretty good.
What Companies Should You Consider?
I started out with some of the usual suspects such as Samsung, Korea Electric Power, Kia, Hyundai, and a few others. Then I ruled those companies out, and instead chose to further research the following: LG Display (NYSE: LPL), Posco (NYSE: PKX), SK Telecom (NYSE: SKM), and WooriFinance Holdings (NYSE: WF).
LG Display manufactures thin-film transistor liquid crystal display (TFT-LCD) panels. Its products are used in televisions (TVs), laptop computers, desktop monitors, mobile phones, industrial devices, automobile navigation systems, aircraft instrumentation, medical devices and others. The company also produces organic light-emitting diode (OLEDs) and monitors. Its products are primarily distributed to developed overseas countries such as the United States, Germany, Japan, and Singapore.
LG Display was once a very profitable company. In 2004, for example, LG Display earned a whopping $5.11 per share. In addition, from 2007 to 2010 this company’s earnings were fairly stable given that they ranged from $2.28 and $3.39 over that time period. Furthermore, this company has grown revenues at 18%, on average, over the past 5 years. Although the company is currently struggling to make a profit, many analysts believe that this company will become highly profitable once again. All in all, this company is a fairly high risk, high return company.
Posco manufactures steel products. Its products include hot rolled steels, steel plates, wire rods, cold rolled steels, galvanized steels, electrical galvanized steels, stainless steels and others. Posco’s products are used in ships, automobiles, consumer electronics, machine structures, general structures and others. In addition to importing and exporting steel products and raw materials, the company also designs and constructs commercial and residential buildings.
Posco is a very profitable company that has demonstrated the ability to grow at a healthy rate. Over the past 5 years, for instance, this company has grown its top line by an average of more than 21% a year. As a result, this company currently generates more than $200 in revenue per share each year. So if this company can cut some costs and improve its margins, it can become very profitable. And if earnings per share improve, then the company has a lot of room to increase its dividend yield, which is currently slightly above 3%. Especially if you consider that at a current dividend payout of $2.67 per share, Posco is only using 21% of its earnings to pay its dividend.
SK Telecom provides cellular voice, wireless data, broadband internet, and fixed-line telephone services, including digital convergence and new businesses. The company's wireless data services include wireless internet access that allows subscribers to access a range of online digital content and services and to send and receive text and multimedia messages using their mobile phones. Through the company's subsidiary, SK Broadband, the company offers broadband internet access, video-on-demand, and IP television services, as well as local, domestic long-distance and international long-distance fixed-line telephone services to residential and commercial subscribers.
It appears that SK Telecom faces the same challenges that every other telecom company faces, namely regulation, increased competition and margin compression. But SK Telecom is a stable company, is trading at a P/E ratio of around 8, and has a dividend yield of more than 5%. Even though I am admittedly biased towards some European telecom companies, this company doesn’t look that bad, particularly if it were to either pull back a little or raise its dividend.
Woori Finance Holdings
Woori Finance Holdings manages and supports its subsidiaries in their operations. Its subsidiaries are involved in the a range of businesses, including banking, securities, life insurance, credit card, asset management, consumer financing and investment fund businesses. The company provides its products and services to individuals as well as to corporations.
This company has a book value of $64.07, which means that it is currently trading at a price to book value of around 0.6. Furthermore, this company trades at a P/E ratio of approximately 4, pays a modest dividend of around 2%, and is well-positioned to benefit from a global recovery. On the downside, the performance of this company is highly correlated to the performance of U.S. economy, and its earnings and revenue growth appear to have slowed.
3 Factors to Consider
- South Korea has low unemployment and embraces free trade.
- South Korea’s economy is very dependent upon exports.
- South Korean companies will benefit disproportionately from a global recovery.
My Foolish Take
All factors considered, I think that South Korea is one of the best places to consider investing. Before investing in any one company, conduct thorough research. Even though these companies are trading on the NYSE, it is still challenging to find accurate information. You may want to consider purchasing an ETF such as iShares MSCI South Korea Capped Index.
RyanPeckyno has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!