South Korea: Asian Beacon

Investing Daily Article of the Week

by John Persinos, Managing Director, Personal Finance and Investing Daily

Despite its rising prosperity and growing middle class, South Korea is typically overshadowed on the world stage by China and Japan, its more powerful regional rivals.

Even impoverished North Korea gets considerably more attention, as witnessed last week when Bill Richardson, former governor of New Mexico, and Eric Schmidt, executive chairman of Google (NASDAQ: GOOG), led a private delegation to the communist dictatorship to argue for greater social and economic freedom.

Consider this startling fact: North Korea is home to only about 1,000 registered Internet Protocol (IP) addresses, compared with more than 112 million in South Korea.

The media may give short shrift to South Korea, but investors who do the same are missing potential profits. The country’s economy ranks 15th in the world by nominal gross domestic product (GDP), making it a G-20 member.

Global economic growth is showing signs of accelerating in 2013, which bodes well for South Korea’s export-dependent economy, especially its highly advanced technology sector.

Bank of Korea, South Korea’s central bank, predicts that the country’s GDP will grow at an annual rate of 3.2 percent this year, up from an estimated 2.1 percent in 2012.

The central bank also expects exports to expand at an annual rate of 4.3 percent in 2013, a significant rebound from a 1.3 percent reduction estimated for 2012 when the final numbers are tallied.

To be sure, these new forecasts are revised slightly downward from previous estimates, but they nonetheless point to genuine growth in the country after a dip in 2012.

The Economic Miracle

Korea’s previous historical name, Chosun, means “the land of morning calm.” But this nation’s modern political story is anything but calm.

Korea was liberated from harsh Japanese rule by Allied forces at the conclusion of World War II, only to be divided into the communist North and pro-Western South. The two sides descended into the Korean War in 1950. The war ended in a cease-fire in 1953 but without a peace treaty, leaving the divided peninsula in a technical state of war that persists to this day.

In tandem with South Korea’s economic rise are continuing tensions with its bellicose neighbor to the North and heightened concern about the expanding regional clout of China, a steadfast ally of the Stalinist-style government in Pyongyang.

Against this backdrop, Park Geun-hye was elected president in December 2012. Daughter of Park Chung-hee, South Korea’s longest-ruling strongman, she is the first woman to lead this now democratic but socially conservative country.

Geun-hye’s pro-export policies combined with rebounding domestic consumption are on track to boost the country’s economic growth. Whether her rhetoric in favor of economic reform and better relations with the North pans out or not, she is nonetheless raising hopes that economic stimulus is on the way.

Widely overlooked by investors is South Korea’s increasingly strong consumer, as reflected in GDP per capita, an indicator that measures how prosperous a country feels to each of its citizens.

According to the International Monetary Fund (IMF), the country’s GDP per capita in 2011 stood at USD22,778, giving it a surprisingly high ranking of 41 among all nations. The IMF predicts that this number will reach USD33,948 in 2016.

South Korea’s GDP per capita well exceeds that of China and India, its rivals as emerging market stars. The US came in at 11; Japan 37; China 122; and India 165 (see chart, below).

The new year is bringing winds of change to South Korea that are encouraging for its rising ranks of affluent consumers.

South Korea can proudly lay claim to being one of the world’s most compelling success stories, rising from war-torn austerity and harsh dictatorship to democracy and thriving free enterprise in a mere half century.

This economic miracle stems from the country’s singular contribution to global capitalism: huge, family-operated conglomerates, dubbed chaebols. These entities grew rapidly during the go-go 1960s and even during the recessionary 1970s largely because of regulatory favoritism and their ability to readily tap connections in government for low interest rate credit.

These chaebols have come under fire lately from the country’s reformers, who view them as stifling competition. The paradoxical role of chaebols in Korea’s social and economic life was a contentious issue in the recent elections that brought Geun-hye, a prominent conservative, to power as the country’s new president.

Although the scion of a right-wing and pro-business dynasty, Park during the campaign espoused a program of economic liberalization. She also underscored the need for entrepreneurialism and the formation of new, innovative companies to breathe greater life into a Korean business model that’s in danger of becoming ossified.

Park has also argued for the enforcement of regulations designed to foster greater competition. All of these factors now percolating in South Korea spell good news for its citizens—and for investors.

Seoul Searching

On January 7, South Korea-based Samsung Electronics (OTC: SSNLF), the world’s largest smartphone manufacturer and one of the country’s founding chaebols, announced that it would post fourth-quarter earnings for fiscal 2012 of KRW8.8 trillion (USD8.3 billion), marking an extraordinary run of five straight record quarters.

Samsung Electronics manufactures, distributes and sells a wide array of electronic products including smartphones, personal computers, digital cameras, TVs and DVD players.

Samsung generated about USD155 billion in revenue in 2011; the technology giant expects to show USD190 billion in revenue for all of fiscal 2012.

Shares in Samsung, valued at close to USD230 billion, rose a whopping 44 percent in 2012, exceeding a 9 percent rise in the broader South Korean market.

Moreover, the company’s trailing price-to-earnings (P/E) ratio is only 12, compared to about 15 for its sector, and the company sits on a huge cash hoard of USD20 billion.

The American icon Apple (NASDAQ: AAPL) dominates the US smartphone market, but Samsung rules the majority of the global market. Research firm Strategy Analytics reported this month that Samsung would probably widen its lead over Apple in global smartphone sales this year, with 35 percent growth.

The smartphone market now accounts for nearly a quarter of global technology sales, a figure that’s on track to double over the next three years.

International Data Corp (IDC), a market research firm specializing in information technology, reports that the global mobile phone market grew 2.4 percent year over year in the third quarter of 2012, driven by sales from companies such as Samsung.

According to IDC, vendors shipped a total of 444.5 million mobile phones in the third quarter, compared to 434.1 million units in the same year-ago quarter.

Fourth-quarter figures are yet to be released, but they’re expected to show similar strong growth. IDC estimates that by 2015, one billion smartphones will be in use around the world.

A more conservative way to profit from these trends is through the iShares MSCI South Korea Index (NYSE: EWY) exchange-traded fund. Roughly 23 percent of the ETF’s holdings are shares of Samsung.

In the Bank

A third play on the South Korean renaissance is KB Financial Group (Seoul: 105560, NYSE: KB).

Despite woes experienced by overextended banks throughout the world, especially in debt-plagued Europe, KB Financial racked up steady growth in 2012.

The company’s total assets reached KRW277.6 trillion, a year-over-year increase of 7.2 percent. Total loans last year were KRW212.1 trillion and deposits KRW190.3, for year-over-year increases of 7.3 percent and 5.8 percent, respectively.

The company’s Tier-1 ratio, which measures sufficiency of capital, is now 11 percent, highest among its peer group. Its price-to-book ratio is low at 6.

In late December, KB Financial once again proved its tendency toward prudent due diligence, when its board scuttled a USD3 billion deal to purchase ING Groep’s (NYSE: ING) South Korean operations, citing the attempted foray into the insurance business as too risky.

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