摩根士丹利-亚太地区-投资策略-韩国与中国策略与经济：可持续降级的基本情况-2019.2.26-67页.pdf

Joon.SLaura.WDeyi.TMin.DMORGAN STANLEY&CO.INTERNATIONAL PLC,SEOULBRANCH+Joon SeokEQUITY ANALYST+82 2 399-4934MORGAN STANLEY ASIA LIMITED+Laura WangEQUITY STRATEGIST+852 2848-6853Deyi TanECONOMIST+852 2848-7410Min DaiSTRATEGIST+852 2239-7983Morgan Stanley appreciates your support inthe 2019 Institutional Investor All-AsiaResearch Team Survey.Request your ballot.South Korea/China Strategy&EconomicsSouth Korea/China Strategy&Economics|Asia Pacific Asia PacificBase Case of Sustainable De-escalation;But What If?Can the 2nd US-DPRK summit on Feb.27-28 be an inflectionpoint for the N.Korea geopolitical issue?Our base case is sustained de-escalation post-Summit but.:Since the first US,North Korea summit,progress has been slow,but we expect a sustainable de-escalation scenario assuming discussions are constructive and both sidescontinue talks post-Summit.can we reach Breaking the Ice scenario?Uncertainties remain:We believebreaking the ice would require a clear roadmap for denuclearization andconcessions while going beyond breaking the ice would require denuclearizationactions linked with progressive and synchronous unwinding of sanctions.A lot ofground needs to be covered for these scenarios to play out and hence they arenot our base case.What opportunities could unfold if North Korea were to open up?Although notour base case,we estimate a gradual Vietnam-style liberalization process couldbring investment opportunities of up to US$9bn/year,while reunification of thetwo Koreas could present investment/consumption opportunities of up toUS$77bn/year during the reconstruction phase.Further,in our what if scenario infrastructure upgrade/expansion and mining&materials would likely be areas for quick win opportunities,but considering themagnitude of infrastructure expansion required we expect Korean andinternational participation.As industrialization and urbanization take hold inNorth Korea,industries where re-rating potential would likely be higher andmore sustainable would be real estate,travel&tourism,especially consumerspending.Korean companies have inherent advantages but ones with strongbrand power and ability to customize services should benefit more.Opportunities not just for Korea:Development of N.Korea would likely be aninternational effort but we would expect Korea and China to have moreopportunities.While Korean companies seem to have an edge in cement,construction,tourism and consumer areas,we believe Chinese companies wouldsee opportunities in comms.equipment and transport logistics.Equities offer more upside:We do not expect a Berlin Wall like single event topush up the market,rather a string of events.We assume 3-5%upside for KOSPIunder a breaking the ice scenario and 15-20%if we go beyond that.FX&rates dependent on policy response:The KRW local market is less sensitiveto North Korea newsflow.A breaking the ice outcome could provide KRW withshort-term support.Min Dai,Sheena Shah,Chun Him Cheung and Belle Changare fixed income strategists and are not opining on equitysecurities.Deyi Tan and Jin Choi are economists and arenot opining on any securities.Their views are clearlydelineated.Due to the nature of the fixed income market,the issuers orbonds of the issuers recommended or discussed in thisreport may not be continuously followed.Accordingly,investors must regard this report as providing stand-aloneanalysis and should not expect continuing analysis oradditional reports relating to such issuers or bonds of theissuers.Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1February 26,2019 07:55 AM GMT Contributors2 Base Case of Sustainable De-escalation but.Our base case is that sustained de-escalation is reached post-Summitas both sides continue to have discussions;thebreaking the ice scenario could be possible if a specific roadmap is agreed upon.Base case:We believesustained de-escalationwill be reached assuming both sides are able to carry out constructivediscussions at the second summit and talks between the two countries continue post-Summit.Whether they can agree on adetailed denuclearization roadmap matched with a synchronous opening up roadmap will be the key to reaching the breakingthe ice scenario but there is still a lot to resolve.Bull case:If a denuclearization roadmap is agreed upon with some level of detail at the Summit or thereafter it would be morefavorable for markets.In this case,the possibility of reaching breaking the ice would be higher but there would still be moresteps to take and execution would be key.Bear case:Our third path is a case of slow progress by both sides unless a breakthrough is made post-Summit,which couldlead to a return to an uneasy equilibrium scenario.If breaking the ice scenario can be reached,what