CLSA goes Korea crazy

CLSA it appears has gone Korea ga-ga. The broker has earned a reputation for making big calls, and doing it with a certain flair - for example, launching its Hong Kong 'Boomtown' report 12 months ago using Hong Kong cinema as a hook. To be fair to CLSA's judgement, the 'Boomtown' call turned out to be a good one, and now its 'Korea wave' call, demands similar attention.

The Hong Kong-based broker has just completed a roadshow to five cities to posit its view that Korea's blooming popular culture is having a synergistic impact on the nation's key brands. Likewise the pop culture 'feelgood' factor is boosting domestic confidence, and CLSA believes all of this good news should feed through to a stock market re-rating, which will see the Kospi track upwards towards 2,000 (from it current level of around 1,074).

What gave the roadshow some added flair, was that aside from the usual analyst presentation, there was a video documentary packed full of interesting interviews in Seoul, Tokyo and Hong Kong, plus speeches from a top Korean film producer, a top record producer and a brand consultant. The roadshow also (deliberately) chose non-conventional venues: the Back room at the St Martin's Lane Hotel in London, FIZZ in New York, Peking Tom's restaurant in Boston, and the Asian Civilization Museum in Singapore.

In Hong Kong, the venue selected for the presentation was the Palace Theatre in IFC 2, followed by a party at chic venue Red (where FinanceAsia is tonight holding its 5th anniversary party for this website). CLSA faced some embarrassing technical problems with showing the movies (in a cinema of all places), but in spite of that the one and a half hour presentation was interesting and made its point well.

The Korea Wave in question - known in Korean as 'Hallyu' - has been building momentum since the late 1990s, and has seen the country export much of its pop culture to other Asian countries, with Japan and China being the two most significant examples. Movies such as 'My Sassy Girl', 'Swiri' 'Old Boy', 'Silmido' and 'Taegukki' have been big successes domestically and abroad as well as critical successes (for example, 'Old Boy' won at Cannes).

Meanwhile, the soap operas, such as 'Daejanggeum' (A Jewel in the Palace) have stirred huge viewing audiences in Hong Kong and China. The melodrama 'Winter Sonata' has had Japanese housewives swooning over its star, Bae Yong-joon, who has been given an honorific in Japan 'Yonsama' normally reserved for royalty.

Japan's Prime Minister Koizumi even joked that he wished he was as popular as Bae. (And he is not the only politician to be swept up in the Korea Wave: when Vietnamese Prime Minister Phan Van Khai visited South Korea's presidential mansion he specifically requested that the star of melodrama 'Glass Shoes' - actress Kim Hyun-joo - sign his menu.)

Then there are the pop stars. Female singer, BoA is bigger than Britney Spears in Japan. Other star acts include Lexy, Se7en, Rain and Baby Vox. (And in terms of distribution, Korea is also at the cutting edge: in 2003, Korea became the first market anywhere in the world where mobile phone and online sales, passed sales from traditional retail outlets.)

And apart from traditional media, there is online gaming. Korean games such as Lineage and Mu, have become massively popular in China, and are also a major cultural export.

CLSA's director of Korean research, James Paterson began his presentation by stating that "We believe that this cultural wave represents the turning point for Korea after a sustained period of low domestic confidence, as well as a means to polish up a national image that remains stained by outdated notions and ignorant stereotypes. This in turn should help to improve perceptions of the Made in Korea brand."

Paterson noted that perceptions and national confidence (or lack of it) were important factors that investors should not ignore. He cited the example of the US, where confidence was at a low ebb in 1980, but was boosted by the victory of the ice hockey team in the Lake Placid Winter Olympics against a seemingly invincible Soviet Union team. Indeed, that game is now viewed as one of those intangible turning points in confidence that was part of the nation's renewal. Paterson pointed out that a movie called 'Miracle' has been made about the ice hockey victory in question, and has this very theme at its core.

