By Martin Hutchinson
Contributing Editor

With key countries in the world economy spiraling toward recession, and even India and China panicking about domestic inflation levels, there’s one country in particular that still seems to offer good value in its equities markets, thanks to an economic outlook that combines decent growth and only modest inflation.

That country is South Korea.

We’ve talked about Korea several times before. But the truth is that it’s worth a closer look. So let’s begin our latest visit with a truly startling fact about this country and its economy: Both its exports and imports have grown at truly staggering rates recently.

Powerful Gains in Global Trade

In May alone, exports reached $39.5 billion, up 27.2% from a year ago. Imports were $38.5 billion, up 28.8% from a year ago. The sharp-eyed investor will notice one key point here: Although the balance of trade has deteriorated somewhat in the past year, exports still exceed imports. That’s important, to be sure.

Just as remarkable is the fact that this staggering growth in both trade factors hasn’t been caused by currency movements: The Korean won is down around 6% against the U.S. dollar over the past year, to its recent level of 1,019. That decline against the greenback has been caused by the increasing internationalization of the Korean economy, and its increasing importance in global trading patterns.

Politically, the last year has also been good for Korea. The pro-business candidate, Lee Myung-bak, won December’s presidential election, and his Grand National Party won a handy majority in April’s legislative elections.

This means economic policy is firmly anchored in a pro-business direction, after a decade of eccentric economic management whose most significant features were a steady increase in the size of government (though it is still substantially smaller than in the United States or most other rich countries) and a series of attempts to imprison the chairmen of the country’s major chaebol conglomerates. Hyundai Motor Co. Chairman Chung Mong-koo received only a suspended sentence instead of the expected term of imprisonment on June 5; the remaining list of chairmen under indictment consists only of former Samsung Group Chairman Lee Kun-hee.

While there’s now relief in the boardrooms of Seoul, the resolution of this legal mess will be an enormous liberating force to Korean businesses themselves, which for the first time in a decade will now be able to focus properly on international expansion, without top management worrying about a 4 a.m. wakeup call from the local constabulary.

Real Economic Muscle

Korea’s growth remains strong, with the economy posting a year-over-year gain of 5.8% in the first quarter. The panel of experts at The Economist expects economic growth of only 4.5% in 2008 and 4.3% in 2009. But given the vibrancy of Korea’s exports and its 10.0% April increase in industrial production, those projections are almost certainly much too low (The Economist experts may not have taken full account of the effect of better government policies).

Needless to say, when the “experts” appear too bearish on a particular market or economy, there’s a very good chance that country’s stock market is undervalued!

Only inflation – at 4.9% in the year to May 2008 – is a worry. But the combination of the weak won and surging global commodity prices are sufficient to easily explain this without suggesting that Korea needs radical monetary tightening.

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Three-month interest rates are currently 5.4%, just above the level of inflation, but 3% above those in the United States, which has a similar inflation level.

Profit Plays to Make Now

Since the Korean stock market currently trades on only 11 times earnings, it appears to represent a truly excellent value, given the country’s favorable growth prospects. Because Korea has few raw materials, it is essentially an anti-commodities play: Its corporate earnings should mostly benefit if commodity and energy prices start to decline.

There are five Korean stocks that have American Depository Receipts (ADRs) fully listed on the New York Stock Exchange and that trade in reasonable volumes. Some of these are more attractive than others-Kookmin Bank, Posco and SK Telecom Co. Ltd. seem the best bargains.

Kookmin Bank (ADR: KB): The largest bank in Korea, Kookmin has been hit by investor disillusionment with the global financial-services sector; indeed, at one point it was down 50% from its 2007 high. It has rallied from its low and currently trades at a Price/Earnings (P/E) ratio of only 7.8 times forecast 2008 earnings. It also has a dividend yield of 4%, which is still more than you’ll get out of U.S. Treasuries.

Korea Electric Power Corp. (ADR: KEP): Shares of Korea’s electric power company, often referred to as KEPCO, are currently trading at 11 times projected 2008 earnings, and feature a dividend yield of 2.4%. KEPCO’s steady growth should benefit from any acceleration in Korea’s economic growth rate, but it is forced to buy coal from overseas, which has doubled in price in the past year. Right now, that makes the stock a borderline “Hold/Buy.”

