5 Stocks To Ride On The South Korean ‘K-Wave’

Cosmetics and Media companies have gained from the ‘K-Wave’

South Korean (EWY) companies are capitalizing on the rise in cultural exports following the so-called ‘K-wave’. Also termed as “Hallyu”, this rise in South Korean pop culture has boosted the country’s fashion, tourism, media, luxury goods and cosmetics sectors. Data from the government indicates that South Korea’s cosmetics exports rose 44% to $4.2 billion, more than double its 2014 figure of $1.79 billion.

Production of cosmetics rose by 21.6% to 13.05 trillion won ($11.46 billion) in 2016.The country’s largest cosmetic company, AmorePacific, led the way with output of 4.4 trillion won ($3.85 billion) accounting for 33.6% of the total production output. Meanwhile, LG Household and Healthcare contributed 27.45% to total output. Aekyung Industrial and Innisfree made up 1.94% and 1.5% of total production of cosmetics in 2016.

AmorePacific recorded sales growth of 18% while LG Household & Health Care’s sales surged 14% last year. Operating profits of these companies jumped 10% and 28% respectively in 2016. Shares of AmorePacfic and LG Household & Health Care have returned -5.4% and 16% during the year so far. In comparison, the benchmark KOSPI Index has gained 18%. Cosmetics stocks have trailed broad markets in 2017 as tensions with China (FXI) hurt the country’s exports. However, with these tensions easing now, cosmetics stocks have room to run. Last year, China contributed to 20% of AmorePacific’s total sales and 7% of LG Household’s revenues.

Since 2014, AmorePacific and LG Household & Healthcare’s market capitalization have gained exponentially putting them ahead of the nation’s large shipbuilding and petrochemicals companies. AmorePacific is now among the country’s top ten largest stocks with its market cap reaching nearly $17 billion.

However, not all cosmetic companies stocks have gained. Shares of Tonymoly have remained weak since its debut and have lost 9.1% YTD. Meanwhile, shares of cosmetics manufacturers, Korea Kolmar Co. and Cosmax have returned 9.7% and -3.8% respectively.

Sell side analysts remain bullish on Korean cosmetics stocks as they continue to find new markets in places like Europe and the United States. AmorePacific has received 19 buy ratings, 1 sell rating and 18 hold ratings, while LG Household & Healthcare has 27 buy ratings, 1 sell rating and 9 hold ratings.

CJ E& M, a broadcasting company, witnessed sales growth of 14% last year and the company’s shares are up 6.9% in 2017 so far. Mike Suh, senior vice-president at CJ E & M, expects the company will not see high octane growth from the K-wave waning anytime soon. “I believe Hallyu will last for the next 10 years at least, which means infinite opportunities for content exports,” he said.

South Korea’s duty-free store operators have also benefited from the popularity of Korean cosmetics, particularly from Mainland Chinese consumers. Duty free retailer Hotel Shilla and department store operators Shinsegae and Lotte Shopping have reported sales growth of 14%, 15% and 1% last year and their shares have gained 18.6%, 30.4% and 37% so far in 2017.

Hallyu has also boosted South Korea’s popularity as a tourist destination, with 17.2 million foreign tourists visiting the country last year, nearly double that of the 8.5 million tourists recorded in 2010.

Year to date, the best performing consumer stocks in South Korea are F&F, Fashion Platform, and Hankook Cosmetics. Shares of these companies have surged 66%, 59% and 43% YTD.

Valuations in the South Korean consumer sector look compelling with average price to earnings multiple of 16.6x. Kukdong Corporation, SD Biotechnologies, and Pan-Pacific Co are the most attractive stocks based on their cheap valuations. These stocks have one year forward PEs of 5.2x, 7.9x, and 8.1x and are trading at the steepest discount to their peers. Meanwhile, AmorePacific, Samick Musical Instruments and Cosmax are the most expensive local consumer stocks with PEs of 30.1x, 28.3x and 26.5x respectively.