Samsung the Elephant

Samsung dominates life in his own country like no other company in the world. But the slogan "what is good for Samsung is good for South Korea" is open for debate.

The South Korean economy is a paradox. It has become the third largest economy in Asia after Japan and China. Its 48 million citizens in a generation enjoyed a leap in their standard of living and no country has more than South Korea benefited from the rise of China, which has become an important export. Its sovereign credit rating was recently upgraded due to reduced tensions with North Korea and it enjoys the foreign exchange reserves of more than $ 200 billion dollars. The Korean people have full satisfaction for a job well done, but instead are rather a disgruntled lot.

The per capita income is about a third that of the OECD average. Economic growth is expected in the 3-4% range closer to a mature economy than an Asian tiger. Unemployment is still a problem and a stronger currency and relatively high wages are shrinking exports which account for 40% of its economy. Output with only 7% this year after a 31% jump last year. After a credit binge, average net consumer loans is equal to 100% of disposable income and the Bank of Korea has recently bumped its benchmark rate for the first time in three years.

What is going on here? Somewhat surprisingly, South Korea is experiencing many of the same issues that Americans complain outsourcing. It was the largest investor in China last year with more than $ 6 billion fixed investment. His biggest steelmaker Posco announced 12 billion dollar investment in a steel plant in India, where the 24 steel companies is already running. Hyundai produces 600,000 cars in China and its subsidiary Kia makes 150,000 more.

Meanwhile, Samsung Electronics has Asia's largest technology company by market capitalization become (bigger than Sony), and its largest maker of memory chips and flat-panel displays and mobile phones. Samsung has a credit rating higher than sovereign rating of South Korea. With 62 branches, the Samsung group dominates life in Korea like no other company in history. It represents 15% of the country's total economic activity, 25% of the capitalization of the KOSPI stock market and the taxes it pays represent almost 10% of total government revenue!

Samsung, an increase of 25% so far this year, is still attractive at about 11 times consensus 2006 earnings forecasts and operating profit increased by 29% in the third quarter. Despite third quarter net profit falls 30%, it is expected a strong fourth quarter. There is a shortage of LCD television panels and flash memory chip global market share of over 60%. If prices have fallen flash chip sales have risen 40%.

But the company is not a great game on the South Korean economy. Rather, it is a global game in three major markets and the expected payoff of his extraordinary commitment to R & D. The South Koreans are dissatisfied because the five largest companies are growing outside the country more than in it and at a stage of development where it should be more competitive production. Onshore The challenge is the low cost production platform with massive scale just next door - the problem is China. Samsung already has 29 factories and 50,000 employees in China.

Because China has already begun to things such as machine tools, that the South Koreans were busy exporters in 2003 and 2004 produce, South Korean planners believe must quickly transform into a finance, communications and transportation hub - akin to the role of Singapore and Switzerland. The question then they have the right companies, the right skills and what is its competitive advantage?

Together, Samsung, POSCO, KEPCO (Korea Electric Power) and SK Telecom accounted for nearly 50% of the South Korean stock exchange's market capitalization. For a basketball analogy, the South Korean starting five used are strong, but the bench is a little thin and his team has lost.'s Home advantage The problem is not Samsung, but rather that they need about ten more Samsungs.

The top four companies also make up 40% of South Korea iShare (Ewy) ETF is up 29% so far this year. Samsung alone accounted for 23% of this ETF and buying the iShares gives you more exposure to the top ten South Korean companies. I trim our position in the iShares South Korea to take some profits off the table and with the expectation that the stronger won and higher interest rates will lead to a slowdown in exports. Together with the likely return of the North Korean problem, this may very well undermine investor confidence.

Bottom line: buy Samsung based on valuation and top notch global reach and R & D, but expect tougher going for the South Korean economy as China changes its robust export market for direct competitor.