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1、,TP(KRW),1900000,420000,270000,Equity StrategyAsiaThe Flying DutchmanKorea:Investing“Gangnam style”Key Korean stock ideasName BBG CMP(KRW)HSBC ratingCJ Cheil Jedang 097950 KS 349500 OWSamsung Electronics 005930 KS 1336000 OWSamsung F&M 000810 KS 230000 OW(V),abcGlobal Research Growth is weak outside
2、 the Samsungsmartphone supply chain;one culprit isa unique feature of the property market Earnings at risk of downgrades;preferselected tech and consumer names Key OW:CJCJ,Samsung Electronics,Samsung F&M.Key UW:OCI,HyundaiDev,Seoul Semiconductor,OCI CompanyHyundai DevSeoul Semi,010060 KS012630 KS046
3、890 KS,1620002080020750,UW(V)UW(V)UW(V),1540001500017500,Psy-ched out?The hit music video Gangnam Style byrapper Psy has been highlighted as an example of the kind of,Source:HSBC estimates.Prices as of 17 October 2012.22 October 2012Herald van der Linde*Head of Equity Strategy,Asia PacificThe Hongko
4、ng and Shanghai Banking Corporation Limited+852 2996 6575.hkBrian Cho*Head of Research,KoreaThe Hongkong and Shanghai Banking Corporation Limited,Seoul Securities Branch,creativity Korea needs to raise the countrys internationalprofile.It has certainly helped put Gangnam,the upmarketpart of Seoul kn
5、own for its steep property prices,on themap.Unfortunately,another distinctly Korean feature of thereal estate market is causing a rise in household debt andslowing domestic demand.The system of jeonse,based on alump sum rather than monthly payments,has led to biggerbank loans and higher interest rep
6、ayments,makingconsumers reluctant to spend(see page 5).Earnings risk.While corporate earnings are growing at thefastest rate in the region largely because of Samsung andthe Galaxy smartphone supply chain exports are weak.Helpful monetary policies and reasonable valuations aresupporting local equitie
7、s,but forecasts by sell-side analystsare still too high.Korea had the largest misses in the recentresults season and we expect more earnings downgrades.Weremain neutral on Korea.Other key themes:,+822 3706 8750,Household debt and weakness in domestic growth are,Devendra Joshi*Strategist,Asia Pacific
8、The Hongkong and Shanghai Banking Corporation Limited+852 2996 6592.hkView HSBC Global Research at:http:/*Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulationsIssuer of report:The Hongkong and Shanghai BankingCorporation LimitedDiscla
9、imer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaimer,which forms part of it,not yet fully priced in.The divergence between the techsector,and domestic consumer plays and Korean banksshows that technology is tradi
10、ng at a record premium.Expect a rotation from tech into consumer.While Korean equities could see considerable sellingpressure if the Samsung share price peaks,we believe4Q will show its Galaxy growth story is getting stronger.Key OW:CJCJ,Samsung Electronics(an HSBC SuperTen stock),Samsung Fire&Marin
11、e.Key UW:OCI,Hyundai Development,Seoul Semiconductor.,2,EquityStrategy,Asia,22October2012,abc,1.5,9.0,Key Korean buy and sell ideas,Company nameCJ Cheil JedangSamsung ElectronicsSamsung F&M InsuranceOCI CompanyHyundai DevelopmentSeoul Semiconductor,BBG code097950 KS005930 KS000810 KS010060 KS012630
12、KS046890 KS,SectorFood ProductsSemiconductorsInsuranceChemicalsConstruction&EngineeringElectronic Equipment,Share price34950013360002300001620002080020750,HSBC ratingOWOWOW(V)UW(V)UW(V)UW(V),HSBC analystKaren ChoiRicky SeoSinyoung ParkBrian SohnBrian ChoBrian Sohn,HSBC target price420000190000027000
13、01540001500017500,Diff to target price20%42%17%-5%-28%-16%,Source:HSBC estimates;Closing prices as at 17 Oct 2012 and in KRWKorea sector weightings,Rating,PE(x),PB(x),ROE(%),ROA Comment(%),ConsumerSemiconductors,OverweightOverweight,15.08.1,2.01.4,13.319.2,7.5 We prefer F&B sector over retail as rec
14、ent price hikes and strong KRW/USD to lead to earnings improvement in 2013e.However,among retail names,Hyundai Department Store could be worth a look due to its defensiveness.12.8 The DRAM market outlook should be more favourable in 2013 as migration difficulty and conservative capacity expansion pl
15、ans should limit supply growth.,NAND should also remain positive until 1Q13 due to supply/demand balance improvement from stronger demand and global capacity decrease.,Commercial banks,Neutral,6.1,0.6,9.8,0.8 We expect the muted earnings outlook to persist in 2H12 with the earnings turnaround delaye
16、d to 2H13.This should be driven by two areas of weakness:,NIM compression(ongoing regulatory pressures)and tepid loan growth(delayed recovery of the domestic property market,and tightened riskmanagement).,Insurance,Neutral,11.1,1.0,9.7,1.2 We expect non-life insurers to report y-o-y improvement in o
17、perating fundamentals due to reduced earnings volatility,stemming from structural auto loss,ratio improvements with the revised deductible scheme reducing excessive claims and bigger investment income.We see life insurance as unattractive given the falling market rates due to 1)a high portion of fix
