Revenues Up, Profits Down

The recession hit the nation hard. Parent companies fostered or acquired subsidiaries to expand their business in the first half of 2012, but became frustrated when such subsidiaries experienced losses and falls in profits. Worse yet, machinery, chemical, and steel companies were expected to rebound in Q2, but their corporate earnings are not showing any signs of recovery.

On August 30, the Korea Exchange (KRX) analyzed 663 of 669 listed companies that submitted semi-annual reports in December last year. According to the analysis, their sales revenue was estimated at 579 trillion won, up 7.5 percent from a year earlier. However, their operating and net profits decreased, falling 13.9 percent and 16.1 percent, respectively.

Losses in Subsidiary Profits Frustrates Parent Companies

Consolidated financial statements, which contain the profits of subsidiaries and overseas branches, show more frustrating corporate earnings for the first half of this year. Consolidated sales stood at 789 trillion won, up 9.9 percent from a year earlier. However, consolidated net profits fell 23.9 percent, eight percent more than individual net profits. Indeed, a large number of parent companies are suffering from devastating corporate earnings because their subsidiaries are struggling with financial shortfalls.

Woongjin Holdingsm, which sits among the bottom 20 companies in terms of consolidated operating profit for the first half of this year, posted a deficit. This is because its three subsidiaries – Woongjin Energy, Kukdong E&C, and Seoul Savings Bank – were affected by unfavorable factors such as the global depression in the solar industry, a protracted slump in the construction industry, and the insolvent Seoul Savings Bank. The Basic House, a Korean apparel company, saw the gain on valuation of its shares decline by more than 82 percent due to the poor corporate earnings of its Chinese operation. According to rumors, KT will soon change its structure to that of a holding company because it owns approximately 50 subsidiaries. However, the gain on valuation of its subsidiaries for the first half of this year fell by approximately 40 percent. The holding companies of conglomerates such as Doosan, GS, LG, CJ, and SK, which aim to hold a controlling stake in companies, also saw the gain on valuation of their subsidiaries decline by up to 60 percent.

Machinery, Chemical, and Steel Companies Fail to Pick Up

Korean securities companies released a report on September 6th regarding the average corporate earnings forecast for Q2 of the top 100 companies in terms of market capitalization. The report predicted that the corporate earnings of machinery and steel manufacturers will bottom out before picking up in Q2.

In fact, excluding electronics and auto makers such as Samsung Electronics and Hyundai Motor Company, the vast majority of the top 100 companies saw their corporate earnings shrink. For Hyundai Heavy Industries, SK Innovation, POSCO, and LG Chem, their corporate earnings sank by more than half. KEPCO suffered the biggest loss in profit, with its net loss for the first half of this year standing at 2.8960 trillion won. Korean Air and Asiana Airlines also experienced losses in profit.

Woo Young-moo, head of the Securities Research Center at HMC, said, “The first half of this year was characterized by the ‘earning surprises’ of most companies, except for the cases of Samsung Electronics and Hyundai Motor Company. China’s economic stimulus measures will help material companies turn a profit, but most Korean companies are unlikely to turn around in the second half of this year because exports are continuing to decline and domestic consumption is weak.”

Samsung Electronics posted a consolidated operating profit of 12.5745 trillion won in the first half, up 87.67 percent from a year earlier. Its sales stood at 92.8674 trillion won, up 21.52 percent, while its net profit was 10.2418 trillion won, up 62.80 percent. Kia Motors recorded a consolidated operating profit of 2.3396 trillion won during the same period, up 25 percent year-on-year. Its sales stood at 24.3409 trillion won, up 9.49 percent, while its net profit reached 2.2977 trillion won, up 10.42 percent.

Some Companies Produced Profits

Despite the recession, some companies did produce results. With Samsung Electronics reporting record operating profits thanks to the huge sales of its smartphones, mobile-related companies such as Jahwa Electronics and Korea Circuit joined the ranks of the top 20 companies in terms of operating profit growth rate.

Paper manufacturers such as Asia Paper, Daeyang Paper, and Moorim Paper generated profits due to a sharp rise in pulp prices, while food companies’ net profit rose 71.8 percent from the previous quarter, far outpacing the surplus growth rate of companies in other business sectors.

