Earnings to Begin Rebounding from 2H23
The author is an analyst of NH Investment & Securities. She can be reached at yd.yoon@nhqv.com. -- Ed.
Downgrade from Positive to Neutral
We downgrade our investment rating on the domestic securities sector from Positive to Neutral, noting that the securities industry has been negatively affected by the ongoing housing market correction. Given rising uncertainties over PF issues, investors are recommended to hold a conservative approach towards related financial stocks until they clearly prove the soundness of their asset quality.
For the time being, dampened investment sentiment should continue to dominate securities stock performance. While they are trading at historic-low valuations (P/B of 0.4x), valuation merits fail to stand out under today’s market environment. In our view, securities shares will rebound, either when: 1) the market begins to take note of sound financials at major securities stocks; or 2) cyclical securities stocks begin to reflect in advance an anticipated market turnaround.
Top pick: Kiwoom; second-preferred pick: Samsung Securities
Against this backdrop, a selective approach based on individual companies’ fundamentals looks wise. We recommend Kiwoom Securities as a sector top pick and Samsung Securities as a second-preferred pick. Investment points for Kiwoom are: 1) its lowest exposure to real estate business among major securities; and 2) its stable revenue structure focused on brokerage business. Meanwhile, Samsung Securities is well known for its strong risk management capabilities, and it also boasts the highest dividend merit among large-sized securities. We view Samsung Securities’ recent share price decline as being excessive.
The following changes are shared in common in our TP calculation for all securities stocks under our coverage: 1) a switching in base year (BPS estimate) from 2022E to 2023F; 2) a hike in assumed risk-free rate from 2.5% to 3.5%; and 3) 2023F EPS revision. Meanwhile, the discount rate applied stands at 30% for Kiwoom, 40% for Samsung Securities, 45% for KIH, 35% for Mirae Asset Securities, and 40% for Daishin Securities. Based on our revised TPs, we have also downgraded our investment ratings on KIH, Mirae Asset, and Daishin from Buy to Hold.
2023F combined NP: W2.9tn (+6.3% y-y)
We forecast the combined NP of the five securities firms under our coverage at W2.7tn (-50.8% y-y) in 2022, W2.9tn (+6.3% y-y) in 2023, and W3.2tn (+10.1% y-y) in 2024. Earnings should begin rebounding from 2H23, with the uptrend to sustain through 2024. Assuming that ongoing interest rate increase will come to an end by end-1H23, trading income should begin to normalize from 2H23. We forecast that IB commission income will drop 29.0% y-y to W743.1bn in 2023.