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.

 

Ticker Name Sector Price

Mkt Cap

(Wbn)

Score EV/EBITDA (NTM) ROCE (FY1) Rating
006360-SE Gs Engineering & Construction Corp Industrials 27,650

1,897

(11.1) (1,999.9) -11%

U

020760-SE Iljin Display Co Ltd Information Technology 16,700

456

(3.4) 5.9 41%

052690-SE Kepco Engineering & Construction Co Inc Industrials 66,100

2,201

(1.8) 9.4 26%

005930-SE Samsung Electronics Co Ltd Information Technology 1,313,000 213,703 (1.6) 3.1 23%

E

035420-SE Naver Corp Information Technology 271,000 19,613 (1.5) 20.2 24%

O

086280-SE Hyundai Glovis Co Ltd Industrials 189,000

8,081

(1.4) 11.2 22%

O

021240-SE Coway Co Ltd Consumer Discretionary 50,100

4,589

(1.4) 9.1 22%

000660-SE Sk Hynix Inc Information Technology 29,750 23,721 (1.2) 3.7 20%

U

018880-SE Halla Visteon Climate Control Corp Consumer Discretionary 34,500

4,158

(1.2) 7.1 20%

E

161390-SE Hankook Tire Co Ltd Consumer Discretionary 50,600

7,916

(1.1) 6.5 19%

E

004130-SE Daeduck Gds Co Ltd Information Technology 20,750

401

(1.1) 2.0 19%

051900-SE Lg Household & Healthcare Ltd Consumer Staples 530,000

7,820

(1.1) 12.8 19%

O

033920-SE Muhak Consumer Staples 18,200

516

(1.0) 6.0 18%

000270-SE Kia Motors Corp Consumer Discretionary 56,500 26,105 (0.9) 4.7 18%

O

002270-SE Lotte Food Co Ltd Consumer Staples 622,000

818

(0.9) 7.1 18%

004490-SE Global & Yuasa Battery Co Ltd Consumer Discretionary 53,900

704

(0.9) 3.0 17%

044820-SE Cosmax Inc Consumer Staples 44,000

621

(0.9) 15.7 18%

036570-SE Ncsoft Corp Information Technology 156,500

4,219

(0.8) 13.0 17%

U

011210-SE Hyundai Wia Consumer Discretionary 160,500

4,477

(0.7) 6.0 16%

E

007810-SE Korea Circuit Co Ltd Information Technology 16,250

323

(0.7) 3.9 15%

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.
Ticker Company Sector Price

Mkt Cap

(Wbn)

EPS Growth(2010-12 vs 2005-07)

P/E

P/B P/E * P/B Rating
000270-SE Kia Motors Corp Consumer Discretionary 64,400 26,105 7410%

7.8

1.5 12.0

O

009540-SE Hyundai Heavy Industries Co Ltd Industrials 281,500 21,394 186%

6.4

1.0 6.5

O

096770-SE Sk Innovation Co Ltd Energy 153,000 14,153 450%

7.7

0.9 7.1

O

011780-SE Kumho Petro Chemical Co Ltd Materials 108,000 3,306 233%

6.1

1.8 10.7

097950-SE Cj Cheiljedang Corp Consumer Staples 250,000 3,275 1982%

8.3

1.1 8.9

O

028050-SE Samsung Engineering Co Ltd Industrials 78,900 3,156 368%

6.3

1.7 10.6

E

001450-SE Hyundai Marine & Fire Insurance Co Ltd Financials 28,100 2,512 384%

9.0

1.3 12.1

O

000240-SE Hankook Tire Worldwide Co Ltd Financials 25,150 2,339 209%

1.3

0.8 1.0

001120-SE Lg International Corp Industrials 31,500 1,221 334%

4.8

0.8 4.0

006120-SE Sk Chemicals Co Ltd Materials 51,500 1,073 319%

5.4

0.7 3.8

001430-SE Seah Besteel Corp Materials 26,750 959 189%

5.8

0.7 4.1

000070-SE Samyang Holdings Corp Consumer Staples 86,300 707 326%

3.4

0.5 1.7

004490-SE Global & Yuasa Battery Co Ltd Consumer Discretionary 50,300 704 533%

7.5

1.2 9.0

000640-SE Dong-a Socio Holdings Co Ltd Health Care 152,000
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