Sempio’s net profit grew 3,925.4 percent in the first half of this year. Meanwhile, TS Corporation, Binggrae, Samyang Foods Group, and CJ Cheil Jedang all saw their net profits increase 40 to 90 percent.

Cho Young-joon, head of the Research Center at Shinyoung Securities, said, “Because food companies produce basics for our daily living, their good performance reflects a bad economy. Therefore, if you invest in a leading food company with brand power in China, you will be able to earn a decent profit.”

42 Percent of Listed Construction Firms Posted Deficits

In particular, 42 percent of listed construction companies suffered falls in profits due to the moribund domestic housing market. According to the KRX on September 5, net losses were witnessed in the first half of this year among 42.4 percent of the 33 construction companies listed in the stock market. What is worse, companies under workout programs or court receivership are becoming more desperate financially due to a protracted slump in the housing market.

Kumho Industrial, currently under a workout program, posted the largest deficit among construction companies with a net loss in profits of 499.8 billion won, followed by Byucksan Engineering & Construction (459.5 billion won), Samwhan Corporation (185.1 billion won), and NamKwang Engineering & Construction (103.9 billion won). In particular, Kumho Industrial went into the red this year after turning a profit in the first half of last year. For Byucksan E & C, currently under court receivership, its net loss increased by more than 400 billion won.

Large construction companies, which are making efforts to win overseas contracts in an attempt to revitalize themselves, also posted poor earnings in the first half of this year. GS Engineering & Construction’s net profit was estimated at 144.9 billion won, down 44 percent from a year earlier. For Hyundai Engineering & Construction and Daewoo Engineering & Construction, their net profit decreased by around 30 percent due to increasingly fierce competition between domestic and foreign companies in overseas markets, thus forcing them to offer lowered bidding prices, and therefore leading to weaker profitability.

Some of the construction companies that made positive net profits also reported negative corporate earnings. Among the 19 construction companies that turned a net profit in the first half of this year, only 8 achieved larger earnings than the same period last year. Most companies posted a slight increase in net profit, with some exceptions. Samwhan Camus made a turnaround this year after recording a deficit in the first half of last year. For Hwa Seong Industrial (413 percent) and Halla Engineering & Construction (170 percent), their net profit increased by more than 100 percent.

KOSDAQ-listed Companies Report Improvements in Sales and Operating Profit

As companies in the blue-chip and mid-sized company division of KOSDAQ saw their sales and operating profit rise dramatically, those listed on the stock market in the first half of this year reported an overall improvement in corporate earnings. However, small companies in the venture company division posted lower corporate earnings than bigger companies.

The KOSDAQ market headquarters at the KRX analyzed the corporate earnings for the first half of this year of 53 listed companies that closed their accounting books in December last year and which submitted consolidated financial statements to them. According to the analysis, operating profit stood at 475.9 billion won, up 54.31 percent (167.5 billion won) from a year earlier. During the same period, their sales revenue and net profit stood at 4.8524 trillion won and 196.2 billion won, respectively, up 18.64 percent (904.3 billion won) and 136.14 percent (267.1 billion won), respectively.

The ratio of net profit to net sales, which refers to the percentage of net profit to sales revenue, rose higher than last year. The ratio for Q1 this year was 4.88 percent, up 2.22 percent from last year’s 3.66 percent. This means that if a company sold 1,000 won worth of products and earned 36 won in return last year, it earned 48 won from selling them at the same price this year.

The corporate earnings of the 16 companies in the blue-chip company division improved sharply. Companies in this division achieved a net profit of 333.2 billion won in Q1, up 151.28 percent from last year. Their sales amounted to 2.4104 trillion, up 28.53 percent during the same period.

24 companies in the mid-sized company division also generated more profits than last year, achieving a net profit of 77.6 billion won, up 752.75 percent year- on-year. Their sales stood at 719.4 billion won over the same period.

12 companies in the venture company division earned a net profit of 56.4 billion won, up a trifling 0.8 percent year-on-year. However, their sales reached 719.4 billion won, up a whopping 46.16 percent during the same period.

IT companies showed the outstanding performance among venture companies, with IT companies from all sectors – IT parts, semiconductors, digital contents, and computer services – achieving decent corporate earnings. Most importantly, the net profit of semiconductor companies increased 63.02 percent from last year.