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Korea Report - December 2003

Author : Hwang & Co Date : 04-02-23 16:02 Hit : 38058

*Topics

-President Roh made another bombshell remark on his presidency
-Prosecution's probes on illegal presidential election fund expanded
-Bird flu spread across the country and mad cow disease in USA confirmed.
-Korea decided to dispatch 3,000 troops to Iraq.
-Former top aide to ex president Kim DJ sentenced to 12 years in prison.
-Record exports saved the country.
-Government to establish fund with excessive foreign reserves for investment.
-Credit card industry became a time bomb in the economy.
-Korean shipbuilders secured record order book in 2003.

*GOVERNMENT AND SOCIETY

President Roh Moo-hyun stunned the nation again to take another political gamble, vowing to quit the presidency if his election camp is found to have received illegal campaign funds more than one tenth of what majority opposition GNP took for last year's presidential election. He, by his bombshell remark, tried to advertise his self proclaimed moral superiority over GNP and aimed at getting upper hand in the upcoming April general election. Some lawmakers commented that he had thrown his last card to get out of deepening political crisis he is presently in.

The prosecution arrested a lawyer, Surh Jeong-woo, close aide to Lee Hoi-chang, ex presidential candidate of opposition GNP, on charge of collecting van loaded KW5 bil from Hyundai Motor and truckloaded KW15 bil from LG, and KW11.2 bil worth of public housing bonds from Samsung, ahead of presidential election last year. Prosecution also sought an arrest warrant for Rep Choi Don-woong of the GNP, over his role in collecting KW10 bil from SK Group and pushing Samsung and LG to provide more funds. Uri Party called the main opposition party "a crime ring that outdoes the mafia. Even mafia do not use such roguish method, collecting money in trucks." Lee Hoi-chang admitted to having received, under his entire responsibility, illegal donation amounting about KW50 bil from chaebols for last year's election, and said that he is ready to go to jail.
Prosecution arrested Lee Kwang-jae, a close confidant to President Roh, who admitted receiving illicit funds, strongly suggesting the possibility of misappropriation of a chunk of money that goes to repay the debts of a bottled water company once owned by Roh. President Roh, then candidate, was told to have attended at the meeting where his close aide received illicit fund from businessmen, in 2 cases. 2 majority opposition parties pounded President Roh for his alleged involvement in the bribery scandals, saying he should be subject to impeachment, as he turned out to have lied before the people. Prosecution indicated that illegal funds received by Roh camp would be in the range of KW4.1-6.1 bil, while GNP's is estimated KW51 bil.

The opposition dominated National Assembly overrode President Roh's veto of a bill authorizing an independent investigation into corruption scandal against his aides. Of the participating 266 lawmakers out of 272 total member of Assembly, 209 voted for the bill, dealing a serious blow to president's authority ahead of April general election. National Assembly pass the government budget plan of KW118.3 tril for next year. The Parliament passed a proposal to introduce securities-related class action suit, allowing all investors to be entitled to equal compensation when one of them wins legal bail against a company that resulted in their financial loss. The parliamentary vote on the ratification of the FTA with Chile was blocked by angry reactions from lawmakers representing farmers.

The fatal bird flu has been pounding the poultry farms across the southern half of the nation during Dec, Government decided to spend KW7 bil to buy and slaughter a total of 5.6 mil chickens and ducks which contain a deadly bird flu. The spread of fatal bird flu showed the signs of abating, with no suspected cases reported at the end of Dec.
Korea officially banned the import of US beef and beef products following laboratory confirmation of America's first case of mad cow disease. Korea imported 187,000 tons from USA in first 11 months this year, about 68% of the total volume of imported beef. Korea has been one of 3 largest beef importer from USA with Japan and Mexico. USA has sent a special delegation to Korea to discuss the matter, but Korean side agreed to import US beef only in case international authority confirms the safety of US products.

10 Biggest news in 2003; 1. Roh Moo-hyun took the presidential office, and jumped into controversies over his careless remarks and scandals involving his aides. 2. Arson attack on Daegu subway, claiming 192 lives. 3. Probe of presidential election funds, involving political parties, president's aides and chaebols. 4. Park Jie-won, key aide to ex President Kim DJ, was sentenced to 12 years in prison for his receiving bribery and illicit money transfer to NK. Chung MH, ex chairman of Hyundai Group killed himself amid a probe. 5. An unemployment rate reached 3.7% and credit delinquency rose to 3.65 mil. 6. Typhoon Maemi hit the country, claiming 131 lives and causing around KW4.78 tril damage. 7. Government took the extreme measures to prick the bubble, stopping the rampant speculation on real estate market. 8. Struggle on nuclear waste dump site for 6 months, government turned the issue to starting point. 9. Korea decided to dispatch around 3,000 troops to Iraq. 10. Bird flu spread across the country and mad cow disease in USA dropped the beef consumption.

