STRATEGY EQUITIES RESEARCH KOREA MARKET OUTLOOK 2012 OUTLOOK – JEKYLL AND HYDE YEAR SUMMARY BNPP TOP RECOMMENDATION Two different halves anticipated Company BBG code Rating Price Mkt cap KOSPI faces an uphill battle to post its third consecutive outperformance (KRW) (KRW b) against MSCI AxJ. We expect 1H market optimism to lead to a yearly peak level before consolidating in 2H as politics drives increased volatility. E-Mart 139480 KS BUY 268,500 7,485 Dongbu Ins 005830 KS BUY 50,600 3,582 CATALYST Hyundai Dept 069960 KS BUY 159,500 3,733 Election year does not bode well for equities Hyundai Mobis 012330 KS BUY 318,500 31,004 We expect global growth concerns to persist. Two important elections Kia Motors 000270 KS BUY 68,100 27,511 could heighten policy risk, impacting numerous sectors. We expect any KT&G 033780 KS BUY 78,300 10,750 rally to be short-lived and to soon lead to profit taking activities. OCI Co 010060 KS BUY 221,000 5,271 IMPLICATIONS Samsung Elec 005930 KS BUY 1,026,000 151,129 Quality and lower-beta stocks preferred Samsung F&M 000810 KS BUY 209,500 9,925 We maintain a defensive and blue-chip stock bias in our model portfolio. Samsung Heavy 010140 KS BUY 29,800 6,880 A s ector rotation strategy might be a temporary relief. Long-term value SK Telecom 017670 KS BUY 137,000 11,062 investment in proven winners should help to weather a tough year ahead. Woongjin Coway 021240 KS BUY 37,650 2,904 KEY CHART Last price* Change KOSPI outperformance vs MSCI AxJ in 2010-11 (KRW) (w-w %) (%) 20 KOSPI 1,853.2 (1.2) 15 Foreign holding (%) 32.8 (0.4) 10 KOSDAQ 525.7 2.3 Foreign holding (%) 7.7 (1.5) 5 KRW/USD 1,156.7 (0.5) 0 KRW/JPY 15.1 (0.4) (5) Jan -10 Mar -10 Jun -10 Sep -10 Dec -10 Mar -11 Jun -11 Aug -11 Nov -11 KRW/EUR 1,479.0 1.0 *As of 10 January 2012 Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas Sun Chung Kyun Jang [email protected] [email protected] +822 2125 0532 +822 2125 0537 BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the inside back cover. PREPARED BY BNP PARIBAS SECURITIES ASIA THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX 11 JANUARY 2012 Korea Market Outlook Sun Chung CONTENTS Market overview – 2012 ______________________________________________________________________ 3 Key market drivers in 2012 _______________________________________________________________________________________ 3 Election years – heavy metals rock _____________________________________________________________ 4 North Korea – a well discounted event by investors ______________________________________________ 8 Valuation remains undemanding _______________________________________________________________ 9 Top picks – a balanced portfolio of defensives and quality blue chips ______________________________ 11 Sector outlook summary _____________________________________________________________________ 14 Short-term risk, Earnings Revision Index continues downward trend ______________________________ 17 Alternative Energy/Industrials sector outlook ___________________________________________________ 20 Automobiles sector outlook __________________________________________________________________ 24 Steady growth of HMG to continue into 2012E _______________________________________________________________________ 24 Macro uncertainties provide prolonged opportunity for growth ________________________________________________________ 26 MOBIS is 2012 auto sector top pick ________________________________________________________________________________ 27 Consumer sector outlook ____________________________________________________________________ 28 Get luxury in a downmarket – 2008 experience suggests that department store growth will remain resilient to the macro situation _ 28 Korean discount stores exercise their bargaining power, SSSG recovery to continue in 2012E _________________________________ 28 Homeshopping, including on-line, is the fastest growing retail channel __________________________________________________ 29 Growing regulatory concerns ahead of the elections in December 2011 __________________________________________________ 30 Insurance sector outlook _____________________________________________________________________ 31 Reminiscence of 2011 – modest outperformer _______________________________________________________________________ 31 2012 looking ahead – outperformance to continue ___________________________________________________________________ 32 Shipbuilding sector outlook __________________________________________________________________ 37 Major beneficiary of steady offshore and LNG demand in 2012-13E ______________________________________________________ 