A Value Play In Asia’s Overlooked Banking Market

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

But 2007 has seen a change of heart. Foreign investors have pushed the Korean banking stock index up over 10% thus far this year, as they cashed out amid a correction in the Chinese stock market.

Here’s why this week’s Global Bull Market Alert pick, Woori Finance Holdings Co. Ltd. (WF) — South Korea’s third-largest banking institution by assets and sixth-biggest by market capitalization — is the best way to profit from the rebound in the Korean banking sector.

While bigger rivals spent 2006 distracted by acquisitions, Woori initiated a price war in late 2005 that helped it win massive market share in high margin mortgages and in lending to small and mid-size enterprises. This robust loan expansion — up 59% for the past two years — will enable Woori to generate steady interest income for years to come. Such expansion normally comes at a cost of a lower quality loan book. Not so for Woori. Its ratio of nonperforming loans to total loans actually fell to 1% at the end of 2006 from 1.4% at the end of 2005.

And Woori’s efforts are bearing fruit. Revenue shot up 35% to 19.211 trillion won in 2006 and net profit increased 19% to a record 2.016 trillion won from 1.688 trillion won. As impressive as these numbers are, they actually understate Woori’s achievements compared with its rivals. While profits at most Korean banks fell by a third in the fourth quarter of 2006, after the government tightened provisioning rules, Woori doubled its net profit in Q4 2006 to 419.2 billion won from 188.2 billion won in Q4 a year earlier. This performance beat average forecasts of 373.4 billion won by over 12%.

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You’d expect to pay a premium for this kind of growth. Yet Woori remains a bargain. While top Indian banks trade at P/Es of 20, and Chinese banks as high as 60, Woori’s trades at a P/E of only 9.7.

Here’s another reason you can expect Woori’s share price to rise. State-owned Korea Deposit Insurance Corp. (KDIC) owns 78% of Woori. But KDIC intends to divest itself of an additional 28% through a stock offering later this year. Ultimately, KDIC wants to sell the remaining 50% of its shares to a strategic investor. Why does this matter? Increasing Woori’s limited free float will not only allow institutional investors to increase their positions in Woori, but also make the stock eligible for inclusion in the MSCI index. That means a higher profile — and higher rating — for Woori as we move through 2007 and 2008.

So buy Woori Finance Holdings (WF) at market today and place your stop at $72.50. There are no options on this one.

PORTFOLIO UPDATE

Millicom International (MICC) shot up 13.46% last week, after announcing its profits skyrocketed 16-fold to US$169 million in 2006. Revenues almost doubled in fourth quarter 2006, compared with the same period of 2005. Move your stop to $66.00

We were stopped out of Hutchison Telecom (HTX) last week. HTX’s price drop after the sale of Hutchinson Essar for $11.7 billion to Vodafone has us scratching our heads. The market cap of HTX is now less than the price of the asset it is selling. This makes no sense from a fundamental standpoint. Nevertheless, as a trading service, we must stick to the discipline of our stops.

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After a rip roaring final quarter in 2006, global markets treaded water for the first month or so of the year.

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