KT Corp. (ADR: KTC): Formerly operated as Korea Telecom, KT Corp. is now Korea’s leading fixed-line telecom-services provider, which was privatized in 2002. Although the shares carry a P/E on trailing earnings of less than 9, the stock’s forward P/E ratio is 13, as the company’s margins are under pressure in the very competitive Korean telecom market. Even with a dividend yield of 4.3%, it is probably only a “Hold.”

Posco (ADR: PKX): Posco is Korea’s largest steel company, and its shares are trading at a P/E of 12 on estimated 2008 earnings. It also features a dividend yield of 1.9%. Posco has a large export operation to China, making it a participant in China’s explosive growth. Although it’s the world’s third-largest steelmaker, it’s the most efficient in terms of output per man-hour. Like KEPCO, Posco suffers from the rising prices of raw materials; in its case iron ore business, for instance, it was recently socked with a 65% price increase. Even so, as we’ve previously reported to you, let’s not forget that when Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman Warren Buffett made his first investment foray into Korea last year, he took a 4% position in Posco – making it one of 20 Korean companies that he invested in. Posco is a well-run company that will become very attractive when the commodities bubble deflates, which may not be too long delayed. We rate it as a long-term “Buy.”

SK Telecom Co. Ltd. (ADR: SKM): SK is Korea’s largest mobile phone company, with operations in China and Vietnam. Its shares trade at 10.3 times estimated 2008 earnings, and it features a dividend yield of 4.8% – meaning that income investors also will do well from it. In China back in 2006, SKM invested in a $1 billion convertible of China’s #2 mobile company China Unicom Ltd. (ADR: CHU): The bonds were converted in August 2007 and the resulting 6.6% share stake in the fast-evolving China Unicom is currently worth almost $2 billion. In Vietnam, SKM’s 73%-owned Vietnamese subsidiary had 3.5 million subscribers in 2007, and that unit is aiming for 5 million in 2008. The only downside risk is in the U.S. market, where SKM’s U.S. operation shows a loss, and where SKM management seems to want to make some acquisition, throwing good money after bad. Because of that, we rate this stock as a borderline “Hold/Buy.”

Finally, you could look at the Korean exchange-traded index fund, the IShares MSCI South Korea Index Fund (EWY), an exchange-traded fund (ETF) that invests in the Morgan Stanley Capital International Korea Index. This ETF has a P/E of only 11, but a yield after expenses of only 0.6%.

News and Related Story Links:

• Money Morning Special Investment Report:
  With New Leadership And a Tougher Stance, it’s Time For Investors to Take a Look at Korea.

• Money Morning:
  
  Warren Buffett and Berkshire Hathaway Purchase Stakes in 20 South Korean Firms, Including POSCO.

• Radio Station WTOP/The Associated Press:
  Court again suspends Hyundai exec’s jail term.

• Wikipedia:
  
  Lee Myung-bak.

• Wikipedia:
  
  Grand National Party.

• Money Morning News Analysis:
  Phase One of China’s Telecom Overhaul: China Unicom, China Telecom Corp. and China Netcom Swap Assets.

• Wikipedia:
  
  Chaebol.

• Wikipedia:
  The Samsung Group.

• Wikipedia:
  Lee Kun-hee.

Surrounded by charges of tax evasion and breach of duty, Chairman Lee Kun Hee will step down from Samsung Group – parent company of 59 businesses and South Korea’s largest company. 

He’ll be joined by Vice Chairman Lee Hak Soo and Presient Kim In Joo, who will quit by the end of June.

"The resignation by Chairman Lee Kun Hee is unprecedented," Tom Coyner, who helps advise foreign investors in Korea as president of Soft Landing Consulting Ltd. in Seoul, told Bloomberg. Coyner said it signals "an end to the era of the Masters of the Universe."

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After more than two decades on top of Samsung, Lee was shrouded in controversy. Last week, he was charged with evading $133 million (112.8 billion won) in taxes and breaching his chairman duties by enabling his son to reign control of several of the group’s units.

These charges stem from a four-month investigation that began when Lee’s house was raided in January after a former company lawyer alleged the company created several "slush funds" valued at $200 million.

