[머니콕] JPMorgan Northeast Asia Analyst, Merrill Lynch Co-CEO, Korea Subsidiary, First Research Center Head of Samsung Securities, 1st Generation Korean Hedge Fund Manager. Nam-woo Lee (56), an investment expert who left a more brilliant career in the domestic and foreign financial industry at the young age of his 30s, returned as a stock educator. He has been a visiting professor at Yonsei University Graduate School of International Studies since four years ago, teaching financial analysis, industrial analysis, and corporate governance at Underwood International University (undergraduate) and graduate school.
Professor Lee, who is acting as a stock mentor for college students, recently published an investment guidebook for beginner and intermediate level individual investors,’good stocks and bad stocks’. He cited △family companies, △increased brand values, and △large-scale research and development (R&D) companies that build barriers to entry as good stocks that would generate stable profits. On the contrary, as bad stocks to avoid, they cited △companies that build gorgeous office buildings, △companies that do business in the domestic market, and △companies that are interfered with by the government.
Prof. Lee predicted that Samsung Electronics, the leader of the domestic stock market, said, “The annual yield has been about 16% including dividends for the past 10 years.” He added that the fair share price level of Samsung Electronics could reach 95,000~115,000 won by the end of this year or early next year, assuming 2022 operating profit of about 70 trillion won.
The following is the full text of the interview.
“Political rights, nonsense involvement in the national pension investment”
Q. Introduce yourself.
A. I am a visiting professor at Yonsei University Graduate School of International Studies. I have been in Yonsei University for about 4 years. Before that, I worked as an international finance and investment expert for about 30 years. About half of them worked in Hong Kong. I was the first research center director at Samsung Securities 20 years ago. I created my personal hedge fund in Singapore and managed it for about 3 years exclusively for foreigners. It can be said to be the first generation of Korean hedge funds. He also served as Korea Co-Representative Merrill Lynch and Head of Asia-Pacific.
After Korea opened the stock market to foreigners in 1992, demand for Korean experts began to develop in Hong Kong. I joined JPMorgan Hong Kong Asia Pacific Research in 1993. In Hong Kong as a whole, there were fewer than 10 Koreans in the financial sector. I mainly covered IT companies in Northeast Asia. At the time, Japan was a huge powerhouse, and there was also a chance to cover Sony.
Q. The reason for writing’good stocks and bad stocks’.
A. I teach three subjects at Yonsei University: Financial Analysis, Industry Analysis, and Corporate Governance. Focusing on practice rather than theory, I teach what happens in the market in conjunction with theory. The contents have been accumulated for 3-4 years, but I wondered how to use this for investment education for the general public. As the corona worsened last summer, I had a lot of physical time and I was able to devote myself to writing for four months starting in the fall. This is the first book I ever published in my life. When I was the head of the Samsung Securities Research Center, I was thinking of paying for it, but when I inquired with the group, I said,’It doesn’t seem like a good idea for the current executive to publish a book. I am not currently active, but I have written a book that can be read by beginners to intermediate level users while experiencing a variety of experiences.
Q. Do you think that the KOSPI 3000 is expensive for foreigners?
A. For foreigners, the index itself doesn’t seem to have much meaning. Over the past 10-20 years, a large part of foreign trade has shifted to algorithmic machine orders. It doesn’t mean much in terms of direction or scale that foreigners sold and bought. However, if divided into mutual funds (public offering funds) and hedge funds, the MSCI Korea Index benchmarked by mutual funds. If the KOSPI 3000, the stock price-to-earnings ratio (PER) is 13-14 times and dividend yield is 1.5% as of this year. That’s about assuming that profits will increase a lot this year. Compared to past history or other emerging countries, it seems to feel the burden that it is not undervalued. There is not much good news for each sector by industry. Many foreigners say that there are no growing companies among large-cap stocks in Korea. The battery stock, which showed growth momentum, was also buried by the bad news of Volkswagen. From the perspective of mutual funds, the current market seems to feel that the market is at a very high level. Hedge funds have been quiet recently because short selling is fundamentally difficult. If short selling is allowed in a few months, individual long shorts will generate foreign stock trading momentum.
