Korea Insiders Buying Most Shares in Two Years Amid Rally
May 06, 2011, 3:09 AM EDTBy Saeromi Shin and Michael Patterson
(Updates stock prices.)
May 6 (Bloomberg) -- South Korean executives are buying shares in their companies at the fastest pace in two years, fueling a rally that already sent the benchmark index to a record high.
Insiders of KRX 100 Index companies made at least 255 stock purchases this year, topping sales by 34 percent, according to data compiled by Bloomberg. The value of purchases jumped to $51 million, the highest level since the first quarter of 2009, when South Korean stocks began a rally that sent the KRX index up 40 percent in six months.
LG Chem Ltd. Chief Executive Officer Kim Bahn Suk and Hana Financial Group Inc. Director Lee Ku Taek bought shares as the KRX index’s valuation climbed to 1.6 times net assets, the most expensive level since June 2008. Analysts are increasing earnings estimates for South Korean companies as global economic growth and supply curbs at Japanese competitors boost demand. KRX index profits will jump 27 percent in the next 12 months, compared with 18 percent in the MSCI All-Country World Index, according to about 2,000 projections compiled by Bloomberg.
“Executives won’t buy shares to lose out, and it’s a good signal for Korean stocks,” Kim Sung Woo, a Seoul-based money manager at Mirae Asset Global Investments, South Korea’s biggest mutual fund company that oversees more than $40 billion, said in an April 28 phone interview. “They’re the ones who know the company pretty well, and that reflects their confidence in business outlooks and share prices.”
Earnings Outlook
The 100-stock KRX index, whose companies have a median market value of $5.4 billion, has advanced 4.4 percent this year. The Kospi Index, comprised of more than 700 South Korean stocks with a median market capitalization of about $114 million, has gained 4.7 percent and reached an all-time high on May 2. The Standard & Poor’s 500 Index is up 6.2 percent since Dec. 31, while the MSCI AC World gauge of stocks in emerging and developed markets has climbed 4.9 percent.
LG Chem’s first-quarter profit beat analysts’ estimates as the Seoul-based company benefited from Asia’s economic growth and disrupted operations at chemical producers in Japan following the nation’s strongest earthquake. Confidence in the outlook for profits is one reason LG Chem executives purchased shares, Owen Sung, a Seoul-based spokesman for the company, said in an e-mailed response to questions.
Kim, the CEO of South Korea’s biggest chemicals maker, bought about 500 shares on March 23, among more than $353,000 worth of equity purchased by LG Chem insiders in the past three months, according to data compiled by Bloomberg.
KT Buyers
Lee, the Hana Financial director, purchased 3,000 shares on March 22, according to data compiled by Bloomberg. Hana insiders have bought $406,000 of equity in the past three months, the data show. The purchases may have been made as a bet on the company’s growth potential amid “undervalued” share prices, Lee Jung Dae, a company spokesman, said by phone.
Company insiders of Seongnam, South Korea-based KT Corp., a seller of Apple Inc.’s iPhone and iPad, made at least 89 stock purchases during the past three months, the most in the KRX index, according to data compiled by Bloomberg.
“The current share price is excessively undervalued compared with fundamentals, and there’s enough room for stock- price gains,” KT said in an e-mailed statement on April 21. “Stock purchases by executives, which were voluntary buying, show their confidence in the company’s future.”
Korea Discount
The KRX index’s rally has boosted its price-to-book ratio by about 60 percent since the first quarter of 2009, according to data compiled by Bloomberg. The South Korean index still trades at about a 16 percent discount to the MSCI AC World, compared with an average gap of about 30 percent during the past five years, according to data compiled by Bloomberg.
The discount stems in part from concern over conflict with North Korea, which shelled an island in the South’s territory in November, according to Mirae Asset’s Kim. Former U.S. President Jimmy Carter made his second trip in less than a year to North Korea last month to help push forward stalled multinational talks on curbing the regime’s development of atomic weapons.
The increase in South Korean valuations has left shares vulnerable to a slowdown in developed-nation growth, according to Adrian Mowat, the chief Asia and emerging-market strategist at JPMorgan Chase & Co. in Hong Kong. Seok Yun, the Seoul-based head of research at Credit Suisse Group AG, says the end of the Federal Reserve’s bond-buying program, known as quantitative easing, in June may also limit gains.
Global Growth
Fed policy makers said on April 27 that the economy is recovering at a “moderate pace” and a pickup in inflation is likely to be temporary, as they agreed to finish their $600 billion of bond purchases on schedule.
Economic reports in the biggest developed economies, which had surpassed forecasts from mid-August through April, are trailing estimates this month as raw-material costs rise and central banks tighten monetary policy, according to Citigroup Inc.’s Economic Surprise index. The gauge, which measures how much reports are exceeding economist estimates in Bloomberg News surveys, has declined to minus 13 from 35 at the beginning of the year.
In the U.S., insiders are cutting back stock investments. Executives of Standard & Poor’s 500 Index companies made 135 share purchases in the first quarter, trailing sales by 91 percent, according to data compiled by Bloomberg. That compares with 160 buys in the fourth quarter and 172 in the third quarter, the data show.
Profit Momentum
The rally in South Korean stocks “mostly reflects the resilient global economy, and I believe upside potential from here may be limited,” Credit Suisse’s Yun said in an interview. “Stocks may move in a narrow range in the short term because of uncertainty over how markets would react to a possible end of so-called QE2.”
Equity analysts are still raising their earnings estimates for South Korean companies. Profit-growth forecasts for the KRX index increased by 6 percentage points this year and per-share earnings are projected to reach the highest on record in the next 12 months, data compiled by Bloomberg show.
“Earnings momentum has been very strong,” Michael Chung, a strategist at Citigroup in Seoul, wrote in an April 25 research note.
South Korea’s economy expanded 4.2 percent in the first quarter from a year earlier, while exports climbed 27 percent to a record in April. The nation’s economy may expand 4.5 percent this year, compared with global growth of 4.4 percent, according to April estimates from the Washington-based International Monetary Fund.
LG Chem Rally
“Growth will probably stay strong or even accelerate,” Goohoon Kwon, a Seoul-based economist at Goldman Sachs Group Inc., said in an April 27 interview with Bloomberg Television.
LG Chem shares have climbed 29 percent this year and touched a record high on April 21. The company is valued at 14 times estimated earnings, compared with an average 16 times for global peers, according to data compiled by Bloomberg. Analysts predict the stock will advance 19 percent in the next 12 months, according to the average of 26 price estimates compiled by Bloomberg.
Hana Financial shares have gained 2.1 percent in 2011, compared with a 5.3 percent drop in the MSCI Korea Financials Index. The Seoul-based lender trades for 0.9 times net assets, about half the 1.7 average ratio for global peers, data compiled by Bloomberg show.
KT shares are trading at 7.1 times estimated earnings, 54 percent lower than the global industry average, after falling 13 percent this year, data compiled by Bloomberg show. Analysts forecast KT shares will rally 32 percent in the next 12 months, based on the average of 15 price estimates compiled by Bloomberg.
“Corporate earnings are set to get better,” said Jason Yu, head of research in Seoul at Samsung Securities Co., whose team was top-ranked for Korea research by Asiamoney magazine’s 2010 survey. “Stock purchases by major shareholders at this price level could be a good implication because this means that they’re optimistic about price outlooks.”
--With assistance from Jinyoung Lee and Shinhye Kang in Seoul and Susan Li in Hong Kong. Editors: Darren Boey, Allen Wan
To contact the reporters on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net
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