Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Nearly 30 years of experience in the Korean/Asian equity research. Major sectors coverage include the following:
- Technology 
- Consumer 
- Special Situations/Deep Value Plays
- Tender Offers/M&As
- Holdcos/Stubs
- Asian Unicorns/Private Companies

Korea/Asia, Events, IPOs

Weeding Out the Chaff for Portfolio Outperformance in 2017

Thematic (Sector/Industry)

South korea Industrials / Thematic (Sector/Industry)

The Korean Stock Market remains surprisingly fundamental driven and free cash flow remains a fundamental factor that could help investors to weed out the chaff. In our previous report, <a href="https://www.smartkarma.com/insights/weeding-out-the-chaff-for-portfolio-outperformance-in-2017" target="_blank" data-smartkarma-citation="insights:7825">Weeding Out the Chaff for Portfolio Outperformance in 2017</a>, we identified 71 companies (out of the top 500 market cap in Korea) that have the following characteristics (a) Sales growth of at least 3% per annum from 2014 to 2016, with no year of sales decline. b) Positive operating and net profit in 2014 to 2016. c) Generate positive growth in both operating and net profits YoY from 2014 to 2016. Of these 71 companies, we further divided them into ones that generated positive free cash flow in 1Q16 to 3Q16 (Group A) and those that generated negative free cash flow during this period (Group B). The 48 companies (Group A) have the positive attributes of (a) to (c) as well as positive free cash flow in 1Q16 to 3Q16 was down 0.2% on average from end of 2015 to 21 December 2016 versus the 23 companies (Group B) which were down a whopping 13.1% on average during this period. <div class="content-highlight">We want to caution that the past performance may not work well in future periods. But when selecting the stocks for the long run in Korea, free cash flow remains an invaluable tool in weeding out the potential winners and losers in the Korean Stock Market. </div>

The Korean Stock Market remains surprisingly fundamental driven and free cash flow remains a fundamental factor that could help investors to weed out the chaff. In our previous report, Weeding Out the Chaff for Portfolio Outperformance in 2017, we identified 71 companies (out of the top 500 market cap in Korea) that have the following characteristics (a) Sales growth of at least 3% per annum from 2014 to 2016, with no year of sales decline. b) Positive operating and net profit in 2014 to 2016. c) Generate positive growth in both operating and net profits YoY from 2014 to 2016. Of these 71 companies, we further divided them into ones that generated positive free cash flow in 1Q16 to 3Q16 (Group A) and those that generated negative free cash flow during this period (Group B). The 48 companies (Group A) have the positive attributes of (a) to (c) as well as positive free cash flow in 1Q16 to 3Q16 was down 0.2% on average from end of 2015 to 21 December 2016 versus the 23 companies (Group B) which were down a whopping 13.1% on average during this period. We want to caution that the past performance may not work well in future periods. But when selecting the stocks for the long run in Korea, free cash flow remains an invaluable tool in weeding out the potential winners and losers in the Korean Stock Market. 

Samsung Electro Mechanics Co, Ltd. (009150 KS)

Hyundai Engineering & Construction (000720 KS)

Posco International Corporation (047050 KS)

HD Korea Shipbuilding & Offshore Engineering (009540 KS)

HD Korea Shipbuilding & Offshore Engineering

Kepco Plant Service & Engineering (051600 KS)

Daewoo Engineering & Construction (047040 KS)

GS Engineering & Construction (006360 KS)

Samsung Electronics Pref Shares (005935 KS)

Free Cash Flow Remains King in Weeding Out the Winners and Losers