Q. How do you view the controversy about selling the national pension?
A. I think it is nonsense to talk about this in the political world and some individual investor associations. The National Pension Plan has guidelines, and it is most important to adhere to the principle of mid- to long-term asset allocation. This controversy is similar to short selling. Last year, the KOSPI almost doubled from the bottom. Those who make this claim are those who want the stock price to continue to rise. The intention itself is for personal gain. After all, I think it is desirable to invest in important institutions such as pension funds based on the principle of mid- to long-term asset allocation. It is said that the share of domestic stocks should be reduced to 17% by the end of this year. That’s why the stock price went up a lot, and that was the problem. If it is currently over 20% and needs to be reduced, it will have to be reduced (as planned).
There is a reason that the national pension asset allocation guidelines reduce the proportion of domestic stocks. Comparing the total returns of domestic and overseas stocks over the past 10-20 years, domestic and overseas stocks have not been profitable at around 7% per year, and even 5% per year excluding Samsung Electronics. On the other hand, U.S. stocks have generated 10% annual returns over the past 30-50 years. It was determined that overseas growth would be high and long-term performance would be good, and the proportion of overseas stocks was increased. I believe that these principles must be observed and not subject to pressure from individual investors or politicians.
“Samsung Electronics fair value 95,000~115,000 won”
Q. How much will Samsung Electronics’ share price go?
A. Since I am not an analyst specialized in semiconductors, I am not suggesting a target price. I think the research of domestic securities companies has recently weakened. The framework seems to be a bit wrong when it comes to looking at the target price. For economically sensitive stocks like Samsung Electronics, it is important to consider when peak earnings (maximum corporate profits) occur and to assume profit margins at that time. For Samsung Electronics, 2018 was the peak of profits in the past cycle, and the stock price peaked at the end of 2017. This cycle is hitting the bottom in 2019, and analyst consensus sees a peak around 2022-2023. Analysts view it conservatively during the upcycle, so if we apply the actual figure of 24% of the 2018 operating margin in 2022, Samsung Electronics’ operating profit is expected to reach 70 trillion won. It is how many times the PER will be multiplied there, but in the past cycle, the PER was about 9 times at the peak. I think the target PER should be higher than in the past, as the interest rate is still low and the dividend rate at Samsung Electronics has also increased. So, by multiplying the PER of 12-15 times, the stock price can come out from 95,000 won to 115,000 won at the end of this year or early next year. As a framework for forecasting not only Samsung Electronics, but also economically sensitive stock prices, I presented examples in my book.
Q. Samsung Electronics vs. Apple.
A. In fact, Samsung Electronics is self-certified as the best IT hardware company in the world. However, Apple still makes a lot of money on premium iPhones and profits from Apple’s services, so this year’s profit is expected to be around 75 trillion won. Samsung Electronics’ expected profit this year is 40 trillion won. First of all, the scale of profit itself is about twice as large as that of Apple. The other thing is that Apple has a PER of early 30x, while Samsung Electronics has a PER of 14x. The difference in PER has governance reasons, but international financial markets don’t like capital-intensive models like Samsung that much. Samsung is a business model that requires investing more than 30 trillion won each year. That’s Samsung’s strength to create a super gap, but from the perspective of investors, I like a light-weight model that focuses on research and development (R&D) like Apple and does not directly manufacture as much as possible. Since Apple was recognized as a service platform company rather than manufacturing, the stock price was revalued. After all, it seems to be the difference between the two companies’ business models.
In terms of investment, both Samsung Electronics and Apple are attractive stocks. In my opinion, the best IT hardware company in the world called Samsung Electronics is a Korean company, so I am lucky that Donghak ants can easily live. Samsung Electronics’ annual yield including dividends over the past 10 years has been about 16%. That kind of return is attractive because it is expected to be possible in the next five years or so. Apple has generated more than 20% annual returns over the past five years, but growth will slow and the stock price will slow down in the future. However, this company is very shareholder-friendly. Every year, over 70 trillion won was purchased and burned, and there is a belief that it will continue to do so. Both of them are good stocks, so choosing one of them seems to be an unfair question.