37 Conventional vessel segments may face a super hangover in 2012 _______________________________________________________ 38 Flight to quality ________________________________________________________________________________________________ 38 Technology sector outlook ___________________________________________________________________ 40 Memory industry outlook ________________________________________________________________________________________ 40 Display industry outlook ________________________________________________________________________________________ 43 Mobile phone industry outlook ___________________________________________________________________________________ 48 Telecom sector outlook ______________________________________________________________________ 50 Smartphone growth and rise of 4G/LTE _____________________________________________________________________________ 50 Regulatory risks seem low in 2012 _________________________________________________________________________________ 50 Appendix __________________________________________________________________________________ 52 Macro outlook – Seoul Power, Richard Iley, Chief Asia Economist __________________________________ 57 Seoul Power ___________________________________________________________________________________________________ 57 Please see Korea Research Team list on page 65. 2 BNP PARIBAS 11 JANUARY 2012 Korea Market Outlook Sun Chung Market overview – 2012 2011 was a tough year in the equity markets. We originally expected about 25% upside to our KOSPI target and strong outperformance against MSCI AxJ index during the year. We were only half correct, as KOSPI finished in the negative territory (-11% in 2011), but it was able to eke out positive 7% relative outperformance over MSCI AxJ Index as a consolation prize. We believe that 2012 could be another difficult year for stocks, since KOSPI has fared well against its North Asian peers by outperforming the benchmark regional index for two consecutive years. KOSPI generated 7% relative outperformance against MSCI AxJ index in 2011. The prospects of three consecutive years of beating the MSCI AxJ index could be low. Also, a mixed bag on the global macro picture with EU recession, modest improvement in the US, and selective easing in China would continue to fuel market volatility and suppress Korean shares given their high gearing towards cyclical industries and developed market demand. Thus, we expect 2012 to be a year of two halves – with almost Jekyll and Hyde-like performances. However, we are more bullish on 1H12. We expect investor sentiment to kick the year off strongly. Our global economics research team forecasts another round of quantitative easing to provide a liquidity driven rally in 1Q. The positives could stem from the US economy as unemployment and consumption data improve gradually. Korean shares and North Asia could enjoy solid appreciation as key beneficiaries of improving global growth prospects. We believe that KOSPI would likely reach the yearly high during Q2 before reality settles in as political wrangling heats up. We expect market volatility to be politically driven as happened in the EU sovereign crisis as well as the 2008 subprime crisis. There will be slew of elections in many countries and Korea will have two important elections – an 11 April parliamentary election and a 19 December presidential election. Politics could amplify market volatility as campaigners debate economic reforms and regulations, in our view. History shows that our market has not performed well in election years unless there was a strong global economy backdrop. Hence, we anticipate KOSPI to trade sideways or to consolidate in the latter part of the year. Key market drivers in 2012 1 Elections – April parliamentary and December presidential elections could make economic policies a focal point. We are concerned over sectors with high regulatory risks, such as banks, telecoms and utilities. Retailers and insurers might be pressured in favour of consumer benefits. Also, inflation has been a drag on the Korean economy in 2011. A commodity price (oil) surge might handicap regulators in implementing any growth policy to win over voters. We are wary of too much regulatory involvement in the election year. 2 Global economic outlook is crucial to KOSPI sentiment given the high concentration of cyclical industries in Korea. An increase in liquidity via QE will help the market start off on a high note. 3 EU sovereign crisis – A repatriation of funds and focus on recapitalisation in Europe bodes ill for foreign investors’ sentiment.