Selective Approach Recommended
The author is an analyst of NH Investment & Securities. He can be reached at midas.sohn@nhqv.com. -- Ed.
In 2020, small/mid-cap stocks have led the market, rallying strongly on ample liquidity, economic stimulus packages, and Korea’s New Deal policies. In 2021, the fundamentals of large-caps are expected to improve, with liquidity expansion likely to affect the real economy. While improvement is also expected for small/mid-cap stocks, the pace of improvement should slow y-y. In 2021, we advise taking a selective approach to small/mid-cap stocks that are expected to show greater fundamental improvement than large-caps. We have selected six promising companies that are capable of displaying rapid earnings growth by adding new businesses to their portfolios.
I. KG Mobilians
The government raised the limit on payments made through mobile payment platforms from W600,000 in 2019 to W1mn in Apr 2020. Accordingly, consumers can now make mobile payments to purchase big-ticket items, such as air tickets and home appliances. This development should bolster the mobile payment market in 2021. Also, KG Mobilians is expected to enjoy economies of scale via its entry into the credit card PG market.
II. DFM
We expect profitability at DFM’s wheat flour and animal feed businesses to improve on won appreciation against the dollar. We also note that the firm’s strong financials should limit share price downside risks, and that subsidiary Wooriwa is the leader of the domestic pet food market. Recent capacity additions for pet food should contribute to sales from 2021, helping the firm to escape the current undervaluation.
III. E&D
Amid increasing investor appetite for ESG investment, the fact that the majority of E&D’s sales come from the environmental solutions business bodes well for its growth. Helped by the government’s particulate matter reduction scheme, the firm’s environmental solution sales are to expand 20% y-y next year. Moreover, thanks to capacity additions, rechargeable battery cathode precursors are likely to make earnings contributions in earnest from 2H21, in turn leading to valuation re-rating.
IV. SeAH Steel
While SeAH Steel’s steel pipe businesses for energy production (eg, oil drilling) and piping are performing sluggishly, the structural steel pipe business (particularly for wind turbines) is showing top-line growth. Demand for large-size thick wall steel pipes is on the rise in line with an increase in the size of wind turbines. The firm boasts valuation merit in the steel industry. We expect its valuations to re-rate on additional wind-power-related orders.
V. Laon People
Sales of Laon People’s AI-based machine vision solutions have been growing rapidly in 2020, backed by greater investment for yield improvement and automation. In 2021, the firm’s client base is to expand, with its solutions adopted by diverse downstream industries. AI machine vision solutions sales are to grow to W15.9bn in 2020 and W23.0bn in 2021.
VI. Haatz
Haatz specializes in the manufacture of household range hoods, built-in equipment, ventilation systems, and ventilation purifiers. The firm’s M/S has climbed steeply of late, following the bankruptcy of its largest rival. Also, demand for remodeling has increased on a significant uptick in housing transaction volume, which should serve to trigger strong sales growth. Among new businesses, the ventilation purifier business deserves attention, as its sales are to grow led by rising interest in air quality due to Covid-19 and fine dust pollution.