South Korea: 3 buys in a 'love to hate' market

by Yiannis Mostrous, contributing editor Personal Finance

Investors have a love-hate relationship with the South Korean market. But now South Korea deserves another look from investors who have a long-term perspective.

And while another selloff of South Korean equities could be in the cards, the investment case for South Korea remains persuasive. Here we look at a favorite bank, a tech stock and an ETF.

The first pillar of our argument is valuation. With a price-to-book ratio of 1.23, South Korea has one of the cheapest Asian stock markets. At current valuations, the market still offers an attractive return on equity of about 13 percent.

The second reason is the growing strength of South Korea’s corporations. Once the junior varsity squad of Asia’s corporate world, South Korean firms have evolved into some of the world’s most familiar and well-established names.

Corporate profit margins have been stable and these firms have made great strides to reduce debt. In the past, South Korean firms typically had a net debt-to-equity ratio of about 300 percent. Today, that astronomical number has fallen to a little over 30 percent.

US-listed shares of South Korean banks offer investors a convenient path to establishing a foothold in the South Korean market. These banks have seen their stock prices decline by about 40 percent in dollar terms. But this performance belies the group’s strong financial results, with higher earnings across the board.

Our favorite South Korean financial  name is KB Financial Group (KB). This Seoul-based financial holding company increased its net interest margin (NIM) by 45 basis points in the second quarter to more than 3 percent.

KB Financial Group also posted a 4 percent increase in loan growth in the first half of the year and accumulated deposits of about USD34 billion.

KB Financial Group’s shares trade at 0.5 times book value and seven times earnings. In, 2009, the lender’s shares traded at 1.2 times book value.

The bank’s Tier-1 capital ratio stands at 10.91 percent, which is among the highest in its peer group. Buy KB Financial Group up to 45.

For the more adventurous investor, liquid crystal display (LCD) panel producer LG Display (LPL) is an intriguing opportunity.

LCD panels are used in a broad array of electronics and high-tech devices, from personal and tablet computers to flat-screen televisions.

The company controls 22 percent of the global LCD market and is the biggest competitor to domestic rival Samsung Electronics Corp.

The global financial crisis and an uncertain outlook for the global economy have been unkind to LG Display. However, industry watchers believe that prices for LCD panels could stabilize in the fourth quarter.

Although television and personal computer panel demand remains choppy, a new market for LCD panels has opened up in the tablet computer space.

Production for Apple’s iPad 3 tablet–for which LG Display is a supplier–is underway and Amazon.com’s Kindle Fire has the potential to boost global tablet sales. LG Display is a key panel supplier to Amazon’s new low-cost tablet.

LG Display’s stock is volatile, but is now priced at bargain levels. Buy LG Display up to 15.

Finally, iShares MSCI South Korea Index (EWY) is an exchange-traded fund that provides blanket exposure to the South Korean market, with an emphasis on the country’s technology, financial, industrial and consumer sectors.

The ETF also has considerable holdings in South Korea’s vibrant auto industry, with investments in domestic champions such as Hyundai Motor and KIA.

The fund’s trailing one-year loss of 0.74 percent puts it in the top 5 percent of its category; its trailing three-year return of 37.7 percent is even better, landing it among the top 1 percent of its peers. Buy iShares MSCI South Korea Index up to 58.

learn more about this financial newsletter at Personal Finance.