Continuing with Richard Samuelson Interview
In reponse to a question about expected foreign investment in S. Korea, RS said "... only a handful of companies merit foreign interest. Let me just give you a couple of numbers. I have a sort of big spreadsheet of aggregating (sic) all manufacturing earnings and sales and cash flow, and if you look back over the last eight years, on aggregate, return on equity has never exceeded 8.4 percent here in aggregate, in the best years; and it's been as low around (sic) 4.3 percent. Well you know, the benchmark corporate bond yield here is anywhere from 11.5 to 12.5 percent. All right? Now, admittedly, there are companies that have much higher than 8.4% return on equity, LG Information and Communication is one of them. But it gives youa sense for what the average return is here and, frankly, for a minority investor, that's really not that attractive."
RS then went on to state that one stock he liked and was buying was Samsung, saying "Yes. Yes, I do [think it's been oversold]". In response to a question about companies "where you might be a little contrarian" he mentioned Korea Housing Bank: "Well, we've got a clear buy on Korea Housing Bank, and I'm not sure all brokers would touch any Korean bank at this point."
Getting back to my favorite Korean issue, TWST asked, "Are there one or two other companies that you think may be growing with the internal economy?" RS responded, "The classic one would be Korea Electric Power Corp. Korea is interesting. Korea subsidizes its industrial sector, in other words, when I speak of Korea, I speak of Korean consumers. In other words, the tariff rate for the consumer sector here is nearly double that of the manufacturing sector and it's a very deliberate policy to make electricity cheap for capital intensive industries, particularly steel. Now, one could argue that longer term and also on average, because of that, the tariff rates in Korea are relatively low. In other words, they're high for the consumer sector by Asian standards, but extremely low and probably the lowest in Asia for the manufacturing sector. Now, one could argue that that kind of a policy, as the market is liberalized, probably will be adjusted going forward. It hasn't happened yet, but if you're running companies on a discounted cash flow basis going out 10, 20 years, that could be a reasonable assumption.
Of course, the fact that the tariff rate, on average, is so low, has caused KEPCO to be a very efficient producer. If you look at the various measures of efficieny, in terms of how much electricity gets wasted, in terms of the efficiency of their grid, in terms of electricity output per head, per person, per employee, KEPCO is sort of at the top ranks in Asia, like a Japanese utility. It's not a sloppily run electricity producer, which one has to like. It is also currently a monopoly, at least, the grid is entirely monopolized and in terms of production here, so quite literally demand has got to grow at least at the level of GDP growth, which is, year in and year out, in excess of 5% or 6%, sometimes as high as 9% here.
On top of that, the usage of electricity here is low per person [less than half that of Japan, he indicated] ... it's logical to assume that electricy demand is going to grow at sort of 1.5 times GDP going forward for a long time, this is pretty attractive. Now,t he big caveat, of course, and this throws a wrench into all yhour forecasts, is if the North Korean border falls, or North Korea collapses, it will probably fall to KEPCO to subsidizee North Korea well into the next century, so bear that in mind. But, or course, if the border falls, then you'll probably want to sell all your Korean holdings.
TWST: I see. What are your five top picks in Korea now?
RS: Right now, POSCO, Samsug Electronics, L.G. Information and Communications, Housing Bank and Commercial Bank and Yukong [...] is primarily an oil refiner, but also a petrochemicals producer, but again, tremendous interim resutls, earnings momentum story, stocks are very cheap and there are also shares available in the underlying market."
Well I'm getting kind of tired of typing this. TWST is a great resource IMHO. If interest is expressed on the thread I'll continue with my synopsis of the interview. RS gave his prediction of the direction of the Korean market over coming months, but I gotta make the phone line free for now. Ciao.
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