is needed to go further?1)Execution of denuclearization according to an agreed roadmap2)Normalization of US and North Korea relations3)Cooperation and accords with neighboring nations4)Progressive and synchronous actions linked to denuclearization processExhibit 1:Scenario AnalysisScenarios before meaningful agreements are made between the key stakeholdersScenarios in case agreement is reached and consistent execution is shownSUSTAINEDDE-ESCALATIONPEAKESCALATIONBreaking the Ice:Partial opening up by North Korea could follow denuclearisation andwould lift sentiment and could create opportunities for related businesses.This scenario should be a preamble to the more advanced reunification scenarios we setout and some initiatives could even be expedited depending on how well the negotiationprocess proceedsPositive developments lead toSustained De-escalation:Continuedtalks between stakeholders andprovocations have ceased.Action&reactionde-stabilise anuneasy equilibrium to EquilibriumDisrupted scenario,leading toheightened friction&potentialdisorderly resolution.Full Union:This scenario can come directly after Breaking theIce or be a more gradual process by going through theBecoming More Engaged scenario.Reunification would come with significant fiscal benefits andgrowth support in the near term,given the need to quicklynarrow the disparity between the North and South.Becoming More Engaged:North Korea takes it furtherwith full liberalisation and reforms like Vietnam in 1986when it transitioned to a market economy.The prerequisites mentioned in our report should havebeen resolved but S.Korea and N.Korea maintain separatebordersBaseCase:UNEASYEQUILIBRIUMStatus quo of Uneasy equilibriumwhere we oscillate betweentemporary escalation&temporaryde-escalation.Source:Morgan Stanley Research3.What If North Korea Opens Up?Key Potential Opportunities inNorth Korea by SegmentExhibit 2:Key Opportunities in North Korea by SegmentSectorsSubsectorsDescriptionExpectedOpportunitiesInfrastructureRailway NetworkMainly about upgrading existing network as railway currently being the main mode oftransport in North Korea has the length.To link North and South effectively,there is theneed to upgrade the 3 key trunk lines-Gyungeui,Gyungwon and Donghae lines.W7890tnHighway and RoadsAs North Korea lacks highways(around 15%level vs.South Korea),there is a need tobuild new highways in order to link with South Korea and also China.In the case ofpublic roads,they need to be upgraded as 82%of the roads are unpaved but expansionalso needed to improve connectivity.W2030tnAirports and SeaportsThe initial push need should be more on the seaport side as cargo volume shouldincrease more quickly while airports also needed to support cargo volume but forgrowing visitors.W23tnPower&ElectricityPower-plant EPCAging is the main issue for North Koreas powerplants with 85%of thermal plants and60%of hydroelectric plants built before 1980.Need to raise utilization rate fromcurrent 3040%level close to South Koreas 6070%.Even if North Koreas existingplants and transmissions system was upgraded to South Koreas level,this wouldincrease the capacity from 7%vs.South Korea level to around 2025%level.Hence,toreach even 50%level of South Korea a double in capacity would be required.Renovation:W910tnNew build:W6080tnUrbanizationResidential DevelopmentWe believe there will be 2 types of residential construction demand;(1)required newbuild of 1.216mn units needed to satiate housing demand based on a supply ratio ofaround 7080%;and(2)reconstruction/redevelopment projects to be sizable as around2.8mn homes are deemed to be more than 30 years of older.W1012tnConsumer SpendingConsumer Staples/HealthcareWe expect consumer demand would initially grow quicker in the staples segment,withfoodstuff,beverages,personal care as well as healthcare/medical products.To add,themedium for spending should be more offline channels,with migration from traditionalchannels to larger scale stores.NAConsumer DiscretionaryAs consumer spending matures and urbanization proliferates,there should beincreasing demand for discretionary products,but this should take considerable time.In the case of Vietnam,it took more than 20 years after the launch Doi Moi thatdiscretionary product consumption growth picked up.The opportunities should rangefrom cosmetics,transport equipment,apparel,home appliances,and payment services.NALeisureOne of Koreas main export items is K-culture including music and TV-based dramas andwe expect continued social integration of the two Koreas would lead to South Koreasbroadcasting and culture to proliferate in North Korea also.Travel&TourismOutbound tourismAs North Korea opens up,there would likely be considerable inbound tourismopportunities as infrastructure gets built