*NORTH KOREA AND NATIONAL DEFENSE

Government decided and Parliament approved to dispatch additional 3,000 troops for the period of 8 months from Apr 1, 2004, to the northern oil field region near Kirkuk, Iraq. It would be organized with well trained 1,400 combatants, and 1,600 engineering and medical staffs. The mission will include a sizeable group of non military government officials and civilian experts who will work on humanitarian efforts on the sidelines of the 3,000 troops.
2 Korean engineers were killed and 2 others wounded by a terrorists attack in Iraq, while they travelled to power transmission tower construction site in Tikrit from Bagdad. Government considers evacuating more than 3,400 Korean construction workers from Middle Eastern countries if the security conditions deteriorate in the region.

The 6 way talks to discuss NK's nuclear program, can be held in mid Jan, but not earlier, as USA rejected a NK's offer to freeze its nuclear program if USA took it off the list of nations sponsoring terrorism and resumes oil supply, insisting NK's suspected weapons of mass destruction must be dismantled in verifiable and irreversible way without condition. Lybia has promised to surrender its WMD and halt its nuclear development program, in a bid to end nearly 2 decades of international isolation. Iran signed an agreement with IAEA that permits inspections of its nuclear sites. President Bush urged NK to follow the step of Libya.

The Seoul District Criminal Court sentenced Park Jie-won, former chief presidential secretary to ex President Kim DJ, to 12 years in prison on charges of taking bribes of KW15 bil and for his involvement in the illicit money transfer to NK. Immigration and quarantine office to control the flow of the people crossing between 2 Koreas opened. USA announced its Christmas Eve donation of 60,000 tons of food to NK, which was held amid the concerns over the distribution.

*ECONOMY AND POLICY

BOK forecasts that Korean economy will grow 5.2% next year, citing recent optimistic data as improving consumer sentiment and continued trade surplus. Finance Ministry confirmed the Korean economy bottomed out in 3rd quarter of 2003, citing falling inventories, improving shipments and brisk local businesses in overseas market. Government plans to repay $2 bil in debt, ahead of schedule, owed to ADB from 97-98 economic crisis. Currently Korea owes $4.8 bil and $1.7 bil to IBRD and ADB, respectively.
Korea's consumer confidence index soared up to a 9 month high in Nov to 94.6 from 91.5 in Oct and 90.4 in Sept. Korean manufacturers' business sentiment rose for the 4th straight month in Nov with the index advanced to 84 from 74 in Oct.

Record export saved Korea, amid poorly performing domestic and global economies, war in Iraq, outbreak of SARS in Asia and election of new president that made things very uncertain. Korea's export increased 19.6% on year in 2003, reaching a record high $193 bil, while import also swelled 17.5% to 178.7 tril, posting trade surplus of $14,3 bil, the biggest in 4 years. Korea's export next year seems to be expanded to $217 bil thanks to steady recovery of global economy and China's explosive growth.
Korea's current account surplus in Nov widened to a level not seen in nearly 5 years to around $2.95 bil, driven by strong exports and greater overseas investment income, bringing the Korea's 11 month surplus to $12.5 bil.

Foreign ownership has been rising to more than 40% of listed equities and 27% of commercial banks at the end of June. Lone Star Funds is controlling 51% of Korea Exchange Bank, New Bridge Capital owns 51% in Korea First Bank, and a consortium of Carlyle and JP Morgan hold 36.6% stake in KorAm Bank. Foreign investors are likely to continue to prefer Korean stocks over those of Japan and Taiwan, mainly due to the relatively low price and brighter corporate earnings prospects. The foreign ownership of Japanese equity stands at 19.6% and Taiwan at 22.8%. Local financiers are currently prompting to rally to prevent the nation's strategic businesses from falling into hands of overseas funds.

Government plans to promote the private equity fund business to develop the nation's fledgling capital and asset management sector. Private equity funds buy company's shares with a money from small group of investors seeking high profit over a long period.
Government is to emerge as a major financial player with its plan to be more aggressive and larger scale fund management starting next year, with an estimated $127.68 bil.
The government plans to establish a state-run fund by 2005 that will use foreign exchange reserves to invest in overseas assets. It estimated the "appropriate' level of foreign exchange reserve at $121.4 bil, and any amount exceeding the level should be used as assets for the investment in other areas to generate the profits. Korea's foreign reserves stood at $155.35 bil.