Lee tactfully apologized in a televised briefing – not so much for the base of the charges, but for the trouble they are causing.

"I’m truly sorry for causing so much concern with the investigation," Lee said. "I will assume full legal and moral responsibility."

Interestingly, the current charges pale in comparison to previous charges brought against Lee. In 1996, he was convicted of bribing South Korean presidents Chun Doo Hwan and Roh Tae Woo, which earned him a two-year prison term that was soon pardoned by sitting president Kim Young Sam. 

And in 2005, Lee was investigated for – and later cleared of – using corporate funds to pay presidential candidates. 

No change expected, somehow

For Samsung, the resignation trifecta creates a serious hole atop the conglomerate. In the meantime, the group will dismantle its strategic planning office.

Some analysts are skeptical of the move’s ambiguity, especially when timed after top brass resignations.

"I don’t see anything more than a change of people in charge. There’s no change at all in the fact that (the Lee family) will remain the owner," Citibank economist Oh Suk-tae told Reuters.

It would take a team of lawyers to dissect the degree and specifics of the Lee family’s ownership of Samsung, but put simply, they own a large majority of the parent company and its units’ shares.

And it isn’t likely that the scandal – as colossal as it would be if it occurred in the United States – will affect the company’s operations.

Samsung’s businesses include high-tech offerings, semiconductors, telecommunication, life insurance, fiber optics, supertankers, compressors and more – all of which account for about one-fifth of South Korea’s exports, Reuters reported.

Samsung Electronics Co. Ltd. alone is Asia’s largest maker of cell phones and televisions.

News and Related Story Links:

• Bloomberg:
  Samsung Chairman Lee to Step Down After Indictment

• Wikipedia:
  Slush fund

• Reuters:
  Samsung chief stands down; sorry for tax scandal

The splendidly named Grand National Party, allied to the new President Lee Myung-bak, won a majority in the local legislature, taking about 153 of the 299 seats itself and having allies and friendly independents that hold roughly another 40 seats. The center-left opposition – in power both presidentially and legislatively until last December – was reduced to around 70 seats.

You may reasonably ask why you should care. There are, after all, about 183 countries in the world, perhaps 100 of which are more or less democratic in nature, which gives you roughly 30 elections a year to worry about. Figuring out who are the "good guys" in that number of races is absolutely impossible – even in Korea, which is one of our more-important trading partners.

Every now and then, however, an election brings a change that is truly significant, either politically or economically. In Korea, this election has brought significant positive economic change.

Since the Asian crisis of 1997, Korea has been run by the center-left. That group didn’t do too bad a job: Economic growth ticked along at an average annual rate of between 4% and 5%. The per-capita growth rate is about the same, given that Korea has only 0.4% per annum population growth. There’s a budget surplus, and the country also boasts a balance of payments surplus. Overall inflation is only 2.5%. The stock market is around double its 2003 level, which is when the previous [and now-outgoing] government came into power.

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As nice a job as the outgoing government managed to do, its policies also included a few that held back growth. For instance, government spending rose from 21% of Gross Domestic Product (GDP) to 28% over the decade the left was in power. That increase in government outlays saps resources from the private sector by diverting the resources into less-productive public sector uses – reducing the economy’s overall productivity growth.

The outgoing government also imprisoned the chairmen of three of Korea’s top six chaebol conglomerates, and placed severe restrictions on their expansion. SK Telecom Co. Ltd. (SKM), for example, part of the Sunkyong Group, was not permitted to increase its cell-phone market share significantly above 50%. Only after Lee’s presidential election victory in December did restrictions start to relax. In February, SK Telecom was permitted to acquire 44% of its competitor, Hanarotelecom.Inc. (OTC: HANAY).                                                

However, President Lee’s more free-market approach seems likely to ratchet Korean growth up a notch.  He ran for election on the platform that Korea should expect a growth rate of 7% – not 5% – and with a budget surplus and low inflation rate he is well positioned to deliver his goal. Lee has promised both corporate and individual tax cuts, and a major program of privatization, starting with three state-owned banks – including the Korea Development Bank.

