Despite Significant 1Q20 Losses
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
Impacted by ELS hedge-trading losses, KIH posted a 1Q20 net loss of over W100bn. However, the firm’s earnings are expected to recover gradually from 2Q20 onwards.
Lower TP to W65,000
We revise down our 2020 earnings estimates for KIH, and in turn lower our TP from W73,000 to W65,000 (calculated by applying a target P/B of 0.73x to 2020E BPS of W98,611). However, we maintain a Buy rating, considering the high likelihood of earnings recovery from 2Q20 onwards.
Records large-scale 1Q20 losses, affected by ELS-related losses, etc
KIH posted a 1Q20 net loss of W113.4bn, significantly missing both our estimate (NP of W3bn) and consensus (NP of W9.7bn). 1) The trading business recorded a net loss of W285bn, most of which stemmed from ELS hedge-trading losses. Following favorable market conditions at the beginning of the year, the company’s hedge trading balance increased from W4.1tn at end-2019 to W4.6tn by end-March. In particular, the firm’s significant losses can be attributed to its use of volatility modeling that is more sensitive to market changes than that employed by other firms in the valuation of ELS products. 2) It booked a net loss of W36.9bn for offshore funds, and subsidiaries (excluding KIS) also registered sluggish earnings, with the Hong Kong subsidiary and Korea Investment Partners posting net losses of W17.7bn and W11.3bn, respectively. 3) However, the remaining divisions performed relatively well, with brokerage income reaching W74bn (+53.9% y-y), IB income totaling W110.6bn (+35.9% y-y), and WM income coming in at W74.3bn (+29.9% y-y).
Still attractive from long-term perspective
Despite its sizeable 1Q20 losses, we believe that KIH remains attractive from a mid/long-term perspective. 1) Though significant, the company’s 1Q20 ELS hedge-trading losses are viewed as a one-off. 2) Losses related to the fair value of funds under management and earnings at VC subsidiaries have likely narrowed substantially thanks to the global stock market recovery from April. 3) With average daily transaction value still standing at W15~20tn as of May, the profit contribution of the retail business (WM, brokerage) is expected to expand going forward. Even considering the large-scale 1Q20 losses, KIH’s 2020E P/E looks reasonable at 6.9x, and if assuming NP normalization, its 2021F P/E comes to only 3.8x.