Korean chemicals, cosmetics companies face weak Q3 outlook on slow China growth

[Courtesy of LG Household & Health Care and Amorepacific]

South Korean companies, mainly in chemicals, game software, and electronic equipment and devices sectors, are expected to post weak earnings in the third quarter despite China’s reopening as the world’s second-largest economy is facing a slowdown in growth.

According to market data tracker FnGuide Inc. on Thursday, the combined sales of 251 listed companies which three or more brokerage firms have released third-quarter estimates are projected to reach 639.4 trillion won ($478.5 billion), down 2.9 percent from the same period a year ago. Operating profit was forecast at 44.51 trillion won, up 2.5 percent during the same period.

Sales projection was down 0.2 percent and operating profit 1.9 percent from a forecast a month ago.

Key sectors that saw downward adjustments in third-quarter operating profit from a month ago are chemicals (-23 percent), game software (-18.4 percent), electronic equipment and devices (-16.2 percent), and personal care products (-11.6 percent).

Despite China’s reopening, the slow pace of economic recovery have led to increased inventory burdens, resulting in companies to record earnings shocks in the second quarter, which prompted brokerage firms to cut their earnings forecasts for the third quarter.

Brokerage firms saw that sectors sensitive to economic conditions and heavily reliant on China’s exports, such as semiconductors, electronic equipment and devices, and chemicals, are unlikely to experience significant improvement in the third quarter.

“Demand for chemicals remains weak due to the downturn in the Chinese economy, and LG Chem Ltd.‘s cathode materials are still experiencing a decline in average sales price in the third quarter, which is causing earnings disappointment,” said Jeon Yoo-jin, an analyst at Hi Investment & Securities Co.

The downward trend in memory chip prices also continues. Semiconductor exports in July declined by 16 percent compared to the previous month. “The inventory burden in memory chips still exists, and the recovery of foundries’ utilization rates is slower than expected,” said Baek Gil-hyun, an analyst at Yuanta Securities Co.

The personal care product sector including cosmetics has also experienced downward adjustments for the third quarter as two major players, Amorepacific Corp. and LG Household & Health Care Ltd., reported second-quarter results that fell short of market expectations, setting a low bar for the third quarter.

Despite China’s resumption of group tours to Korea, Chinese retail sales in July were lower than expected, leading to expectations that brands heavily reliant on Chinese sales will continue to see a slow recovery pace in the third quarter.

The third-quarter forecasts for the airline, securities, and automobile sectors, on the other hand, have improved.

In the meantime, the combined sales of 615 companies listed on the Kospi market rose 2.28 percent in the first half of this year from the same period a year ago. Operating profit, however, plunged 52.45 percent and net profit 57.94 percent.

When excluding Samsung Electronics Co., sales rose slightly by 5.16 percent, but operating profit fell by 37.94 percent.