"Listed SMEs Hit Hard by COVID-19 Performance Decline... Need for Financial Support"

Woori Financial Research Institute Report... Sharp Decline in SME Operating Rates Due to COVID-19 Driven Drop in Parts and Equipment Demand

[Asia Economy Reporter Kwon Haeyoung] It is forecasted that the performance of listed small and medium-sized enterprises (SMEs) will significantly deteriorate this year due to the impact of the novel coronavirus infection (COVID-19). There are calls for financial support targeting companies experiencing temporary liquidity shortages.

According to the '2019 Q4 Performance Trends and Implications of Listed Small and Medium-sized Enterprises' report released on the 5th by Woori Financial Management Research Institute, the global economic downturn caused by the spread of COVID-19 has led to a sharp decline in demand for parts and equipment this year.

Overseas telecommunications companies in China, the United States, and other countries had planned to increase investments in 5th generation (5G) communication equipment this year, but delays and reductions in investment plans are expected to result in sluggish orders. Due to delays in organic light-emitting diode (OLED) investments by Chinese display companies, demand for display equipment and parts has also decreased, and sales of mobile phone and automobile parts have sharply declined.

The decline in demand for parts and equipment is expected to cause a greater drop in operating rates for SMEs compared to large corporations. Although SMEs’ operating profits have shown improvement, their operating profit margins remain significantly low. An analysis of the performance of 666 SMEs in Q4 2019 by Woori Financial Management Research Institute showed sales of 9.3 trillion won, a 10.9% increase compared to the same period last year. However, operating profit was 35.1 billion won, improved from the previous year, but the operating profit margin was only 0.4%.

Woori Financial Management Research Institute stated, "SMEs have weak profitability, and despite a significant increase in sales in 2019, 56% of listed companies analyzed for Q4 2019 were operating at a loss," adding, "If sales decline this year, performance is expected to worsen significantly and liquidity risks will increase."

Due to the consumption slump caused by the spread of COVID-19, the performance of consumer goods and service sectors is also expected to deteriorate. According to the Korea Small Business Institute, the proportion of companies reporting damage due to COVID-19 was 31% in manufacturing, 38% in services, and 61% in accommodation and food services. Although demand has increased in healthcare, gaming, and internet service sectors due to COVID-19, it is necessary to verify whether this trend leads to sustained performance improvement.

Kim Sujin, Senior Researcher at Woori Financial Management Research Institute, advised, "Due to the global economic downturn caused by the spread of COVID-19, demand for parts and equipment is decreasing, and both growth and profitability are expected to worsen in 2020," adding, "Financial companies should closely monitor liquidity risks and also seek ways to support companies facing temporary liquidity shortages or difficulties caused by rapid exchange rate fluctuations."