Why Funds Are Selling Analysts’ Top-Ranked Korean Stock

South Korean money managers are selling out of analysts’ most-loved stock.

Hanssem Co., the nation’s biggest furniture retailer, attracted unanimous buy ratings from 16 brokerages as it surged 206 percent in the 12 months through last week, more than any other company in the benchmark Kospi index with a market value of at least $2 billion. Local institutions unloaded $5.5 million of the shares in the past month as valuations climbed to a record 8 times net assets and Sweden’s Ikea moved closer to opening its first store in Korea this year.

Hanssem, which has grown to more than 300 outlets across the country since it was founded in 1970, has been one of the biggest winners from spending unleashed by record levels of consumer debt and government efforts to revive the housing market. Now, Shinyoung Asset Management says it’s time to sell as the stock trades at an unprecedented premium versus the Kospi and Ikea plans to open a 25,749 square-meter shop near Seoul.

“I sold all of my shares in Hanssem,” Huh Nam Kwon, the chief investment officer at Shinyoung Asset Management, which oversees about $8.8 billion, said from Seoul on Sept. 3. “It has the property market momentum already priced in and it’s overvalued.”

The rally may already be losing steam. Shares of the Gyeonggi-based company fell 5.2 percent over the past three trading days, the steepest drop in two months, as the Kospi retreated 0.1 percent. The stock’s relative strength index reached a more than five-year high of 82.7 on Sept. 2, a signal to some traders that it was poised to retreat.

Rising Profit

The stock declined 1.7 percent to 115,500 won at the close, its lowest level in more than two weeks. Korean markets opened today after a three-day holiday.

Hanssem still has attractive earnings prospects, Park Yong Hee, an analyst at E*Trade Securities Korea, said by phone from Seoul on Sept. 4. The company’s net income rose 43 percent in the three months to June. Stronger branding and bankruptcies of some local rivals have helped it increase market share, according to Nomura Holdings Inc.

Hanssem, which also supplies kitchens and building materials to new housing developments, is getting a boost from government policies designed to revive demand for real estate after prices dropped for four straight years in Seoul. Korea loosened banks’ mortgage restrictions in July, while home sales that month increased about 23 percent from a year earlier.

“Growth momentum is still there for the company,” Park said. Hanssem has about 20 percent of Korea’s furniture market and 40 percent of the kitchen-fitting business, he said.

Buy Ratings

The company lost its unanimous buy record at the end of last week when Eva Dimensions, a Locust Valley, New York-based research company, cut its rating to neutral. Hanssem’s consensus recommendation of 4.9, on a Bloomberg scale where 5 represents all buys, remains among the highest of the 113 biggest companies on the Kospi.

Hanssem’s profit margins may come under pressure after Ikea, the world’s largest furniture seller, enters Korea, said Lee Jin Woo, a money manager at KTB Asset Management Co., which oversees about $7.9 billion.

The Korean company plans to match or beat Ikea for prices on “key products,” it said in an e-mailed response to questions from Bloomberg News.

A recent advertisement on the company’s website shows Jun Ji Hyun, lead actress from Korea’s “My Love from the Star” soap opera, who says that beds are about more than just sleeping. She reads a book, surfs the web and eats brunch, before a Hanssem maintenance man appears to conduct after-sales service.

Profit Margins

“Hanssem has showed good strategies that amplified the brand, but the valuations are too high,” Lee said by phone from Seoul. “Ikea is soon entering the Korean market and this will spice up the competition. Profit margins can go lower.”

While government measures to boost the real estate market are supportive, rising consumer debt levels may constrain gains in home prices next year, according to Daewoo Securities Co. Household debt, including loans and goods purchased on credit, stood at a record 1,024.8 trillion won ($990 billion) at the end of March, including 422 trillion won in mortgages extended by banks and other depository institutions, according to the Bank of Korea.

Construction and steel companies are a cheaper alternative for investors seeking to benefit from the nation’s housing recovery, according to Shinyoung Asset Management’s Huh.

Hanssem’s price-to-book ratio is eight times higher than that of the Kospi index and the stock is valued at 32 times projected earnings for the next 12 months, compared with a multiple of 12 for the benchmark index. A gauge of construction stocks on the Kospi trades at 15 times forward profits.

For Hanssem and rivals, “a lot of the benefits seem to have been priced in,” Kim Hak Kyun, a Seoul-based strategist at Daewoo Securities, said by phone on Sept. 4.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE