Expectations for Strong Performance Extend Through Q3

Estimated Operating Profit of 259 Listed Companies in Q3 at 38.858 Trillion KRW, Up 20.14%
Increase in Earnings Surprise Companies Expected from Samsung Electronics in Q2
Government's Additional Economic Stimulus, Continued Earnings Market... High Expectations for Second Half

[Asia Economy Reporter Oh Ju-yeon] Contrary to initial concerns that the second-quarter earnings of domestic listed companies would plummet due to the impact of the novel coronavirus infection (COVID-19), expectations are growing that as the earnings announcement season approaches, results will meet or even exceed market forecasts. Securities firms are revising upward their operating profit forecasts for the KOSPI, with notable differences expected across industries. This positive earnings outlook is also anticipated to continue into the third quarter. Although the variable of a COVID-19 resurgence exists, assuming an early containment, third-quarter earnings are expected to turn positive compared to the same period last year.

According to financial information provider FnGuide on the 7th, as of the end of last month, the estimated operating profit for the third quarter of this year for 259 domestic listed companies was 38.858 trillion won. This represents a 20.14% increase from 32.3378 trillion won in the same period last year. While concerns about a second wave of COVID-19 remain, expectations are higher for the normalization of global economic activities and the recovery trend in economic indicators.

Since mid-May, the securities industry has been revising upward earnings forecasts by sector and company, supported by a significant reduction in the downward revisions of global economic and earnings forecasts. Semiconductors are a prime example. Until early June, the securities industry estimated Samsung Electronics' second-quarter operating profit to be in the low 6 trillion won range. In early May, when the impact of COVID-19 was difficult to gauge, estimates were lowered to the 5 trillion won range. However, from late June, estimates began to be revised upward to the high 6 trillion won range. On this day, Samsung Electronics announced second-quarter sales and operating profit of 52 trillion won and 8.1 trillion won, respectively, significantly surpassing market consensus. This was due to increased semiconductor demand driven by the spotlight on untact (contactless) related industries.

Industry analysis suggests that more companies will show second-quarter earnings surprises following Samsung Electronics. KB Securities researcher Lee Eun-taek said, "Second-quarter earnings were expected to hit the worst due to COVID-19, but this was not because the stock market and the real economy diverged, but because expert estimates and the real market diverged," adding, "Many companies are expected to show earnings surprises compared to market consensus."

Expectations for earnings improvement grow stronger toward the second half of the year. Unlike the sluggish first half due to COVID-19, economic activities are expected to normalize gradually in the second half, supported by additional government economic stimulus policies, suggesting that the earnings market could continue. Expectations remain high for software, gaming, secondary batteries, and biotech sectors. Thanks to the spread of untact culture, companies like Naver and Kakao are expected to continue improving earnings in the second half. NCSoft, which is expected to see increased sales due to growing gaming demand, is projected to have higher daily sales for Lineage 2M in the third quarter (3.2 billion won) compared to the second quarter (2.8 billion won). The telecommunications sector is also among those with upward revised profit estimates. SK Securities researcher Choi Kwan-soon said, "Significant earnings improvements are expected in both wired and wireless sectors in the second half, and stock prices are likely to rebound."

Daishin Securities researcher Lee Kyung-min stated, "Uncertainty over second-quarter earnings is easing, and the earnings outlook for the second half is entering an upward revision cycle," adding, "If investors' expectations for fundamentals (corporate performance) revive, the stock market can continue its upward trend."