Why Wearing Makeup Helps This Man Trade Korea’s Hottest Stocks
Seo Jae Hyeong says he’s started wearing skin foundation and facial masks at night.
It’s not about looking younger, the 49-year-old head of Daishin Asset Management says. Seo is trying to get first- hand insight into one of South Korea’s hottest stock-market bets: the cosmetics industry.
Led by Amorepacific and LG Household & Health Care, makers of Korean beauty products are surging more than 100 times faster than the broader market and prompting the nation’s male-dominated investment world to rethink how it covers the sector.
Shinhan Investment, part of the country’s largest financial group by market value, has deployed two analysts from its industrial team to focus on beauty research. The Korean unit of Daiwa Securities hired a woman to initiate coverage of the industry last month, while Daishin Asset started a “female generation” fund in March in part to tap into growing prospects for the beauty sector.
“When I called a ‘buy’ for Amorepacific years ago, some people laughed at me,” said Daishin’s Seo, who oversees more than $4 billion in Seoul. “The stock jumped nearly 10-fold and look what happened to the old, traditional industries.”
The nation’s cosmetics sector is booming as the rising spending power of Asian consumers — particularly those from China — leads to an influx of tourists eager to mimic the look of Korea’s pop stars and on-screen celebrities. The industry’s rise is helping the $1.4 trillion economy weather a downturn in manufacturing and shipbuilding industries that were once the nation’s biggest source of growth.
Nine cosmetic companies on the Kospi index, including Hankook Cosmetics Manufacturing and Korea Kolmar Holdings, surged an average 311 percent in the past 12 months through yesterday, compared with a 2.9 percent advance by the broader gauge. The MSCI Korea Consumer Staples Index, which gets about 40 percent of its weighting from Amorepacific and LG Household, climbed to an all-time high versus the MSCI Korea Index last week.
Earnings growth is fueling the rally. Amorepacific, the nation’s largest cosmetics company, reported a 42 percent jump in 2014 net income. The producer of brands such as Etude and Mamonde has risen 158 percent in Seoul trading over the past year, making it the best performing stock in the beauty and personal care sector globally, according to data compiled by Bloomberg Intelligence. LG Household, Korea’s second-biggest cosmetics firm, has advanced 75 percent.
Hankook Cosmetics climbed 5.3 percent at 10:13 a.m. in Seoul on Monday. Amorepacific dropped 0.6 percent and LG Household slipped 0.8 percent. The Kospi added 0.1 percent.
The growing importance of cosmetics companies is luring analysts from traditional sectors such as heavy industry, said Yang Ki In, the head of research at Shinhan Investment in Seoul.
“We have to readjust our research resources with the times,” Yang said by phone on April 2. “It used to be that analysts covering heavy industry were the most popular and well- paid. But those industries are now losing to Chinese rivals, and we’re seeing growth in other sectors like cosmetics that are actually benefiting from China.”
Shipbuilders, which former President Park Chung Hee promoted in the 1970s, were the worst-performing stocks on the Kospi last year as orders dwindled. Hyundai Heavy Industries, Korea’s fourth-largest company by market capitalization at its peak in April 2011, now ranks 24th after losing about $30 billion in value. Amorepacific has leapfrogged to 12th place from 48th in 2011 and LG Household is 17th.
The number of Chinese tourists to Korea last year surged 42 percent to 6.1 million, according to the Korea Tourism Organization. More than 70 percent of the visitors’ shopping budget was spent on cosmetics in 2013, Iris Park, the analyst Daiwa hired to cover the sector, wrote in her March 26 initiation report.
Korean television programs such as Get it Beauty, a makeup and skincare advice show that’s hosted on the Chinese online- video site Youku.com, help fuel demand for the nation’s products, according to Park. Korean brands are also “better attuned” to the particular demands of Asian consumers than global competitors such as L’Oreal SA, Park wrote, assigning a positive outlook for the industry.
For Oh Sung Sik, chief investment officer for Korean equities at Franklin Templeton Investments in Seoul, cosmetic stocks look overheated.
Amorepacific trades at 58 times reported earnings, while LG Household has a multiple of 37. That compares with 13 for the MSCI Korea gauge. The best performer on the broader Kospi this year is Hankook Cosmetics, which surged 486 percent.
“Long lines at duty-free shops don’t justify the current price levels,” Oh said on April 1. “I see some herd instinct in the market.”
Getting to grips with female beauty products may be a challenge for investors in a country with one of the largest divisions in gender equality. South Korea ranks 117th among 142 countries surveyed in the World Economic Forum’s annual 2014 Global Gender Gap Report, behind Qatar, India and Liberia.
For Daishin’s Seo, the effort is worth it.
“Understanding women and acknowledging their growing power is a key to success in investment now.”
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