Stock picks - Buy Samsung Elec., Sell LG Chem

Buy: Samsung Electronics

A stock analyst may need a lion’s heart to tell people to buy stocks in the current situation, as the global equity markets are hit by a selling spree. But on Friday, a Samsung Securities analyst was brazen enough to put Samsung Electronics, its sister company, on the top of his buy list, giving it a 10-percent weight in his virtual portfolio.

Samsung Electronics’ shares fell last week along with the whole market. It again slid 3.9 percent on Friday even after the report was published to 789,000 won — that’s 22 percent down from its recent peak of 1,014,000 won in February.

Yang Dae-yong, the analyst who recommended the stock, says that the stabilization of DRAM memory chip price will boost Samsung Electronics’ earnings from the third quarter of the year. The firm is the world’s largest maker of DRAMs, which are used mostly as PC memory chips. It is a highly cyclical item and after every cycle Samsung usually emerges as the winner thanks to its know-how in cutting costs and utilizing advanced technology.

In hindsight, the shock on Samsung Electronics shares last week was not especially bad compared to other blue-chip stocks in the Kospi market. Its share price had already been damaged in previous weeks by a disappointing earnings report for the second half — operating profit fell 25 percent from the same period of last year. The main culprit was the LCD division, which makes flat screens for monitors and TVs. The division recorded 210 billion won in operating loss as the global display panel prices fell, and few expect it to bounce back.

Buy: Nexen Tire

Nexen Tire announced record-high quarterly revenue on Thursday. KB Investment & Securities said the outlook for the tire maker is bright despite the temporary drop in its operating profit rate (8.2 percent, compared to 11.4 percent in the previous quarter).

In a report published on Friday, analyst Shin Chung-kwan attributed the decrease in the profit margin to rising raw materials prices. He estimates that the raw material prices of tires have risen by 14.5 percent on average from the previous quarter, while the prices of finished tires increased by only 4.1 percent during the same period.

But the KB analyst expects the situation will get better in coming months since the prices of natural and synthetic rubber are stabilizing. He also claims that the company also plans to raise the tire price by around 3 percent in the third quarter, which will push up the operating profit rate to beyond 9 percent.
What is more encouraging, Shin says, is that the foreign shareholding of the company is only 6 percent, so the company should be relatively safe from external events.

Nexen shares fell 8 percent to 15,900 won on Friday. KB’s target price is 25,000 won.

Sell: LG Chem

LG Chem was the darling of the Kospi market earlier this year, along with shares of large motor companies and oil refineries, forming the so-called cha-hwa-jeong (car-chemicals-refinery) trio. But the trio’s descent has been as steep as its ascent. This week alone LG Chem’s shares lost almost 20 percent. Friday’s closing price was 407,000 won, which is almost one-third less than its peak price in April. It briefly fell below 400,000 won during the day’s trading.

Hyundai Securities and Samsung Securities removed LG Chem from their recommendation list on Friday and maybe a little too late.
LG Chem produces industrial chemicals but this year the firm has received the spotlight for its involvement in electric car batteries. It is obviously one of the global leaders in the field, setting up factories in Korea, U.S. and Europe and winning a mining stake for lithium in Bolivia. But the car battery business is far from making profit and the cash flow from its existing businesses was flat in the second quarter.

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