Tuesday, September 26, 2006

Korean Firms Still Undervalued (?)

Or at least that is the headline of a rather odd dispatch of a Korean Exchange report. The Korea Times/Hankook Ilbo's rationale for such a conclusion:

The comparison is so ludicrous that it almost barely worth mentioning. Then again one would think somebody like the Korean Stock Exchange would know better. Simply put you cannot make a blanket comparison like that across economies given their GDP and population. There is also a more fundamental flaw here, the idea that absolute size is a measure of worth. Data later in the article show this:

Since the ROE is much higher on Korean firms than Japanese firms, one can easily argue its the Japanese companies are actually overvalued, rather than Korean ones being undervalued. Another odd thing about this article, or perhaps even more disturbingly the report itself, is the way it treats PE ratios:

Were to start with this slaughter of stock statistics....whooo boy! First a PE ration does not tells you little about underlying value of the company. The number is used not to find value per se, but value relative to companies in the same sector. First we have not indication that the Korean top 30 are of the same industrial composition of the Japanese top 30. Another problem are discrepancies in on each local exchange that effect a PE ratio, such as the amount of shares floated in relation to volume or even more basic things like local economic conditions (ask anybody who follow ADR's on the NYSE versus stock in their home economies). Last even if a company puts in a good PE relative to its peers, it says little about things that actually effect valuation like assets, industry profitblity/potentional, and management quality.

On that last issue, management quality I love the selective memory at the end of the article:

Lets not mention that SK Networks was once guilty of accounting fraud which overstated profits, and the man convicted for fraud in the scandal is still head of SK Networks (not to mention the whole proxy fight in relation to that power struggle). I think things like that have more to do with a company valuation that some number from a stock price.


At November 01, 2006 5:07 AM, Anonymous Anonymous said...

Could you tell me briefly 'when is a company undervalued' - just some hints where to start searching info - I need it for a college essay


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