World's Top Innovator South Korea Dominates Asian Stock Winnersby
Hanmi Science, Amorepacific, Celltrion reap gains from R&D
President Park’s pledges `resonated with innovative firms'
South Korea, which topped the Bloomberg Innovation Index in January, is now dominating Asian stock markets with seven of the 10 best performers this year.
Hanmi Science Co. and affiliate Hanmi Pharm Co. soared 919 percent and 681 percent each after clinching deals to sell lung cancer and diabetes treatments overseas. Amorepacific Corp. climbed 107 percent as its Air Cushion foundation cream won positive reviews, driving a 51 percent jump in its net profit in the nine months through September. Celltrion Inc., which developed an arthritis medicine, more than doubled.
Research-driven companies are spearheading a “creative economy” envisioned by South Korean President Park Geun Hye, helping revive growth in a country dominated for decades by family-owned conglomerates. The so-called chaebol have struggled to generate profits as smokestack industries stagnate, with the nation’s exports falling the most since 2009 in October.
“Park’s pledge resonated with the more agile and innovative firms in South Korea, which explained the investor confidence in their future growth," said Bernard Aw, a strategist at IG Asia Pte. in Singapore. "This translated into superior performance in the share prices."
In the Bloomberg Innovation Index for 2015, South Korea ranked No. 1 in measures of research and development, patents and post-secondary education and fourth in hi-tech companies, while scoring highly in both manufacturing and research personnel. It beat Japan, Germany, Finland, Israel and the U.S. in the overall rankings.
Korea Aerospace Industries Ltd., which reported record earnings last quarter thanks to sales in new export markets, convenience store operator BGF Retail Co., and furniture maker Hanssem Co. also made the top-10 list. Japanese cosmetics maker Kose Corp., footwear maker Feng Tay Enterprise Co. of Taiwan, China Huishan Dairy Holdings Co. and Evergrande Real Estate Group Ltd. were the other top performers.
Hanmi Pharm surged to a record after entering into a licensing agreement last week with French drugmaker Sanofi for diabetes medicines. Hanmi will receive 400 million euros ($435 million) upfront and is eligible for payments of up to 3.5 billion euros based on sales. That followed a similar deal in July with Boehringer Ingelheim GmbH of Germany for a lung-cancer drug.
Celltrion’s sales of its arthritis medicine in global markets caused bigger rival Merck & Co. to offer discounts on its blockbuster drug in the U.K. The company has spent heavily on research involving genetic engineering.
“Korean companies have set the world standard in terms of inventiveness and innovative capacity,” said Wai Ho Leong, a regional economist at Barclays Plc. in Singapore. “It is more important for Park to foster a culture of innovation across the economy by allocating more grants and subsidies to encourage small and medium-sized companies.”
Asia’s fourth-largest economy is forecast by the central bank to grow 2.7 percent in 2015, after peaking at 6.5 percent in 2010. The government, bracing for average life expectancy to be 95.5 years by the end of the century, is nurturing startups to revive growth and create jobs for young people.
Standard & Poor’s said in September the net debt of the 150 biggest South Korean companies surged 40 percent since 2010 as they borrowed to make up for falling cash flows and unprofitable investments. Overseas shipments slumped 15.8 percent in October from a year ago as China’s economic growth slowed and export rivals including Japan weakened their currencies.
Korea’s Chaebol haven’t completely missed out on Park’s innovation drive. The Kospi Large Cap Index, made up of Korea’s 100 largest stocks, rose 1.1 percent this year, under-performing a 22 percent gain in the Kospi Small Cap Index. This quarter it gained 3.2 percent, led by an 17 percent rally in Samsung Electronics Co. that reported forecast-beating profit last month.
Arnout van Rijn, Robeco’s Asia chief investment officer, says the maker of Galaxy mobile phones has the human resources and financial power to stay innovative. Robeco Asian Stars Equities fund returned 6 percent in the past year, beating 70 percent of its peers, and Samsung Electronics is its second biggest holding.
“Innovation is hard to find in very large companies but it is quite clear that Samsung spends lots of money in doing that,” said Hong Kong-based van Rijn, who helps manage $274 billion globally. “We are quite positive.”
A gauge of medical supplies companies doubled this year, the most among 19 Kospi industry groups, followed by medical and precision machine stocks and chemical producers. That contrasted with a 26 percent decline in transportation companies and 20 percent loss in iron and metal stocks. LG Chem Ltd. rallied 64 percent and was the second-most bought stock by foreigners as sales of electric-vehicle batteries made up for a lackluster performance in its petrochemical business.
“As the nation’s economic growth slows, investors’ focus has naturally shifted to companies with future growth potential from chaebol-related smokestack industries,” said Huh Nam Kwon, chief investment officer at Shinyoung Asset Management in Seoul. “Cosmetics, biotechnology, environment and aerospace are emerging as new growth engines.”