Seoul Brother

I have long been a fan of Korea's Pohang Iron and Steel (Code #005490) probably since I first visited Seoul in 1992. It was a many moons ago (no pun intended) and I was so naive, that when I accidentally walked down a street in Itaewon, and the girls shouted "Hey Joe!!, want some fun?", I actually looked over my shoulder wondering who they were talking to, and where Joe was, and this was despite having listened to Hendrix so many times I wore out more than several needles on my phonograph cartridge. Now I am sure some readers here never even owned a proper turntable, and I won't hold that against them, suffice to say, I've been sweet on Pohang for a long long time.

Sweet Pohang traded on a low single-digit PE rating for the better part of a decade. You could buy it a 5x and sell it a 8x forward earnings and you would have looked like genius. I could never quite figure out why it did this. Whether it was fear of this risk, or that risk, suspicious of the Moonies, or the fact that an insufficient number of US fund managers simply couldn't find Korea on the map, I don't know, but it just did. Despite its incessant climb towards achieving the distinction as the worlds lowest cost steel producer, and then the worlds largest steel producer, eclipsing Japanese behemoth Nippon, investors barely (and rarely at that) accorded it its due, even while Japanese competitors merged and slashed capacity, and the entire industry in America went bankrupt or as close as possible in order for new Private Equity owners to raid the pension fund. And then, after languishing for much of the 90s, investors really could have done themselves a favor and bought it when the KRW currency was obliterated in the fallout from the Asian crisis in 1998.

Earnings and sales continued to grow as the tumult of 1997-8 faded, but the stock's rating was stubbornly stuck between 5x & 9x forward earnings. And even though there are those that would call the esteemed James Grant perennially bearish, even he too favored the shares Pohang Iron and Steel Corporation as something to play on the long side, given their excellent balance sheet, chipper business outlook, depreciated currency, and unusual value they afforded purchasers. So 2003 and 2004 came and went, with little appreciable attention. The stock just got cheaper, in a Charlie Brown sort of way like whenLucy pulls away the football yet again, even as both earnings and sales were accelerating, and the signs that the 15 year bear market in steel not only over, but was giving way to a heady bull market as China ascended, carrying with it all things hard and/or shiny. Only following the May 2006 pullback in the liquidity complex did investors begin to rediscover Pohang and things Korean.

And discover it they did!! While earnings and future estimates thereof continued to grow, they couldn't keep up with investors' appetites for the shares. Between Sept 2006, and Sept 2007, investors tripled (yes 3x, thrice, three-bagged) the rating on the shares from a forward PE of 5x to a current forward PE of 15x. WOW!! Hot hot and horny can you be? I will admit that I lost my appetite in May 2007 at around 9.5x forward, only because I could buy PCU, AUR or FCX or any manner of other substitute surfing the anti-dollar commodity tidal wave.

But I today, I will exclaim to all silly enough to listen, that its now absurd at 15x forward and 3x forward sales. I can buy SMM (#5405) which dominates the seamless pipe market so essential to the oil patch for 14x forward and less than 2x sales, Kawasaki at less than half price to fwd sales, Nippon Steel for a third, or Kobe or Nisshin for 25 cents on a $1 of Pohang steel sales, and no other value give-away. And to boot, all the Japanese producers still are deemed by those who know to maintain technological edges vs. Pohang making them less exposed to the dumping which is bound to spew forth from Chinese producers in the commodity segment once domestic demand is satiated. Pictured here is the relative Price/CF of Pohang vs. Nucor, which amongst other things is reflecting primarily the massive speculative charge in Pohang and unprecedented change in ratings, since forecast CFs really haven't changed all that much during the past 6-months - certainly not anywhere near to the magnitude of the change in market ratings.

I respect the market, and have given it wide berth on this one, however, I cannot help but believe that investors now so super-bulled-up on Pohang are in for a vertitable Pyongyang-ing, or Kim-Chee-ing, on a relative, and perhaps even an absolute basis. This might not come to fruition until the end of the Calendar year, or when Drobny recommends reversing positions, as investors have invested themselves rather heavily in its fortunes and may attempt mop up excess at least until league-tables are calculated and/or performance fees are paid for the FY. But with market cap now at greater than $70billion USDs and rapidly approaching the USD$100bn mark, thoughtful investors would be wise to look for an exit and/or alternatives and related trades thereof.