Q. Seoul apartment vs US stock.
A. Recently, people in the stock market say that it is not real estate, but all-in on stocks, but I think that is nonsense. You have to look at and talk about historical data. When looking at the total return on real estate or stocks such as apartments, you must include dividend income and rental income as well as stock price or house price. Seoul apartment prices have risen a lot recently, but looking at 10 years, the annual rate of return is 8~9%. Korean stocks account for only 7% per year, and 3% per year excluding Samsung Electronics. On the other hand, U.S. stocks have an annual yield of over 10% and global stocks are around 10% per annum. Overseas stocks, especially U.S. stocks, performed well in the long run. In Korea, real estate outperformed stocks. It is nonsense that real estate should not be invested. Real estate can use leverage (loan) to increase the return on investment. However, in the future, real estate returns are likely to slow down. With prices rising, interest rates rising, and population declining in the mid to long term, the yield of apartments and real estate is unlikely to be in the past. Both stocks and real estate are risky assets, so there will be long-term returns. In the long run, overseas stocks will continue to deliver good long-term performance. Real estate is not inevitable, and if you can invest because you can afford it, you can make good returns by using leverage and holding it in the long term. That’s a fact that 50-100 years of data proves not only in Korea, but around the world. Real estate is also a good investment target.
“Avoid companies that build gorgeous office buildings”
Q. Tesla’s CEO risk, how to respond?
A. Facebook’s Mark Zuckerberg, Amazon’s Jeff Bezos, and Tesla’s Elon Musk are all genius executives. It’s difficult to make the calculations accurately, but the CEO’s share of each company will be 10-20% or more. Musk has a key man risk. If you look at his past history, he has fallen into Mars or space like an astrophysicist since high school and college. That’s more than 90% of Twitter. I’m still spending a lot of time at’Space X’. This person has created a company twice in the past and made investments with that money. It is not this year or next year, but I think there is a high possibility that Tesla will exit at some point and go all-in to the Mars project. From the perspective of investors, that is Tesla’s strength and it is a risk, so it seems difficult to avoid it.
Q. Do women invest better than men?
A. There is no data on professional fund managers comparing female versus male operating performance in Korea. The United States has data, but the results vary slightly depending on the measurement method. There is no conclusion yet. In terms of individual investors, however, as a result of long-term data analysis by California State University professors, female individual investors consistently made more profits than male individual investors. Men buy and sell a lot, but men buy and sell excessively because of the confidence that’I know this stock well, I know the fair value’. When NH Investment & Securities analyzed the rate of return by age group of customers who opened a new account last year, the people who made the highest profit were women in their 30s and 40s, with about 26%. Men in their twenties had the lowest percentage of returns, with an average return of about 4%. When I take classes at Yonsei University, I can feel that young boys are doing a lot of trading.
Q. Is it a corporate damage that builds a splendid office building?
A. The first thing I should avoid while writing a book is a company that builds an excessively colorful office building, and I took Amorepacific and Hyundai Motor as examples. This is often the case on Wall Street. Yahoo also built an excessive office building and sold it to Verizon, and the New York Times, a leading US daily newspaper, built a company building worth over 800 million dollars out of debt to survive the financial crisis and sell it at half price. This is called’the curse of the new office building’. In Korea, Ssangyong Investment & Securities built a great office building, then sold the building and passed over the company. AMOREPACIFIC has a beautiful office building in Yongsan. According to the public announcement in 2014, 520 billion won was invested after subtracting the land price, which was 20% of equity capital at the time. I think it was excessive. Since then, external factors such as THAAD have not been good, but Amorepacific has drawn a downward curve for 6 to 7 years. I hope that a new CEO is coming last year, and I feel like I am strengthening my initial spirit. The happening with the building seems to be over. In the future, the performance is up to the new management.
It was a similar case for Hyundai Motor Company. If you buy the site for the Samsung-dong office building in 2014 at two to three times the expected price and calculate the return on equity (ROE), Hyundai Motor’s ROE will continue to fall until 2019. In 2019, Chairman Eui-sun Eui was not 100% financing, but also received external pension funds, and found a reasonable alternative to lower the number of floors in the building. A gorgeous office building often loses its original intention, which makes it happen. If such companies continue to exist in the future, investors will have to avoid them.
Q. Last advice to investors.
A. When investing, it is important to choose a good industry and stock. You can reduce mistakes by investing in what you have used and what you know well. If an individual investor is holding 3 stocks, even if 2 stocks are 20-30% profitable, if one stock falls 50%, there is no return. If you buy an item you don’t know about and buy it from others, there is always such a possibility. That doesn’t happen if I’m sure the products of the companies I invest in are competitive and have customers. Reducing mistakes by investing in companies you know well is the secret to long-term success as an individual investor.
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