18、ed return reserve(56%of total reserve),2)exposure tovariable life products that are sold with unhedged income and capital protection guarantees,and 3)relatively lower solvency ratios vs.non-life under amore conservative RBC(risk based capital)screen.,Autos,Neutral,6.7,1.3,19.9,7.9 Strong new models
19、momentum(e.g.Santa Fe DM,K3)and expanding presence in the overseas market should allow the automakers to remain solid.,Construction&Engineering Neutral,16.8,3.6 We think margin deterioration is inevitable in 2013 due to the severely competitive overseas markets.Domestic market should also continue t
20、o be cloudygiven 1)economic uncertainties,2)high debt level,and 3)10-20%further downside risk on housing prices.We believe housing prices should reach thebottom by 2H13 or when the government announces meaningful market-boosting plans.,ShipbuildingElectric utilitiesElectronic equipment,NeutralNeutra
21、lNeutral,11.221.114.2,1.33.81.2,12.519.58.6,4.2 While the commercial side is still struggling,the Big 3 will continue to benefit from the offshore growth theme.15.3 While the sector outperformed KOSPI on the back of a defensive earnings portfolio and overseas growth,the fundamentals are little chang
22、ed.4.0 We are positive on Korean TV makers as they are expected to increase their market share in the LCD TV market at the expense of Japanese players;also,positive on handset component makers,including SEMCO(009150 KS),given that Samsung Electronics is maintaining its strength in the smartphonemark
23、et.On the other hand,we have a negative stance on OLED panel makers who are facing expansion challenges mainly due to a delayed investmentschedule by Samsung Display.,MachineryMetals&Mining,UnderweightUnderweight,12.112.2,1.90.8,14.67.0,4.0 A lot of these names are suffering from intensified competi
24、tion and they are likely to miss 3Q12 earnings consensus,except for Sungkwang Bend.3.4 While we prefer POSCO given its solid cash generation and capacity expansion,we expect the steel margin to remain under pressure until end of 2012.,Source:HSBC Equity Strategy,Equity StrategyAsia22 October 2012Hea
25、vy household burden A uniquely Korean feature of the property market is partly toblame for weak growth We remain neutral on Korea.Earnings remain at risk ofdowngrades;prefer semiconductors and consumer names Key OW:CJCJ,Samsung Electronics(an Asia Super Ten stock),Samsung F&M.Key UW:OCI,Hyundai Deve
26、lopment,SeoulSemiconductor,abc,Weighed downKorean householders are becoming increasinglyreluctant to spend their money.With householddebt rising,interest payments are weighing onprivate consumption and domestic demand.One of the root causes is a uniquely Koreansystem of leasing property known as jeo
27、nse.Instead of paying monthly rent,a tenant makes alump-sum deposit which the homeowner is free toinvest.The deposit is returned at the end of thecontract.The problem is that the size of the downpayment is increasing,requiring bigger bank loansand a larger slice of the tenants income to makethe inte
28、rest payments(we discuss this in moredetail in the next chapter).This is hurting growth and having a knock-oneffect on equities.Despite this,Korea remains thefastest growing market in Asia.This is partiallydriven by the success of Samsung Electronics andthe Galaxy smartphone supply chain,but also by
29、unrealistically high growth expectations by sell-side analysts.Korea was the market with thelargest misses in the last results season,and weexpect this to be the case in the next one too.,Across Asian equity markets,we have a neutralstance on Korea.Despite our reservations,accommodative monetary pol
30、icies and reasonablevaluations support local equities.Other key issuesConsumer is cheapThe market has yet to price in the high level ofhousehold debt and weakness in domestic growth.We have examined the divergence between thetech sector and domestic consumer plays andKorean banks.We find that techno
31、logy is tradingat a record premium to the other two sectors.Thus,in a Korean context,we think it makessense to have some exposure to bank andconsumer stocks,despite the fact that their growthoutlook is much weaker.The consumer sector isreally cheap and we expect to see rotation fromtech into consume
32、r.Its all about Samsung ElectronicsHow high can Samsung go?If its share pricepeaked,Korean equities would see sellingpressure.But our analysts believe 4Q will showthat the Samsung growth story is intact.,3,Equity StrategyAsia22 October 2012Election newsWe believe that the presidential electionschedu
33、led for 19 December will be a marketneutral event.The latest polls suggest that race istoo close to call.We believe campaigning will bea higher priority than policy making.Earnings riskEarnings risks remain high.Consensus isexpecting earnings growth of 34.3%for MSCIKorea in 2012.This,in our view,is