The credit card industry is becoming a potential time bomb. Korea's major 8 credit card issuers reported staggering 487% fall in their combined 9 month profit and surge in their delinquency ratio to 11.2% at the end of Sept comparing with 6% at the end last year, while 7 other credit card only companies have amassed a loss of KW4.14 tril, during first 9 months. Korea credit delinquents hit new high at 3.65 mil in Nov, making up 7.6% of total population of 47.93 mil.

KEB Card is to be merged for survival with its parent bank, KEB. Samsung Card considers taking over Samsung Capital in Feb next year, in the hope to stay afloat. Woori Finance Holdings decided to inject upto KW600 bil into its credit card unit before the planned merger of its banking business with a credit card unit.
LG Group agreed to buy KW800 bil of LG Card's bond to ease the card company's debt problems. Creditor banks' plan to sell LG Card is running into trouble, as no bank showed its intention to bid for the company that holds KW3.24 tril more debt than assets.
Shinhan Financial Group injected KW200 bil into Chohung Bank in order to prevent the lender's capital edquacy ratio. Industrial Bank achieved its successful listing at home and abroad at the same time.

*CHAEBOL

Prosecutors' bold step dealt a blow to the image of Samsung Group. They allegedly allocated 1,253,000 shares worth KW9.6 bil in Everland, an amusement park affiliate, to Lee Jae-yong, 35, son of group chairman, and his sister for KW7,700 per share, while the shares traded at between KW85,000- 230,000, for illegal transfer of shares to dodge the inheritance tax. The son became the largest Everland shareholder with a 25.1% stake, gaining control of Samsung Group, because Everland holds a 19.3% stake in Samsung Life Insurance, which is defacto holding company of Samsung Group. Samsung Group argued that its stock transactions followed all relevant regulations and prosecution's indictment is "incomprehensive", reflecting only popular sentiment.
Samsung Electronics is expected to retain its top share of global market for 12 consecutive years for the supply of DRAM chip this year with 28.1% share with $4.871 bil revenue, followed by Micron 18.8%, Infineon 17.0%, Hynix 14.5% and Elpida 4.8%. Brand value of Anycall, Korea's best selling handset in the local market made by SEC, has increased as much as 6 folds over past 5 years, worthing KW3.3 tril.

Samsung and LG, Korea's 2 most powerful handset makers, plan to sell 65 mil units and 35 mil, respectively, worldwide next year, accounting about 20% world entire sales volume. Two leading Korean mobile phone operators, SKTelecom and KTF, are set to start 3rd generation mobile services based on a Europe backed technology, making Korea the 5th nation to have a 3G network, after Japan, UK, Italy and Australia.

LG Electronics took command of top spot on the worldwide CDMA mobile phone market for the first time, selling 6 mil units and marking 23% market share in 3rd quarter this year. Despite the bailout of KW2 tril, LG Group is reportedly forced to exit the financial industry by selling its profitable brokerage in package, to lubricate the sale of its troubled card unit. LG Group will be only chaebol with no financial unit under its umbrella.

KCC and Hyundai Group are escalating their dispute over the controlling Hyundai Elevator, defacto holding company of the group, as they strive to win public support ahead of a court battle and a share holders' meeting in March. The Suwon District Court accepted petition from KCC to stop the company from issuing 10 mil new shares to the public, ruling that "because the planned new share offering is not to raise necessary funds for operation but to defend managerial control of Hyundai Elevator's major share holders at time when they are in dispute over control" On the other hand, Financial Supervisory Service considers ordering KCC to dispose its combined 20.63% stake in Hyundai Elevator, because it had broken a disclosure rule when they acquired the shares. Currently Chairwoman Hyun has 26.16% stake, including shares held by symphasizer, while KCC side holds 29.82% stake with 15.3% in friendly league.

Hyundai Motor set a new mile stone, as the company's annual exports broke through 1 mil units and $10 bil barriers for the first time in Korean car making history, since it had exported 6 small cars to Ecuador in 76. Hyundai Motor expects to meet its goal to sell 400,000 cars and trucks in USA in 2003. Hyundai Motor's production of its car in India marked 500,000 unit in 5 years since it started its production in 98. Hyundai Motor is to invest KW700 bil by 2008 to develop more eco-friendly commercial vehicles.
Templeton Asset Management became the largest shareholder of Hyundai Industrial Development, by raising its stake to 17.34% from 16.2% in the company, threatening possible M&A or management control with the support of foreign capital in the stake. Chung's family holds total 17.02%.

SK Corp has taken a more advantageous position in its battle with Sovereign Asset Management by selling all of its treasury shares representing a 10.41%, which gives no voting right to SK Group, to 2 Japanese allies to help the company keep its voting power. It will have a combined 35.54% stake supporting its current management, while Sovereign is estimated to have about 20.69% stake supporting its move to oust 6 of SK Corp's board members.
SK Corp signed a final agreement with BP plc to jointly invest in what would be Korea's first private power plant to generate 1,074 mega watts electricity in Gwangyang.

