Semiconductor, defense, shipbuilding, pharmaceutical and bio ‘clear’… Amore Pacific’s ‘earnings shock’ due to dependence on China
“The king of gaming stocks is crowned. He’s taking 32%.”
This is what an individual investor said in the Krafton online stock discussion room on August 13. Krafton announced its second quarter performance the day before, the highest since its founding. This is due to the significant increase in sales and operating profit as its flagship game, ‘PUBG: Battlegrounds’, is experiencing a second revival. The following day, on the 13th, Krafton’s stock price rose to 325,000 won during the day, setting a new 52-week high. As the second quarter performance announcement season is coming to a close, companies that have recorded good performance despite adverse conditions such as increasing uncertainty in the global stock market are rallying.
HD Hyundai Electric and Samsung Bio’s Good PerformanceAt the center of the second quarter earnings announcement season were shipbuilding stocks riding the super cycle (see Table 1). The shipbuilding industry has recently experienced a boom for the first time in more than a decade, with new vessel demand-related indices approaching all-time highs. Accordingly, major players in the HD Hyundai Group shipbuilding affiliates (HD Korea Shipbuilding & Offshore Engineering, HD Hyundai Heavy Industries, etc.) and Samsung Heavy Industries recorded earnings surprises that far exceeded market expectations for the second quarter. There had been an atmosphere regarding the shipbuilding super cycle that “performance, not orders, should be confirmed,” but this performance completely dispelled market doubts.
Defense companies leading the ‘K-defense’ craze have also announced surprising performances one after another. The defense industry has secured a large backlog of orders from countries around the world, including Poland, since the 2022 Russia-Ukraine War. In particular, this year, the annual operating profit of the five defense companies (Hanwha Aerospace, Hanwha Systems, Korea Aerospace Industries, Hyundai Rotem, and LIG Nex1) is expected to exceed 2 trillion won. Meanwhile, the operating profit of the five defense companies in the second quarter was 674.8 billion won (911.1 billion won in the first half combined), bringing them one step closer to achieving the 2 trillion won mark for the year. Hanwha Aerospace and Korea Aerospace Industries led the performance improvement, exceeding market expectations by 66% and 42%, respectively. With favorable factors such as remaining contracts and additional orders pending in the second half, securities firms are raising their target stock prices for defense stocks.
The gaming industry has overcome a long-term performance slump
Semiconductor, power, and wire companies related to the artificial intelligence (AI) industry also continued to show strong performance. Samsung Electronics saw a significant increase in sales and operating profit due to a rapid recovery in business conditions and price normalization following the surge in demand for AI semiconductors. Among all business sectors, the semiconductor (DS) division alone posted an operating profit of over 6 trillion won. The same goes for power and wire stocks that are benefiting from increased power consumption such as AI data centers. HD Hyundai Electric announced surprising results in the second quarter and declared, “Achieving annual sales of 3.3 trillion won.” LS Eco Energy recorded operating profit in the first half of the year at a level similar to its annual operating profit last year due to its strong second quarter performance.
In addition, pharmaceutical and biotech stocks and financial stocks smiled in the second quarter. Pharmaceutical and biotech stocks are considered sectors that benefit from interest rate cuts and have recently shown an upward trend in stock prices, and their performance is also stable. Samsung BioLogics surpassed 2 trillion won in sales in the first half of the year for the first time since its establishment with an earnings surprise in the second quarter, and Celltrion surpassed market expectations by exceeding 800 billion won in sales for the first time in a quarter. The main reason for both was the growth of the biosimilar business. The financial sector also posted record-breaking performance. The five major financial groups (KB, Shinhan, Hana, Woori, and NH Nonghyup) recorded a combined net profit of 6.2266 trillion won in the second quarter, the highest ever, due to factors such as the rebound of the Hong Kong H Index and an increase in loan interest income.
The gaming industry, including Krafton, has also been enjoying a wind of recovery for the first time in a while. As the COVID-19 pandemic, which had been enjoying special benefits, came to an end, the gaming industry suffered a performance slump for about a year. However, it showed signs of recovery in the first quarter of this year due to the success of new releases and management efficiency, and major companies recorded surprising performance in the second quarter. Nexon’s ‘Dungeon & Fighter Mobile’, which was released in China in May, gained more popularity than expected, and Netmarble’s new ‘Solo Level Up: Arise’ became a hit both domestically and internationally.
On the other hand, there are sectors that have suffered from earnings shocks in the second quarter. Representative examples include cosmetics with high dependence on China, secondary batteries that are weak due to the electric vehicle chasm (temporary stagnation in demand), petrochemicals with prolonged slump in business, and entertainment with the absence of representative artists and constant noise (see Table 2).
The second quarter performance of cosmetics giant Amorepacific missed market expectations by the largest margin (94%) among all listed companies. In the first quarter, Amorepacific appeared to be recovering from its slump since last year. This was due to growing expectations for an economic recovery in China and diversification of export channels outside of China. Then, in the second quarter, it undertook restructuring to fundamentally improve its Chinese business structure, but its performance suffered a major blow. Analysts in the securities industry predict that negative news from China will continue in the third quarter. On August 14, Amorepacific’s stock price gave up all of the gains from its strong first quarter performance and returned to the level at the end of March.
In the secondary battery sector, which is stuck in the chasm swamp, POSCO Future M, LG Energy Solution, Samsung SDI, L&F, and SK IE Technology received poor performance reports. POSCO Future M recorded the second-most serious earnings shock after Amore Pacific and Amore G. As the chasm is expected to be overcome by the end of next year, the weak performance of secondary battery stocks is expected to continue for a while.
In the petrochemical sector, which is suffering from delayed demand recovery and oversupply from China, Lotte Chemical and Hanwha Solutions’ poor performance was noticeable. Lotte Chemical continued its deficit for three consecutive quarters as its basic chemical business posted a large deficit in the second quarter. It plans to lower its basic chemical sales ratio from the current 60% to 30% or less and reduce next year’s facility investment to half of this year’s level to defend its performance. Hanwha Solutions also recorded a deficit for the second consecutive quarter, following the first quarter, by increasing its deficit more than market expectations. It is trying to stabilize its management by replacing its CEO early and raising debt.
The entertainment industry is facing a cold wind blowing through the performance of all major agencies such as Hive, SM, JYP Ent., and YG Entertainment. This is because each agency has major artists in a hiatus and the growth of new groups is slow. In particular, Hive had a conflict with Adore CEO Min Hee-jin earlier this year, which increased business uncertainty.
“We need to increase the growth rate of pharmaceuticals and biotech in the third quarter”
While experts are positive about the second quarter earnings announcement season, they analyze that “in order for the stock market to gain momentum in the third quarter, it must be supported by stronger performance, especially in large sectors.” Yeom Seung-hwan, an executive director at LS Securities, said, “The domestic stock market is largely led by four industries: semiconductors, pharmaceuticals/biotech, secondary batteries, and automobiles,” and “Since semiconductors are expected to improve their performance in the second half of the year, the key will be how the remaining sectors perform.” Director Yeom continued, “It is important for pharmaceuticals/biotech to increase growth, for secondary batteries to not deteriorate further, and for automobiles to not suddenly decline,” adding, “If the shipbuilding and defense industries that performed well in the second quarter continue to support the market in the second half, these large sectors must show solid performance in order to attract more foreign capital.”
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〈This article Weekly Donga 〉Published in issue 1453
Lee Seul-ah, Weekly Donga Reporter [email protected]
2024-08-17 12:19:50