Saturday, May 20, 2006

Investing in South Korea

In the previour articles, we looked at investing in China and India. As we explore more of the emerging and foreign markets, let us take a look at South Korea and see how one can invest in the Korean market. The United States has an annual trade worth 70 billion dollars with South Korea with 27 billion dollars worth of exports and 43 billion dollars worth of imports. The trade balance is improving this year with more exports and imports growing at a lower pace. The country has a population of 48 million people and a GDP of close to a trillion dollars. The per capita income is about $20,000=00. Some of the countries companies are well known around the world - examples include Samsung and Hyundai motor company. The United States is the third largest import partner and the second largest export partner for South Korea. China and Japan represent the other two important partners for South Korean trade.

China is South Korea's largest trading partner and the top most export destiny. One way to invest in China is through South Korean companies. It is possible to get exposure to China through Korean companies. Let us take a look at South Korean companies to see which ones are interesting and also funds that invest in South Korea.

The Chairman of Hyundai motor was arrested recently in an embezzlement charge. This shows that even with global name brands, the South Korean business can be scandal prone and the industry still shows emerging market characteristics. It also shows the risks in investing in emerging markets.

It is possible to invest in South Korea directly by buying the American ADRs and GDRs of South Korean companies. It is also possible to invest in South Korea by buying specific funds and ETFs. The South Korean companies have had a phenomenal ride in the past few years with significant returns that has boosted the entire emerging market segment.

The site shows the funds that invest specifically in South Korea. Interesting among them are EWY, KEF and KF. Both KF and KEF have slighltly outperformed EWY. Let us look at the expense ratios to see which ones look better.

EWY has an expense ratio of 0.74%. KEF has management fees of 2.76%. KF has an expense ratio of 0.86%. As Yahoo! comparison chart shows, KEF has done slightly better than KF and both have gained close to 150% in the past two years as can be seen at the top of this blog.

Let us look at some of the South Korean ADRs to see if the gains of past two years are sustainable moving forward. The South Korean ADRs will only give a glimpse of how things look as they are a small subset of the South Korean industry. South Korean companies make a significant percentage of the emerging market stocks.

Gravity will endeavor to bring together in one place the capital, human resources, technology and distribution channels necessary to create and publish online games, and establish a system to facilitate the publishing of online games. To accomplish this vision, Gravity plans to implement what it calls the "Star Strategy." Gravity's strategy is to interlink what it believes are the five essential elements, like the five points of a star, required for equitable investments in, and development of, online games: development, overseas network, cooperation with major local businesses, brand development and mobile business. Towards that end, Gravity recently completed a reorganization of its internal structure. Prior to its internal reorganization, Gravity had two business divisions: Korea and Overseas. Gravity now has multiple business divisions with each focusing on different geographic regions, including Korea, the United States, the European Union, and Common wealth of Independent States, CIS. According to Yahoo! finances, the EPS was a loss for GRVY.

hanarotelecom incorporated provides various telecommunication services in South Korea. It offers broadband Internet access, voice, leased line, and Internet data center services. The company provides broadband Internet access services through fiber optic networks and hybrid fiber coaxial cable networks to subscribers in apartment complexes and commercial buildings. According to Yahoo! finances, the EPS was negative for HANAD.

Kookmin Bank provides commercial banking services in Korea. It offers various deposit products, including demand deposits, time deposits, savings deposits, certificates of deposit, and foreign currency deposits. The bank provides a range of lending products that comprise mortgage and home equity loans, and other consumer loans, as well as credit cards and trust account management services. The company has a P/E of 12. This is a company that is the mainstay of many funds.

Korea Electric Power Corporation engages in the generation, transmission, and distribution of electricity in South Korea. The company has a market cap of 21 billion dollars.

KT Corporation provides telecommunication services in Korea. The company operates through two segments, Wireline Communications and Personal Communication Service. KTC has a P/E of 8 and dividend yield of 2.2%.

LG. Philips LCD Co., Ltd. supplies thin film transistor liquid crystal display (TFT-LCD) panels to third parties. The company manufactures TFT-LCD panels in a range of sizes and specifications primarily for use in notebook computers, desktop monitors, televisions, and industrial and other applications. It also supplies high-definition television panels. The company has a P/E of 20.

Mirae Corporation engages in the design and manufacture of semiconductor test handlers in the Republic of Korea. The company was profitable in 3-Q 2005 and is trading for a stock price of $1.38 in the U.S market.

POSCO engages in the manufacture and sale of a line of steel products in South Korea. Its products comprise hot rolled and cold rolled products, plates, wire rods, silicon steel sheets, and stainless steel products. PKX has a market cap of 4 billion and a P/E of 4.

Shinhan Financial Group Co., Ltd. through its subsidiaries, offers various banking and financial services to retail and corporate customers in Korea. Its services include mortgage, small business, and consumer lending, as well as accepting demand, savings, and fixed deposits. SHG has a P/E of 10 and a market cap of 17 billion.

SK Telecom Co., Ltd. provides wireless telecommunications services in Korea. The company offers cellular services using a network of code division multiple access technology. SK Telecom also develops and commercializes wireless Internet services. It also offers Internet content and services, as well as provides Internet access to its subscribers. SKM has a P/E of 10.5 and a market cap of 19 billion.

Webzen, Inc. engages in the development and distribution of online games, software licensing, and other related services, principally in the Republic of Korea and other Asian countries. WZEN has a market cap of 90 milion.

Woori Finance Holdings Co., Ltd. (WFH) operates as a financial holding company in South Korea. It engages in a range of businesses, including commercial banking, credit cards, capital markets activities, international banking, asset management, and bancassurance. The company has a P/E of 5.37 and market cap of 11 billion.

The news of the arrest of Hyundai chairman hasnt depressed Korean stocks as a group as investors continue to pour money into the emerging market funds. The Korean stocks are not expensive but they arent dirt cheap either. There is potential upside for some of these companies but it is unlikely these companies will trade at the same level as some of their counterparts in the U.S market because of the risks involved. It is also likely that Korean companies as a whole will be able to exploit the growth in emerging markets like China and India because of their investments in these countries.

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