34、too high.Theregion is expected to have earnings growth of just9.8%for 2012.4,Korea buys KoreaDemand for local equities could rise in thecoming years because assets under management(AUM)in the national pension fund(NPF),one ofthe largest in the world,are still relatively smallconsidering the countrys
35、 level of income.Thematic approachWe use a thematic approach to sector and stockselection.Key themes are 1)structural growth,2)earnings resilience and 3)a value bias.,abc,Equity StrategyAsia22 October 2012Uniquely Korean Household debt in Korea is climbing;high interest repaymentsweigh on private co
36、nsumption and drag down domestic demand The root cause is weak property prices,which force households toborrow more due to the countrys unique jeonse system Policymakers need to restore confidence in the countrys propertymarket and the overall economy.This probably wont happen untilafter the preside
37、ntial election,abc,A real estate quirkAs trade growth weakens,the Korean economyshould be looking to domestic demand for help.The problem is that household debt is rising,deterring Koreans from spending more.By the end of 2011 household debt had grown to arecord high of 154%of disposable income.This
38、 isa familiar theme.Chart 1shows that Koreanhouseholds have increased their leverage steadilyover the past eight years.1.Household debt in Korea continues to climbHousehold debt,%of disposable income160150140130120110100,Ronald Man,HSBCs Korea economist,pointsout that housing-related loans account f
39、or morethan 60%of total household debt in Korea(Chart 2),suggesting that the property market andhousehold debt are closely connected.Real estate prices have risen very slowly across thecountry since the outbreak of the 2008 globalfinancial crisis,and essentially stayed flat in Seoul,home to around a
40、 fifth of the population.Chart 3shows that since June 2012 national house priceshave actually contracted on a monthly basis.2.Over 60%of household loans are housing related in KoreaNon-housingrelated38%Housingrelated62%,Dec-03,Dec-05,Dec-07,Dec-09,Dec-11,KoreaSource:HSBC,CEIC,Federal Reserve,US,Sour
41、ce:HSBC,CEIC,5,Southern,Seoul,Seoul,metropolitan,metropolitan,Northern,National,Daegu,Daejo,average,Incheon,Busan,Ulsan,Gwangju,Seoul,Seoul,Non-,area,area,%,Equity StrategyAsia22 October 20123.Korea property prices are starting to contractIndex:Jun 2011=100105100959085,4.which drives up the jeonse p
42、ayment7065605550,abc,Aug-07,Aug-08,Aug-09,Aug-10,Aug-11,Aug-12,Aug-02,Aug-04,Aug-06,Aug-08,Aug-10,Aug-12,Housing price indexSource:HSBC,CEICWhen property prices are weakening,potentialbuyers choose to wait and rent instead.In Korea,over half of the rent contracts follow the uniquejeonse system.This
43、involves the tenant paying thelandlord a lump sum(50-70%of the propertyvalue)at the start of the lease,which typicallylasts for two to three years.The payment isreturned at the end of the contract without interest.During the contract period,the landlord can usethe lump sum to make private investment
44、s.The lump sum has risen since 2008.Oureconomist says there are two reasons for this.First,as rental demand increases,landlords havegreater bargaining power to ask for a larger5.Its not cheap to live Gangnam style in southern SeoulYears of household income,Jeonse-to-purchase price:ApartmentsSource:H
45、SBC,CEICpayment.The national average fixed payment hasrisen to over 60%of the property value fromaround 50%over the past four years(Chart 4).Second,returns on investments have been lower,in part due to the low interest rate environment,which means property owners require a largeramount to make the s
46、ame absolute return.Now look at this from a different angle.Chart 5plots the jeonse payment in terms of the medianincome in Korea.The most expensive rental areais in southern Seoul(which includes the Gangnamdistrict),where the average Korean will have topay over seven years of their annual salaryupf
47、ront to his landlord as rent.As such,manyKoreans have no choice but to borrow money.,87,7.1,6.2,6543,5.0,4.4,3.7,3.1,3.0,2.8,2.8,2.4,2.3,2.3,210Jeonse v alueSource:HSBC,CEIC,Kookmin Bank6,%,Sep-08,Equity StrategyAsia22 October 2012To tackle the problem of rising jeonse,confidencein rising property p
48、rices must be restored.Chart 6shows a strong correlation between the expectedvaluation of real estate as measured by the Bankof Koreas consumer sentiment survey andmonthly changes in national housing prices.Policymakers have started to act.Recently,thegovernment implemented new measures tostimulate
49、transactions in the property market byeasing the debt-to-income ratio.That said,theimmediate effect may limited for two reasons.First,a study by the IMF suggested that changesin the loan-to-value ratio,rather than debt-to-income ratio,would be a more effective way toraise property prices in Korea.Se
50、cond,there is a glut of 70,000 unsold housingunits,similar to the period just before the 2008global financial crisis.Until the excess supply isreduced,it will be difficult for prices to rise.6.Strong link between confidence and property prices,Brian Cho,our local Head of Research and KoreaStrategist
