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10 Leading Groups in Korea Underperformed
Small and medium caps picked up while large caps were weak in local stock market with the top ten businesses' profits in downtrend.
10 Leading Groups in Korea Underperformed
  • By matthew
  • December 29, 2011, 14:42
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The 10 major corporate groups of Korea showed declining profit figures in Q3, with the European fiscal crisis affecting the real economy and the exchange rates rising rapidly. According to an electronic disclosure by the Financial Supervisory Service on November 21, as well as financial data service provider FnGuide, net income for the year on a consolidated basis tentatively dropped between the second and third quarters for 9 out of the 10 groups. Their gross net profits decreased 24.39%, from 16.099 trillion won to 12.173 trillion during the period. Meanwhile, operating profits fell for 7 of the groups and total sales for 4 of them.

SK Alone in Black, LG in Deep Red

Of the ten, SK Group was the only one to record positive net profit growth. The seven listed affiliates’ combined net income grew 78.69% to 3.325 trillion won as SK Innovation boosted its figure 506.23% in the vibrant petrochemical market.

LG Group, in the meantime, showed a stark contrast with SK. The 10 listed subsidiaries’ total sum slid from 932.9 billion won to minus 425.6 billion between the quarters. Even if the net profit of the group’s holding company LG Corporation estimated by securities analysts at 310.2 billion won is counted in, the 11’s net loss is forecast to exceed 100 billion won.

This is the first time that listed companies under the LG Group have posted a negative net profit. Experts are ascribing it to the sluggish performance of the three in the electronic industry. LG Electronics (-413.9 billion won) and LG Display (-687.5 billion) swung to a deficit, while LG Innotek (-35.6 billion) fell deeper into the red, more than offsetting the good fight on the part of their chemical and telecom peers. “The deficit size looks larger than it is because the figures of LG Display and Innotek are put into LG Electronics’ in the equity method,” said an LG executive.

An analyst mentioned their different business portfolios as the gaping gap between SK and LG, saying, “The electronics sector is quite sensitive to overall economic conditions and LG Electronics failed to fare well this year. However, SK’s energy and telecom arms are less vulnerable to external factors and accounted for 80% of total profits.”

It was Samsung Group that achieved the biggest net income. Despite falling some 3.8% or 166.2 billion won from a quarter earlier, the aggregate amounted to 4.212.1 trillion. The attainment was led mostly by Samsung C&T Corporation and Cheil Industries, which succeeded in lifting net profit 41.56% and 33.02%, respectively. Still, cash cow Samsung Electron-ics had to see its figure decline 64.6 billion won, or 1.84%. “Nonetheless, Samsung Electronics is likely to turn to a surplus next year since its LTE handsets and 3D TVs are proving very popular worldwide,” said a market researcher at Daishin Securities.

Meanwhile, the six subsidiaries of Hyundai Motor Group chalked up 3.268 trillion won in combined net profits, recording a 32.4% plunge from the previous quarter’s 4.832 trillion. The poor performance revolved around its three auto industry affiliates, Hyundai Motor Company, Kia Motors and Hyundai Mobis, going through the seasonal recession and huge losses through foreign currency translations.

Another 3 of the 10 succeeded in remaining positive, but saw their quarterly growth lose steam: profit of 620.7 billion won but -29.15% for Hyundai Heavy Industries; 567.5 billion but -27.21% for Lotte; and 298.2 billion but -79.58% for POSCO. “It takes time for the weak won to result in export growth, but the foreign exchange losses were reflected right away to pull numbers down,” said Yoon Yeong-hwan, managing director at Shinhan Investment Corp. “The currency losses will be handled once the exchange rate stabilizes. The matter is whether global demand will pick up.”

Large Caps Sluggish with Mid and Small Caps Gaining Momentum

The major group’s net income decline has led to a weaker presence in the Korean stock market. At present, the baton is in the hands of small and mid caps, with the weight of the large ones showing a downward trend.

The Korea Exchange announced on December 21 that the top 20’s total market value (as of November 17) reached 529.518 trillion won, 49.71% of the gross market capitalization at 1,065.288 trillion, 0.05% lower than last year’s 49.76%.

On November 21, when the KOSPI index remained rather steady at around 1,900 points, large caps fell more than 5%, while mid and small-cap shares’ fall stopped at 2.63% and 1.17%, respectively. The textile/clothing and food/beverage segments, in which many of small caps are, gained 1.55% and 3.48%, respectively to boot. Their electric/electronic counterpart dropped 2.61%, while the transport equipment sector, including Hyundai Motor Company and Kia Motors, dropped 4.62%. Chemical stocks lost no less than 6.19%.

“The majors had a hard time amid the European crisis and other global risks, while the minors capitalizing on the booming bio-industrial and entertainment industries,” commented a stock market watcher at Shinhan Investment. He added, “Most of the listed firms in the software industry, which is making giant strides nowadays, are in the category of mid and small caps here.”

Things Bode Well for Semiconductor, Media, Garment and Consumer Goods

In the past, there was the tendency of a decline in the stock prices of large corporations leading to a fall in those of small firms in supply contracts with them. However, things are different this year. A case in point is auto part, component and material makers that have diversified their client bases on a global level.

Then, which small and mid-cap shares will be most promising in 2012? “Those stocks have different prospects and thus diversified investment strategies will work,” said Woori Investment & Secu-rities. “Manufacturers in such segments as semiconductors, media, household items, clothing and durable goods are particularly noteworthy, at least until their earnings momentum next year.”

Their bullish movement is likely to continue for a while since investment outlook is cloudy for export-oriented major industries more exposed to the fiscal emergency in Europe and the economic recession in the United States. “The index is predicted to move in a narrow range for the time being, with investors’ preference for minor issues increasing,” said an investment strategy analyst at Kyobo Securities, adding, “Policies friendly to the working class will appear as the presidential election approaches, making the market more favorable to small capital shares.”