He is also likely to take a tougher stance toward the potentially volatile leadership in North Korea, cutting back on handouts and adopting a harder line against its northern neighbor’s alleged nuclear-weapons programs. This newfound aggressiveness by the South Korean leadership will save money both for the government and for the big conglomerates, since they had been expected to undertake unprofitable prestige projects in the North.

There are five Korean stocks that have American Depository Receipts (ADRs) that are fully listed on the New York Stock Exchange and that trade in reasonable volume. Some of these are more attractive than others-Kookmin Bank and SK Telecom in particular seem especially good bargains. Let’s take a look at each of the five, starting with an overview and including an investment rating on the shares:

• Kookmin Bank: (KB): The largest bank in Korea, KB has been hit by investor disillusionment with the financial services sector; at one point it was down 50% from its 2007 high. However, the stock has rallied recently. The bank’s earnings have continued to make steady progress and it has no exposure to the U.S. subprime mortgage market. Kookmin’s shares are trading at a Price/Earnings ratio of only 7.5 on trailing 12 months’ earnings, and its P/E on projected earnings for the next 12 months is a staggeringly low 6.6. Those earnings are expected to increase in a big way. One last benefit: Kookmin’s shares feature a dividend yield of 4%, which is more than you’ll get out of Treasuries these days. Rating: "Strong Buy."

• Korea Electric Power Corp.: (KEP): Shares of the Korea’s electric power company are up slightly from where we recommended them back in December. The shares feature a P/E of 11 on projected earnings, and a dividend yield of 2.4%. KEP’s steady growth should benefit from any acceleration in Korea’s economic growth rate, but it is forced to buy coal from overseas, which has doubled in price in the past year. With an election in the offing, it suffered from price controls in the latter part of 2007, but should presumably have more freedom to raise its tariffs going forward. Rating: "Hold."

• KT Corp.: (KTC): Formerly Korea Telecom, KT is now Korea’s leading "fixed-line" telecommunications provider, which was privatized in 2002. While the P/E ratio on trailing earnings is less than 9, its forward P/E is 11.5 as its margins are under assault from the hyper-competitive Korean telecom market. It has a dividend yield of 4%. Rating: "Hold."

• Posco: (PKX): Korea’s largest steel company, and the world’s most-efficient steelmaker, Posco’s shares sport a Price/Earnings ratio of about 11, and a dividend yield of 2%. The company is a major exporter into China, making it a key participant in that country’s explosive growth. The company does buy its iron ore from Brazil’s Vale (RIO), and was socked with a 65% price increase in this crucial raw material. But don’t forget that investment guru Warren Buffett made Posco one of the 20 Korean companies he invested in last year. If nothing else, that’s a reminder that Posco will become very attractive when the commodities bubble deflates, even though it may be a tad early to make your move right now. Rating: "Buy/Hold."

• SK Telecom: (SKM): It’s Korea’s largest mobile phone company, with operations in China and Vietnam. The stock is now trading at only 8.7 times estimated 2008 earnings, and has a hefty 4.9% dividend yield – so income investors do well from it, also. For many years, its market share in Korea was capped at 50%. But now the shackles are coming off; in fact, SKM recently got the green light to buy 44% of Hanarotelecom, Korea’s second-largest cell phone company. In 2006, SKM invested in a $1 billion convertible offering for China Unicom, Mainland China’s No. 2 mobile-phone company; in August 2007, the bonds were converted into a 6.6% in China Unicom with a current value of almost $2 billion. In Vietnam, SKM’s 73% owned Vietnamese subsidiary had 3.5 million subscribers in 2007, and it’s now aiming for 5 million in 2008. Only its U.S. operations are showing losses, but even those could turn around. Rating: "Buy."

News and Related Story Links:

• Wikipedia:
  Lee Myung-bak.

• VarietyAsiaOnline.com:
  Korea Clears Hanaro Telecom Takeover.

• Wikipedia:
  American Depository Receipts (ADRs).

• Money Morning:
  Warren Buffett and Berkshire Hathaway Purchase Stakes in 20 South Korean Firms, Including POSCO.

Shares of Korea-based SK Telecom Co. Ltd. (SKM) had a great trading day yesterday [Tuesday] based on returns from its shrewd investment in China Unicom Ltd. (CHU).

