S. Korea Builders, Banks May Rise, Shrugging Off Property Curbs
By Kyung Bok Cho
Jan. 24 (Bloomberg) -- South Korean construction companies and banks, whose declines helped make the local stock market Asia's worst performer this year, may be poised for a rebound.
Both groups slumped on concern that demand for houses would fall after the government on Jan. 11 tightened mortgage-lending rules to cool rising household debt and property prices. Shares of developers such as Daewoo Engineering & Construction Co. are among the market's biggest losers. Kookmin Bank, the nation's largest lender, led banks down in the first week of trading.
The stocks have become cheap by Asian industry standards, and earnings beyond housing and mortgages may provide investors with reasons to buy. Bright spots include business loans for banks and overseas contracts for builders.
``Valuations are approaching fairly interesting levels and we're still seeing a stronger earnings profile than the market gives them credit for,'' said Michael Marusiak, who manages about $3 billion in Asian and emerging-market stocks at Principal Global Investors in Singapore. His holdings include Kookmin and Daewoo Engineering, according to data compiled by Bloomberg.
The Korea Construction Index of 38 developers has dropped 13.3 percent this year, the second-worst performance among 19 industry groups in the benchmark Kospi index.
The KRX Banks Sector Index, which tracks the nation's 10 biggest lenders, fell 5.4 percent in the year's first five days before rebounding. The index is down 0.6 percent for 2007.
Now Cheap?
Concern that property-market restrictions may slow the South Korean economy contributed to this year's 5 percent decline in the Kospi. Construction spending amounted to 15.5 percent of the economy in the third quarter.
Banks and builders together account for about 18 percent of the Kospi's value, and the industries' declines have made their shares cheap compared with regional peers.
South Korean builders are valued at 11 times earnings on average, below the ratio of 18 times for an index of 55 Asian construction stocks tracked by Bloomberg. The nation's banks trade at an average of 9.9 times earnings versus a price-to- earnings ratio of 16 times for a regional index of lenders tracked by Bloomberg.
Lower prices have increased the attractiveness of such stocks as Daewoo Engineering, South Korea's biggest builder by market value, and GS Engineering & Construction Corp., the third largest, UBS AG said in a Jan. 17 report.
Hot Real Estate
``We prefer stocks which have a balanced portfolio that can offset the weaker housing market or stocks that have corrected sharply,'' wrote Son Yong Suk, an analyst at UBS.
South Korean home prices increased 11.6 percent in 2006, the biggest gain in four years. Government officials, including President Roh Moo Hyun, have said since September that they intend to bring down prices.
Finance Minister Kwon Okyu and central bank Governor Lee Seong Tae both have warned that swelling household debt could threaten the nation's longest economic expansion in a decade.
The government's measures include home-price caps, stricter screening of borrowers and curbs on the number of loans an individual can take out.
Kookmin, based in Seoul, pre-empted the restrictions by tightening its rules on mortgage loans exceeding 50 million won ($53,000), starting Jan. 3. The bank limits paybacks, including interest, to 40 percent of a borrower's income.
Other Earnings
Amid the restrictions, some investors remain wary of developers until the measures play out.
``We don't think they're at the real bottom,'' said Edgar Chuan, who doesn't hold South Korean builders among the $300 million he manages at Descartes Investment Management in Hong Kong. ``For any policies to take final effect it takes about two to three quarters. We want to wait for a clearer picture.''
Initial concerns that tighter credit conditions would stunt bank earnings are receding as investors bet lenders will respond by lifting borrowing rates.
``Higher interest rates are positive for banks' profitability,'' said Kim Hyun Wook, who manages about $210 million at KB Asset Management Co. in Seoul. ``We're interested in bank stocks.'' He holds Shinhan Financial Group Ltd. and Woori Finance Holdings Co., the nation's second- and third- biggest lenders.
Even if home prices do fall and housing loans shrink, South Korean banks and builders have other sources of profit.
LG Card
Business loans rose 42.2 trillion won last year, compared with a gain of 15 trillion won in 2005. Last month, loans rose by 2.1 trillion won, rather than falling as they did in the previous two Decembers, the Bank of Korea said this month.
Banks also stand to profit from selling stakes in LG Card Co., the country's second-largest credit-card company by billed charges, which they acquired in 2004 in bailing out the company. Shinhan signed a final contract last month to buy LG Card from creditors for 6.7 trillion won.
Mirae Asset Securities Co. estimated in a Jan. 16 report that banks will gain about 2 trillion won from LG Card shares, helping raise average net profit this year by 25 percent. The firm upgraded the industry to ``attractive'' from ``neutral.''
South Korean construction companies were awarded a record $16.5 billion in overseas contracts last year, 52 percent more than in 2005, the Ministry of Construction and Transportation said Dec. 28. Work on power plants and oil refineries in Saudi Arabia and other Middle East nations led the gain. Orders will reach more than $18 billion in 2007, the government says.
Work outside South Korea may account for 16 percent of sales this year at Daewoo Engineering, up from 14 percent last year, Good Morning Shinhan Securities Co. said. Eight of the 11 analysts tracked by Bloomberg have a ``buy'' recommendation on the Seoul-based company's shares.
Hyundai Engineering & Construction Co., the second-largest South Korean developer by market value, may boost revenue from overseas to 25 percent from 22 percent, Good Morning said. All but four of 16 analysts tracked by Bloomberg suggest investors buy stock in the company, also based in Seoul.
To contact the reporter for this story: Kyung Bok Cho in Seoul at kcho7@bloomberg.net |
