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 | 660 | 302% |
8.0 |
0.7 | 5.5 |
– |
| 002240-SE | Kiswire Co Ltd | Materials | 37,200 | 558 | 176% |
7.2 |
0.5 | 3.5 |
– |
| 003030-SE | Seah Steel Corp | Materials | 90,000 | 540 | 204% |
5.5 |
0.5 | 2.9 |
– |
Morgan Stanley rates the stocks indicated in bold above as Overweight.
Morgan Stanley’s overall top picks in Korea
