Morgan Stanley Asia Pacific analysts Shawn Kim and Daisy Ryu analyze opportunities in Korea in their work “Korea, the New Safe Haven – Stocks to Buy and Avoid” of October 20th.

MSCI Korea is up 13 percent since August 23, 2013

Foreign buying looking for a safe haven piled into South Korean equities after August 23, pushing it up 13% (20% in USD terms). Morgan Stanley’s valuation models say Korean equities are now within 2% of fair market value, and that “a lot of the good news is already in the price, and there are risks out there…”

Are there any value picks left?

The report carries two very interesting quant screens – inspired by Joel Greenblatt and Benjamin Graham, respectively.

These screens are intended to be a starting point for locating investment-worthy candidates and the authors say the results should be used in conjunction with the fundamental factors that should drive equity investment in Korea. These are:

  • Rising return on equity (driven by asset turns)
  • Pricing power
  • Quality yield
  • A macro call, which favors domestic exposure.

The Joel Greenblatt buy screen results

This screen looks for high quality companies (high ROCE) that are also cheap (low EV/EBITDA) from the universe of KOSPI 200 & MSCI Korea as of October 16, 2013. The table below shows the top 20 ranked companies sorted by most undervalued score.

 

TickerNameSectorPrice

Mkt Cap

(Wbn)

ScoreEV/EBITDA (NTM)ROCE (FY1)Rating
006360-SEGs Engineering & Construction CorpIndustrials27,650

1,897

(11.1)(1,999.9)-11%

U

020760-SEIljin Display Co LtdInformation Technology16,700

456

(3.4)5.941%

052690-SEKepco Engineering & Construction Co IncIndustrials66,100

2,201

(1.8)9.426%

005930-SESamsung Electronics Co LtdInformation Technology1,313,000213,703(1.6)3.123%

E

035420-SENaver CorpInformation Technology271,00019,613(1.5)20.224%

O

086280-SEHyundai Glovis Co LtdIndustrials189,000

8,081

(1.4)11.222%

O

021240-SECoway Co LtdConsumer Discretionary50,100

4,589

(1.4)9.122%

000660-SESk Hynix IncInformation Technology29,75023,721(1.2)3.720%

U

018880-SEHalla Visteon Climate Control CorpConsumer Discretionary34,500

4,158

(1.2)7.120%

E

161390-SEHankook Tire Co LtdConsumer Discretionary50,600

7,916

(1.1)6.519%

E

004130-SEDaeduck Gds Co LtdInformation Technology20,750

401

(1.1)2.019%

051900-SELg Household & Healthcare LtdConsumer Staples530,000

7,820

(1.1)12.819%

O

033920-SEMuhakConsumer Staples18,200

516

(1.0)6.018%

000270-SEKia Motors CorpConsumer Discretionary56,50026,105(0.9)4.718%

O

002270-SELotte Food Co LtdConsumer Staples622,000

818

(0.9)7.118%

004490-SEGlobal & Yuasa Battery Co LtdConsumer Discretionary53,900

704

(0.9)3.017%

044820-SECosmax IncConsumer Staples44,000

621

(0.9)15.718%

036570-SENcsoft CorpInformation Technology156,500

4,219

(0.8)13.017%

U

011210-SEHyundai WiaConsumer Discretionary160,500

4,477

(0.7)6.016%

E

007810-SEKorea Circuit Co LtdInformation Technology16,250

323

(0.7)3.915%

Morgan Stanley rates the stocks indicated in bold above as Overweight.

The Benjamin Graham buy screen results

Morgan Stanley (NYSE:MS) applies to the Korean market the guidelines described for value investors in Benjamin Graham’s book, The Intelligent Investor (Chapter 14) from the universe of KOSPI 200 Index (INDEXKRX:KOSPI200) & iShares MSCI South Korea Index Fund (ETF) (NYSEARCA:EWY) as of October 16, 2013. Screening for:

  • Strong earnings track record – EPS growth > 160% last five years
  • Inexpensive valuation: 1) P/E (three-year average EPS) is > 25% discount to market multiple, and 2) P/E x P/BV is more than 40% discount to market multiple.
1, 2  - View Full Page
TickerCompanySectorPrice

Mkt Cap

(Wbn)

EPS Growth(2010-12 vs 2005-07)

P/E

P/BP/E * P/BRating
000270-SEKia Motors CorpConsumer Discretionary64,40026,1057410%

7.8

1.512.0

O

009540-SEHyundai Heavy Industries Co LtdIndustrials281,50021,394186%

6.4

1.06.5

O

096770-SESk Innovation Co LtdEnergy153,00014,153450%

7.7

0.97.1

O

011780-SEKumho Petro Chemical Co LtdMaterials108,0003,306233%

6.1

1.810.7

097950-SECj Cheiljedang CorpConsumer Staples250,0003,2751982%

8.3

1.18.9

O

028050-SESamsung Engineering Co LtdIndustrials78,9003,156368%

6.3

1.710.6

E

001450-SEHyundai Marine & Fire Insurance Co LtdFinancials28,1002,512384%

9.0

1.312.1

O

000240-SEHankook Tire Worldwide Co LtdFinancials25,1502,339209%

1.3

0.81.0

001120-SELg International CorpIndustrials31,5001,221334%

4.8

0.84.0

006120-SESk Chemicals Co LtdMaterials51,5001,073319%

5.4

0.73.8

001430-SESeah Besteel CorpMaterials26,750959189%

5.8

0.74.1

000070-SESamyang Holdings CorpConsumer Staples86,300707326%

3.4

0.51.7

004490-SEGlobal & Yuasa Battery Co LtdConsumer Discretionary50,300704533%

7.5

1.29.0

000640-SEDong-a Socio Holdings Co LtdHealth Care152,000