Why Warren Buffett's Keen on Korea

"Attractively priced" stocks, healthy debt ratios, plus solid manufacturing prowess position Korea to profit from growth in China and the Mideast

by Moon Ihlwan

In other parts of the world, South Korea's gross domestic product growth—projected at around 5% this year—would make it a high-profile destination for portfolio managers. But since Korea is in Asia, the country is largely overshadowed by the dazzling economic performances of China and India. As concerns grow about overvalued Chinese and Indian stocks, though, money managers shuffling their Asian portfolios are finding Korea increasingly attractive. For American billionaire investor Warren Buffett, for example, China is out, and Korea is in. During his visit to Asia late last month, Buffett cautioned against overreaching in China. Yet he expressed confidence in Korean equities, describing the country as "one of the world's most attractively priced markets."

Indeed, Buffett's holding in Korean steelmaker Posco (PKXFF) is one of his top-performing stock investments this year. Buffett's Berkshire Hathaway (BRKA) spent $572 million over the past three years or so for a 4% stake in Posco, one of the most profitable steelmakers on the planet, and that stake is now worth well over $2 billion. Berkshire recently sold off its shares in PetroChina, the only Chinese company it owned, but Buffett said during his brief visit to Korea on Oct. 25 that he would hang on to Posco. "It's a great company and great companies get worth more and more," he said.

Certainly Korea is not immune to the turmoil shaking markets worldwide. Shocks from the U.S. credit crisis and soaring oil prices have pared the Seoul exchange's benchmark Kospi index by around 9% this month. Weaker-than-expected tech demand has sent prices nose-diving in memory chips (BusinessWeek.com, 6/15/07), where the Koreans rule.

Samsung Electronics (SSNGY), the bellwether for the country's information technology sector, has fallen nearly 15% this year and has laid off some 1,600 workers, almost 2% of its workforce.

Korea Excels in Shipbuilding

Still, the benchmark Kospi index is up about 30% from the end of last year, a reflection of strong growth in other parts of the Korean economy. A major attraction is the country's manufacturing prowess in diversified industries. Korea's shipbuilding, steel, petrochemical, and other smokestack companies are booming as emerging economies spend heavily to build up their infrastructure and as their shipping trade explodes. "A number of Korean companies are dominant forces in cyclical industries and have historically outperformed their global peers when their industries are in an upswing," says Yang Ho Chull, chief executive of Morgan Stanley (MS) Korea. "What's particularly attractive for portfolio managers is the strong performance of these companies, fueled by the rapid growth of China."

Consider the shipbuilding industry. As China turns into the factory of the world, demand for new ships to carry China trade is expected to remain strong until at least 2010, according to a report by the Bank of Korea, the central bank in Seoul. That means Korea's shipbuilding firms, which built 41% of all ships delivered last year and include the world's top three players—Hyundai Heavy Industries (HYHZF), Samsung Heavy Industries (SMSHF), and Daewoo Shipbuilding & Engineering (DWOSF)—will enjoy a boom (BusinessWeek.com, 5/18/07) for a few more years.

The influx of shipbuilding revenue to Korea is so huge that the central bank warned this month against further appreciation of the Korean currency.