Hong Kong-listed China Unicom had a 6.6% gain after a local newspaper reported China’s government had approved a restructuring plan for the country’s telecom sector.  SK Telecom shares reacted favorably, rising $8 (7,500 won) for the day. SK Telecom’s NYSE-listed American Depositary Receipt (ADR) responded in kind, gaining $0.42 (1.63%) for the day to close at $26.13.

SK Telecom staged a remarkable coup in 2006, when it invested $1 billion in convertible bonds of China’s No. 2 mobile company. The bonds were converted into company shares in August 2007, and the resulting 6.6% share stake in China Unicom is currently worth more than $2 billion.

"From the China Unicom investment, SK Telecom reaped a gain of more than [$1 billion (1 trillion won)]," Tongyang Investment Bank analyst Choi Nam-Kon told TradingMarkets.com.

SK Telecom, Korea’s largest mobile phone company, also has operations in such high-growth markets as China and Vietnam. The stock is now trading about 11 times estimated earnings, with a dividend yield of just over 3% – meaning that income investors should give these shares some serious consideration, too.

Its market share in Korea is creeping up above 50%. And while the stock initially saw a 20% sell-off due to newly-elected President Lee Myung-Bak’s victory, a recent reversal on the pledged 20% mobile tariffs and strong performance from China Unicom have combined to boost the stock.

SK Telecom was recently reported to be interested in acquiring a stake in the U.S.-based Sprint Nextel Corp. (S). Although its initial advances were reportedly spurned, if it comes back, and can buy all or part of that company cheap, SK Telecom will gain an excellent foothold in the U.S. market, where its cutting-edge technology can be expected to add market share. That makes this company a strong buy, as well.

News and Related Story Links:

• TradingMarkets.com:
  SKorea’s SK Telecom sharply higher on heavy investment gains from China Unicom

• Money Morning:
  Outlook 2008: The U.S. Economy Is Down – But Not Out – in the New Year

• Corporate jets? No. While a famously frugal man, he’s owned several hundred of them, especially after taking control of Executive Jet, the corporate jet timesharing service.
• African countries? No, he has declared that the great majority of his charitable activities will be carried out through the Bill & Melinda Gates Foundation, so if an African country or two gets bought by accident, it will be the Foundation doing the bidding.
• Houses? No, he currently owns only one home, in Omaha; he sold his more expensive home in Laguna Beach, Cal. in 2004. He was also notably absent in buying subprime mortgages, and hasn’t yet started buying housing companies. That’s a sign we aren’t yet at the bottom of the housing decline. When Buffett starts buying, we can all breathe a sigh of relief because we’ll know the bottom must be near.
• Tax shelters? No, Buffett is famous for believing in the estate tax, and in substantial taxes, generally. Mind you, the $40 billion he’s given away to foundations won’t be taxable….

Give up? Well, if you’ve been reading Money Morning, you shouldn’t be stumped. Buffett last month bought shares in 20 South Korean companies. A lot of other smart money is going there too; Macquarie Group Ltd., the huge Australian investment bank, has together with the private equity company MBK, set up in 2005 by four former Carlyle Group executives, just bought 30% of the second largest Korean cable operator. MBK and another U.S.-based private equity company CCMP Capital are short listed, along with two Korean companies, for the electronics retailer Himari Co., worth around $2.5 billion. In total, about $26.8 billion of acquisitions have been done in Korea since July.

Do these guys know something we don’t? Not really. We’ve been calling attention to the Korean market since early this year. The country has an excellent long-term productivity growth rate of more than 4% per annum, yet its stock market trades at only about 12 times earnings. One reason has been that the country has had a rather anti-business government under President Roh Moo-hyun, but that may be about to change. Presidential elections are to be held Dec.19, and the Grand National Party candidate Lee Myung-bak is currently leading in the opinion polls – the GNP, out of power since 1997, is the pro-business party that has presided over the era of Korea’s fastest growth, which took place from 1970-95. Lee’s lead is substantial; in the latest poll he has 38% of the intended vote, compared to 18% for a right-wing challenger and 14% for Chung Dong-young of the government party.

If Lee wins, business conditions in Korea may improve – for one thing, the party would presumably stop harassing the major companies as Roh has done, imprisoning the chairmen of three of the six largest chaebol conglomerates. Also, with taxes under control and business conditions more friendly, the market may well rise to a higher P/E ratio. There will also be congressional elections in April to negotiate before the full shape of the new government is known, but now may indeed be a good time to buy.