up.Both Korean and Chinese outbound travelagencies should be main beneficiaries as close proximity should lead to more visitorinflow.NATransport&LogisticsTransport providers on land,sea and air should all benefit from increased cargo andpassenger volume,which includes mainly airline companies,port operators and landlogistics service providers.NASource:Morgan Stanley Research4 Korean and Chinese Stocks Leveraged to Potential North KoreaOpening UpExhibit 3:Stock Screen for Korean and Chinese Stocks Leveraged to Potential North Korea Opening UpKoreaInfrastructureHyunda E&C000720.KSEWHyundai E&C is one of the top construction companies in Korea and is one of the few companies that actually has experienceworking in North Korea.Hanil Hyundai Cement006390.KSNCCement is a key material needed for infrastructure build-up and Hanil Hyundai Cement is one of the top cement companies inKorea.Hyundai Steel004020.KSNCSteel will be needed for building infrastructure network/facilities and Hyundai Steel is a steelmaker that produces constructionrelated steel products.Hyundai Rotem064350.KSNCRailway network expansion is expected for North Korea and Hyundai Rotem is Koreas only producer of railway vehicles andperipheral railway systems.Daea TI045390.KQNCDaea TI is one of the top suppliers of railway signalling and control systems in Korea.Samsung Electronics005930.KSEWSamsung Electronics is one of the largest technology companies in the world that producers a diverse range of products includingsemiconductors,network equipment,mobile devices and household appliances.Energy&MaterialsLS Industrial Systems(LGIS)010120.KSNCLGIS is a top Korean manufacturer of power transmission/distribution equipment,which are required to build up energy distributionnetworks that should needed in North Korea.KPS051600.KSNCKPS specializes in maintenance services for various types of power plants(nuclear,thermal,and hydro)and should haveopportunities from new/upgraded power plants in North KoreaLogistics&TourismCJ Logistics000120.KSOWCJ Logistics has been the biggest 3PL and parcel company in S.Korea with longestbusiness experience in developing warehouse,parcel system and networkKorean Air003490.KSEWKorea Air has the longest air-transport history in Korea and we believe Korean Air can help N.Korea develop domestic andinternational air routes.Hyundai Elevator017800.KSNCIf Geumgang Mt.tourism was relaunched,Hyundai group should be the operator again,as they still hold the license(held byHyundai Asan,which is 75.2%owned by Hyundai Elevator).Property/Consumer/Health CareHDC Hyundai Development294870.KSNCHDC HD is the largest residential development company in Korea and has considerable experience in developing large-scaleresidential projects.KCC002380.KSNCKCC produces diverse range of products from exterior and interior construction materials,paints and other materials,which areneeded to build residential units.Nongshim004370.KSEWFood products to be an area for growth and Nong Shim specializes in instant noodles,snacks,instant rice and beverages with a50%market share in the noodle market.LG H&H051900.KSOWLG H&H produces cosmetics and household&personal care(HPC)products with around 35%market share in HPC in Korea andaround 17%market share in cosmetics.We expect HPC market to be a key area for consumption growth.E-Mart139480.KSOWE-mart is Koreas number one discount store with a market share of around 37%and is also a major online shopping serviceprovider.Orion271560.KSUWOrion is a leading confectionery maker in Korea and operates also in China,Vietnam and Russia.Choco Pie is its most well-knownsnack product.Ottogi007310.KSNCOttogi is a leading maker of food products ranging from curry,soups,ketchup and instant noodles.Affordable foodstuffs should bea key growth area for North Korea.Hanatour039130.KSNCOutbound travel&tourism to North Korea is expected to grow and Hanatour is the largest outbound travel services provider.Generally,destinations that are in the early stages of opening tend to have more package tourists than individual tourists.Studio Dragon253450.KQOWStudio Dragon is Koreas leading drama production house and as North Korea gradually opens up its content market StudioDragon should be a key supplier of content.Green Cross006280.KSNCOne of the top pharmaceutical cos.in Korea with focus on vaccines and other therapeutic medicines.Demand for medical productsexpected to grow as urbanization takes place.ChinaInfrastructureCCCC1800.HKOWCCCC is a leading transportation infrastructure group and it is Chinas top port construction/design company,the largest dredgingcompany in China(ranked 3rd in the world),and the largest container crane manufacturer globally.CMEC1829.HKOWCMEC is an E&C company in China focused on the overseas markets,especially d