Daewoo Electronics is to produce TV sets at a plant in Poland next May as part of its renewed focus on European markets. Tata Group of India was told to confirm its intention to buy Daewoo's Commercial Vehicle unit. Creditor of Ssangyong Motors named China's Nanxing Group, also known Blue Star, as the preferred bidder to buy controlling 55.5% stake in the company, Korea 4th largest automaker, following evaluation of the bids from 8 companies, including GM, Renault, Nanxing Group and Shanghai Automotive.
Korean Air agreed to buy 9 units of 777-200 aircraft from Boeing, increasing the number of 777s to 22. Kumho Group, country's 17th largest chaebol, covering tire manufacturing, leisure business, petrochemicals and Asiana Airline, is to change its name to Kumho Asiana Group from next month to consolidate its corporate identity.

*MONETARY AND ECONOMIC INDICES

KOSPI has gained 27.6% this year. It opened at 635.17 on Jan 2 and hit 810.71 on Dec 30. Main bourse started the year bearish due to uncertainties due to NK's nuclear program and the war between Iraq and USA. It bottomed at 515.24 after SK Global was found massive accounting fraud, boosted to yearly high of 822.16 by successful US invasion to Iraq, pulled down to 788.85 on liquidity crisis at credit card companies, then recovered at the end of the year.
KWon exchange rate against USDollar has moved very stable in the range of 1183-1200, while euro and JYen has kept strengthened, once breaking the barrier of 1.25 and 107, respectively. Foreign currency reserve sharply increased by 28% on year in 2003 to reach $155.35 bil at the end of the year.
Consumer prices in Korea moved up 3.6% on year in 2003, much higher than the 2.7% of last year, due to bad weather during summer and severe typhoon damage that ruined the crop. Yield on 3 years corporate bond has been lowered from 5.7% at the beginning of the month and to 5.57% at the end. The annual unemployment rate posted 3.4%, losing 40,000 jobs in 2003.

SHIPBUILDING AND SHIPPING

Korean shipbuilders secured orders amounted to 13.6 mil CGT during first 3 quarters this year and accounting for 43.9% share of global market on the back of explosive demand, while Japan took the order of 8.9 mil CGT with 28.9% market share, China 3.9 mil CGT of 12.6% and Europe 3.3 mil CGT with 10.6%. HHI contracted 118 units of $ 6.27 bil, by end Oct. SHI has secured 70 ships worth $5 bil, contracting 9600 TEU class container ship, first time in world history. DSME got 49 units of $2.92 bil and STX 49 ships of $2.5 bil. KOEXIM financed the deal between HHI and Primorsk for 3 x Aframax tankers worth $120 mil, as the first shipbuilding financing to Russia.
Shipbuilding and shipping stocks have risen highest during Jan 2-Dec 5 this year with a common factor, gaining 194.49%, due to an increase in orders and a rising exchange rate, outperforming the composite index with 24.28%.

HHI reshuffled its executives. IY Chung stepped aside as advisor and DY Han returned to his previous post to manage the ship sales. YK Suh promoted to senior executive VP, shifted to plant sales division. Hyundai Samho achieved the construction of 10 mil DWT mark in 47 months since its start in 99. It made agreement with Melon to build 2 x Suezmax tankers and Marmaras 2 x 159K tankers. HMD agreed with Barclay Shipping to build 2 x 37 Boston beam PC, Ahrenkiel 4 x 2800 TEU, Daxin Petroleum 2 x 47K PC, National Chemical Carriers 2 x 46.2K PC and Tsakos 2 x 37K PC.
DSME's net profit fell 45% in Nov on year to KW22.2 bil, because of strong KWon, aftermath of typhoon Maemi and higher raw material prices. It contracted with Louis Dreyfus for 2 x 170K bulker, Chandris 2 x 73K bulker, Essberger 2 x Aframax tanker, Sovcomflot 2 x 162K tanker and Lief Hoegh 2 x 6100 PCTC.
SHI agreed with OOCL to build 2 x 8063 TEU class container vessels.
Hanjin Heavy Ind decided to buy and cancel its 3 mil shares in 3 months from next March to stabilize its share price.
STX signed the contract with Pietro Barbaro to build 2 x 51K PC and Dunya Denizcilik 2+2 x 47.4K. STX became the first yard this year in the world to launch 20 ships from a single dock in a year. ShinA contracted with Union Shipping for 1 x 37K chem IMO III.

HMM aims to increase its shipping orders for next year by 7% to 2 mil TEU, while this year's order is estimated to hover around 1.86 mil TEU, a 9.7% increase from last year.