In a similar vein he noted that Korean sports stars are also burnishing the nation's confidence. The US women's PGA now has 14 Korean stars in the top 50; and JS Park has just signed for Manchester United.

Paterson said CLSA's house view was that the Korean market would re-rate to trade on 12 times earnings versus the current nine times; and that the Kospi would be at 2,000 by the time of the Beijing Olympics. The Kospi is now not far from its all time high of 1,139. (This follows a similarly bullish call by Goldman Sachs on the Kospi earlier this year).

To some readers, it will seem ironic that CLSA has turned so ultra-bullish on Korea in the week that Sovereign Asset Management sold out of SK Corp, and at a time when they are continuously reading in international newspapers that Korea is going backwards.

Clearly, CLSA disagrees, and its reasoning is that there are some fundamental trends driving Korea and its equity valuations forward. Paterson pointed out that Korea's stock market has long suffered from the relative absence of domestic investors.

Since the crisis, the stock market has been driven by foreigners. Ordinary Koreans lost confidence in buying stocks after a series of corporate scandals and market meltdowns.

However, this has slowly been changing. Corporate governance has improved, good dividends are being paid, plus there are not many lucrative investment alternatives especially since interest rates are low and the government has clamped down on the real estate market.

Additionally, there are new, independent asset management firms, untainted by the past (such as Mirae), which have notched up strong performance track records. This has led to a boom in what are termed equity instalment plan mutual funds (which see monies automatically transferred from pay cheques) and has injected around $6 billion into the market.

Korea has long had the lowest PE in Asia, and yet has some of the world's top companies - this has struck many foreign investors as anomalous. Korea's domestic investors are just starting to wake up to this fact too. Additionally, they have begun to understand that the market's performance will be underpinned by increasing fund flows from the National Pension Fund.

All of this brings us back to the theme of domestic confidence and the 'feelgood' factor. CLSA's documentary video on the impact of Korean pop culture, included interviews with a sample of Koreans. One of the more telling was the brand manager of Nike in Korea who said that thanks to the international success of Korea's pop culture he felt better about being Korean - ie prouder.

The turning point for this renaissance in Korean pop culture was 1996. At least, that was the date chosen by Jonathan Kim, the top Korean film producer that CLSA invited on the roadshow.

He pointed out that 1996 was the year that an erotic film-maker won a verdict from the Korean Supreme Court that declared that censorship of movies was unconstitutional. That marked the end of Korea's long era of censorship.

Kim pointed out that his own hit movie, 'Silmido' could never have been made in the era of censorship. The film, which 11 million Koreans watched at the cinema, is based on the true story of a crack unit of ex-convicts that was trained in 1971 to go to Pyongyang to execute Kim Il-sung. When policy changed, the air force was ordered to annihilate the unit. (CLSA gave away DVDs of the movie.)

Kim pointed out that Korean cinema has benefited from a number of trends all of which have seen its domestic viewing audience market share grow from 15% in the 1990s to 57% today (ie at the expense of Hollywood), and its exports grow from $0.5 million in 1996 to $100 million this year. He estimated there to be 100 million VCD copies of 'My Sassy Girl' in China.

As to the reasons for the success, he noted that Koreans are good adapters (he even said that he is a case in point: when he heard there were a lot of Jewish people in the movie industry, he changed his name to Jonathan). Meanwhile Korea's film industry has demonstrated that it can combine Hollywood production values with a more Asian sensibility (and a cheaper cost).

Likewise, the movies also benefit from a star culture that cross-fertilises with the soap operas, and sees the beautiful stars of the soaps lend their brand to movies. And most importantly: "We are not Japanese. That is a big advantage in China".

Kim concurred with CLSA that the Korea Wave was good for the Korean economy as a whole. "When people around Asia watch their favourite Korean stars use Korean products, it's like a two hour commercial. John F Kennedy once said, 'If they watch American films, they will buy American products.' The same goes for Korea today."