Buffett bought shares in 20 Korean companies, but you don’t need to go nearly that far to get a decent exposure to the market. For one thing, you can buy the iShares MSCI South Korea Index Fund (EWY), an exchange-traded fund (ETF) whose only current disadvantage is that it is trading at about a 4% premium to its underlying net asset value. This reflects the fact that other U.S. investors have presumably had this same idea.

A second possibility is Korea’s largest bank, Kookmin Bank (KB). Kookmin trades at a P/E ratio of less than 10 right now, which makes it look like a real bargain. Of course, banks in general have been battered by the subprime-mortgage crisis, but Kookmin has little exposure to the troubled U.S. housing and credit markets and its own credit problems in Korea surfaced four years ago, when there was a credit-card-debt disaster. This looks like a good double bet, on a gradual recovery of those banks with little connection to the U.S. mess, and on a re-rating of Korea in general.

Finally, you can buy what Buffett bought – 4% of Posco (PKX) the Korean steel giant that has a P/E ratio of 14 [Presumably, you're not out to buy 4% of it, which would cost you $1.9 billion, but you see what I mean]. Posco has business in both Korea and China, and is one of the largest and most efficient steel companies in the world – well worth looking at.

The bottom line: You can buy the same things as Warren Buffett; you just can’t buy as much.

News and Related Story Links:

• Money Morning News:
  Warren Buffett and Berkshire Hathaway Purchase Stakes in 20 South Korean Firms, Including POSCO.

• San Jose State University:
  The Chaebol of South Korea.

• Money Morning Investment Analysis:
  Warren Buffett’s Berkshire Hathaway is Riding the Rails Again.

• BusinessWeek.com:
  The Warren Buffett You Don’t Know.

• Answers.com:
  Warren Buffett: Biography & More. 

China’s enormous importing and exporting demands had a huge hand in record third-quarter profits for the world’s largest shipbuilding company, Korea-based Hyundai Heavy Industries Co.

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Profits rose to $479 million (434.7 billion won) from $232 million (210.7 billion won) a year earlier. Demand from China is fueling record earnings for several shipyards in South Korea, the world’s leading shipbuilding nation. Hyundai Heavy is growing so fast that it is backlogged with more than three years of orders, Bloomberg News reported. Increased vessel prices also helped drive earnings. 

Hyundai Heavy produced and delivered 65 vessels in the first nine months of the year, at a value of $5.03 billion, according to the company’s web site. In nine months last year, those figures were 58 and $3.82 billion, respectively.

"Earnings will continue to grow as they build vessels from orders they won when prices rose," Song Jae Hak, an analyst at Woori Investment & Securities Co. in Seoul told Bloomberg. Song has a "buy" rating on Hyundai Heavy shares.

Unfortunately, U.S. investors can’t buy Hyundai Heavy, as the company isn’t registered with the U.S. Securities and Exchange Commission. However, they can target shipping companies in a unique position to capitalize on the booming Eastern markets. Many of those companies – like Hyundai Heavy – are reporting record profits, even with the massive order backlogs.

Dry-bulk shipping is the marine transportation of significant commodities in bulk, such as gold, or metal ores. And China siphon up those commodities up any faster. Most of the ports in the busiest countries are not big enough to handle the recent heavy surge in shipping traffic caused by the global boom.

And well-heeled investors have reaped gains of over 500% on this shipping boom.

News and Related Story Links:

• Bloomberg:
  Hyundai Heavy Profit More Than Doubles to a Record

• Money Morning:
  The Two Ways the Global Shipping Sector Can Deliver Bulk Investment Profits

The economy of South Korea grew at a 1.7% pace in the second quarter, its fastest performance in 18 months and one that induced Moody’s Investors Service to boost that Asian nation’s credit rating. And that, in turn, caused Korean stocks and its currency to rise in value. Moody’s boosted Korea’s credit ratings to A2, the first increase in five years, while the Korean Won soared to its highest level since 1997. For the latest up-to-date profit opportunities in Asia, take a look at Money Morning’s latest research report.