The combined operating profit of the top 10 companies by market capitalization in the South Korean stock market falls short of those of leading Japanese company Toyota and top Taiwanese company TSMC.
To address the “Korea discount,” which refers to the undervaluation of South Korean stocks, it is pointed out that while value-increasing efforts are important, fundamental improvement in performance is crucial.
According to financial information provider FnGuide on March 17, the combined operating profit of the top 10 companies by market capitalization in the domestic stock market last year amounted to 35.7 trillion won (US$26.8 billion). This represents a sharp decrease of 54.9 percent compared to the combined operating profit in 2022, which was 79.22 trillion won.
The significant downturn in the semiconductor industry, which has a substantial impact on the South Korean economy, has led to a sharp decline in operating profits. Last year, Samsung Electronics saw a drastic 84.8 percent drop in operating profits compared to the previous year. SK hynix incurred operating losses amounting to 7.73 trillion won. Although there was an improvement in profitability in the automotive and biotechnology sectors, with companies like Hyundai Motor, Kia, and Samsung Biologics showing positive trends, their absolute profit sizes were insufficient to drive the market due to their relatively small scale compared to the semiconductor sector.
The lackluster performance of leading companies driving the South Korean stock market fails to match the operating profits of a single top company by market capitalization in other Asian markets such as Japan and Taiwan.
According to the fiscal year ending in March, Toyota’s operating profit in 2023, spanning from April 2023 to March 2024, is estimated to be approximately 4.9 trillion yen, which translates to about 44 trillion won (US$33.03 billion). Earlier last month, the operating profit outlook was increased by 400 billion yen due to price increases in automobiles and production recovery.
Even the top global foundry company, TSMC, had an operating profit of US$29.5 billion last year, which surpasses the combined profits of the top 10 companies in the South Korean stock market.
TSMC’s operating profit is expected to rise by 19 percent this year, driven by the recovery of the semiconductor industry, particularly due to artificial intelligence (AI) demand.
U.S. big tech companies, which lead global technological innovation, experienced improved performance last year. Microsoft, a front runner in the AI platform competition with ChatGPT, reported a 7 percent increase in revenue for 2023 compared to the previous year. Microsoft’s operating profit margin is as high as 40 percent.
Even Apple, which is evaluated as experiencing stagnant growth, maintains an operating profit margin of 30 percent and a return on equity (ROE) approaching 170 percent. Samsung Electronics, on the other hand, only achieves an operating profit margin of 3 percent.
This is why some experts point out that South Korean companies need to focus on taking the lead in investing in innovative technologies to grow the market. However, it is a positive development that there has been a noticeable growth in high-value-added industries such as secondary batteries and biotechnology in recent years, shifting away from traditional heavyweights like steel, chemicals, automobiles, and shipbuilding.
The relative underperformance of the domestic stock market compared to major countries this year is also attributed to the diverging profit trends of major listed companies. According to Kiwoom Securities, the 12-month trailing earnings per share (EPS) of Japan and Taiwan’s stock markets have increased by 2 to 3 percent since the beginning of the year. In contrast, South Korea’s stock market saw a decline in estimated earnings until February, with a rebound observed in March.
Experts have emphasized the importance of improving Samsung Electronics’ performance, which accounts for 20 percent of the market capitalization of the KOSPI index, to boost investor sentiment. It is expected that Samsung Electronics’ operating profit this year will increase fivefold to 32.5 trillion won compared to the previous year. After the memory business turned profitable in the first quarter of this year, there is a need to strengthen the profitability of the struggling non-memory business.