Major Korean industries expected to see turnaround in Q4

Major South Korean stocks listed on the main Kospi market, including Samsung Electronics Co., reported better-than-expected third-quarter operating profits, but the third-quarter earnings expectations for most Kospi-listed companies continue to be low. Nevertheless, some believe that the fourth-quarter results will be better than expected, given the global economic recovery trend and currency effects which will provide momentum for stocks.

According to Korean stock tracker FnGuide Inc. on Sunday, the third-quarter earnings consensus for Kospi-listed companies with at least three brokerage firms providing earnings estimates fell 0.2 percent from a month earlier. The consensus estimates continued to decline despite earnings surprises from Samsung Electronics, LG Energy Solution Ltd., and LG Electronics Inc., which account for more than 30 percent of the total market capitalization. “In the third quarter, exports rose by 1.7 percent quarter-on-quarter and retail sales fell by 3.5 percent, but the Kospi consensus increased by 33 percent compared to the previous quarter, indicating that it was overvalued,” according to Daishin Securities Co. analyst Jo Jae-woon.

Sectors that continue to see consensus downgrades include semiconductors, shipbuilding, displays, and steel. Hanwha Ocean Co.’s estimated third-quarter operating profit fell significantly from 6 billion won ($4.43 million) a month ago to 1.5 billion won recently due to concerns that the cost associated with the adjustment process following the acquisition by Hanwha Group after recording an operating loss of 159 billion won in the second quarter will limit the improvement in performance.

However, expectations are growing that industries and stocks with lower-than-expected performance in the third quarter will experience a turnaround in the fourth quarter. Fourth-quarter operating profit estimates compiled by FnGuide are also in line with what they were a month ago, unlike the downward trend for the third quarter.

The downturn in the Chinese economy was one of the factors that lowered expectations for Kospi-listed companies’ second-half performance. But there has been a growing perception that the economy has hit the bottom as the gap between new orders and inventories in the Purchasing Managers’ Index (PMI), a measure of inventory turnover, continues to widen.

Inventory growth in the automotive and chemical sectors is also bottoming out, raising hopes that operating profits in the steel, chemical, and machinery sectors that are part of the value chain could improve. Lotte Chemical Corp., which saw its estimated third-quarter operating profit nearly halved over the past month, saw its fourth-quarter operating profit estimate fall by only about 18 percent in the same period. While there is pessimism that the company could see an operating loss in the third quarter, lower oil prices in the fourth quarter are expected to boost demand for its chemical products.

It is also a positive sign that semiconductors, which led the downward revision of the third-quarter consensus, have shown a substantial increase in fourth-quarter operating profit following Samsung Electronics’ earnings announcement.

“Even if we conservatively assume that the sales of the three global DRAM makers will increase by 11 percent year-on-year in the fourth quarter, we expect a turnaround in semiconductor companies’ earnings,” Yuanta Securities Co. analyst Baek Gil-hyun said. In late September, Hana Securities Co. estimated Samsung Electronics’ fourth-quarter operating profit at 1 trillion won, which it revised upward to 2.5 trillion won shortly after the company’s earnings announcement.

Expectations for LG Energy Solution have also improved for the fourth quarter. There was a sense of lowered expectations for the company’s performance in the second half of the year due to slowing demand in the European market and competition with China. However, expectations for the company’s fourth quarter results are rising after its third-quarter earnings announcement. Daol Investment & Securities Co. raised its fourth-quarter operating profit forecast for LG Energy Solution to 833.2 billion won from 715.4 billion won, taking the effects of orders from General Motors Co. and Tesla Inc. in the fourth quarter into consideration.

For the display sector, which saw sharp downward revisions in the third-quarter consensus, there is optimism about a turnaround after analysts noted that Samsung Electronics’ third-quarter earnings surprise was driven by the display division.

Even for industries that have not seen a significant increase in consensus estimates, many analysts anticipate a significant improvement in operating profit in the fourth quarter.

Steel, whose earnings expectations for the third quarter have been downgraded, is also expected to see a rebound in the fourth quarter due to a recovery in Chinese steel demand, higher average selling prices for blast furnace products, and margin improvement.

Additionally, top Kospi companies, which include large exporters, are expected to benefit from the won-dollar exchange rate, which has been hovering around 1,350 won since this month. “If the U.S. economy is doing well and the won-dollar exchange rate is in the upper range of 1,300 won, it will be very favorable for exporters,” Shinyoung Securities Co. analyst Park So-yeon said.