Expecting a Rapid Improvement in Profitability Premature
The author is an analyst of KB Securities. He can be reached at cygun101@kbfg.com. -- Ed.
Valuation gains on non-marketable assets offset impairment losses on invested assets
— Valuation gains on non-marketable assets (e.g., Naver Financial stake) offset a KRW14.7bn loss on disposal of equity-method investment assets (mostly funds) and a KRW51.8bn loss on impairment of subsidiaries’ securities (securities in consolidated subsidiaries, incl. Didi Chuxing). We note that in 4Q21 MAS also booked an impairment loss of KRW374.5bn on subsidiaries’ securities, but the impact was offset by dividends from Alpha Dome City and valuation gains on non-marketable assets.
— We expect ROE to remain relatively low. ROE should normalize only after:
(1) margins on investments in hotels and real estate assets recover,
(2) profitability for invested overseas subsidiaries improves and
(3) returns on invested equity assets increase.
As of 1Q22, invested assets totaled KRW7.4tn (incl. real estate funds invested in a hotel in Hawaii); invested capital in overseas subsidiaries is ~KRW3.8tn.
1Q22 consolidated NP (attributable to controlling interests) of KRW191.8bn (-34.1% YoY)
— MAS reported 1Q22 consolidated NP (attributable to controlling interests) of KRW191.8bn (-34.1% YoY), falling below the market consensus of 8.0%.
— We attribute the YoY decline in NP (attributable to controlling interests) to:
(1) a 42.8% drop in brokerage earnings in line with a downtrend in trading value and
(2) a 10.4% drop in Trading/Financial Product earnings on higher bond yields and the bearish stock market.
— Impairment losses on funds/securities of KRW66.5bn weighed on non-operating income.
— IB earnings improved 26.7% YoY to KRW79.4bn on growth in project financing/advisory fees and acquisition financing fees (e.g., Daewoo Shipbuilding & Marine Engineering).
— SG&A slid 19.6% YoY to KRW248.7bn. Sluggish earnings are believed to have reduced the incentive bonus pool.
— We view 1Q22 earnings as fairly sound given relatively poor investment/management conditions. That said, ongoing earnings contribution from valuation gains on non-marketable assets may negatively impact earnings visibility. We believe expecting a rapid improvement in profitability would be premature, as global stock markets are growing increasingly volatile and the economic outlook is mixed given that COVID-19 is becoming endemic while there are concerns over a slowing economic recovery after monetary tightening.