The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
While short-term earnings deterioration in the securities sector is inevitable due to Covid-19, earnings momentum should gradually recover from 2H20. In the long term, securities players with business models focused on capital investment should still lead the industry.
Earnings to be dampened in 1H20, and recover from 2H20
Over the near term, securities sector earnings are likely to be sluggish due to Covid-19. In particular, we expect to see: 1) hedging losses from financial derivatives due to the sudden drop of global stock indices; 2) investment losses owing to the global economic downturn; and 3) the delay/cancellation of IB deals due to social distancing and tepid stock market conditions. Weak earnings are likely to sustain through 1H20.
However, from a mid/long-term perspective, we maintain our Positive sector rating. In 2H20, delayed IB deals should resume and demand for capital-raising in the market is expected to rise. And, in the long term, demand for investing in appropriate assets at times of expanding liquidity should rise.
From a short-term trading perspective, we recommend Kiwoom Securities (upgrade to Buy) and Samsung Securities. Despite their small IB earnings portions, both firms should benefit from the recent spike in retail investor trading thanks to their large share of domestic retail wealth management.
From a mid/long-term stance, Korea Investment Holdings (KIH) remains attractive. We expect the company’s capital investment-centered business model to be valid in the post-Covid-19 era, helping it to stand out amongst peers.
Meanwhile, noting Mirae Asset Daewoo’s large exposure to the tourism industry (such as hotel investment), we lower our rating on the play from Buy to Hold.
Combined NP at four firms under our coverage to fall 85.6% y-y in 1Q20 and 35.4% y-y in 2020
We expect the four securities companies under our coverage to register combined NP (excluding minority interests) of W100.5bn (-85.6% y-y) in 1Q20 and W1.47tn (-35.4% y-y) in 2020, mainly due to derivative investment losses and sluggish IB earnings.