Stock Prices Also Show Untact Surprise... The Third Quarter's Joy and Sorrow Continue

Samsung Electronics, Naver, and Others Surprise with Earnings, Stock Prices React
POSCO Remains in a Trading Range
S-Oil Barely Maintains 60,000 Won Level

Even with a '+' Growth Rate in the Second Half,
Untact Sectors Expected to Continue Leading

[Asia Economy Reporter Oh Ju-yeon] Semiconductor, IT, software, pharmaceutical and bio-related companies benefiting from non-face-to-face (untact) trends posted better-than-expected earnings in the second quarter, boosting their stock prices. Riding this momentum, the KOSPI, which had sharply fallen after the outbreak of the novel coronavirus disease (COVID-19), has now surpassed its previous high, and the KOSDAQ index has exceeded the 840 mark. It is forecasted that the earnings improvement trend will continue in these sectors in the third quarter as well.

According to the industry on the 5th, Samsung Electronics' operating profit in the second quarter was 8.1463 trillion won, up 23.5% compared to the same period last year. This is a 'surprise performance' compared to the market consensus hovering around 6 trillion won just a month before the earnings announcement. The increase in demand for semiconductors and home appliances was driven by the rise in remote work and online education due to the spread of COVID-19. SK Hynix's second-quarter operating profit also surged 205.3% year-on-year to 1.9467 trillion won, thanks to increased semiconductor demand from the untact trend. The week before Samsung Electronics' earnings announcement (July 27-31), its stock price rose 8.66% from 54,300 won to 59,000 won. Notably, foreign investors showed strong buying activity, purchasing a total of 1.945 trillion won worth of stocks in the KOSPI market during this period, with 1.6176 trillion won concentrated on Samsung Electronics alone.

LG Chem also posted an operating profit exceeding 570 billion won (up 131.5% year-on-year), driven by its future growth engine, the electric vehicle battery business. Its operating profit margin reached 8.2%, the highest since the third quarter of 2018. Just before the earnings announcement, LG Chem's stock price surged 25.47% from 530,000 won (closing price on the 30th of last month) to 665,000 won during trading on the 4th.

NAVER, considered the biggest beneficiary of the untact trend, also recorded its highest quarterly earnings ever, with its stock price hitting new 52-week highs day after day. NAVER's operating profit was 230.6 billion won, up 79.7% year-on-year, and its operating profit margin improved significantly to 12.1% from 7.9% last year. The stock price, which had fallen to 270,000 won at the end of last month, reached a new high of 322,000 won during trading on the 4th. Kakao, which is about to announce its earnings, is also expected to deliver an 'untact surprise.' Kakao's stock price, which was in the high 200,000 won range in early July, is now approaching 400,000 won.

On the other hand, sectors such as automobiles, steel, refining, and shipbuilding have seen their earnings directly impacted by COVID-19, resulting in sluggish stock prices. Looking at operating profit margins by company, Hyundai Motor's margin shrank from 4.6% in the second quarter last year to 2.7%, and Kia Motors' dropped from 3.7% to 1.3%. POSCO's operating profit margin also fell sharply from 6.6% last year to 1.2%, and Hyundai Steel's plunged from 4.2% to 0.3%. SK Innovation and S-OIL have been posting losses since the first quarter.

POSCO has been stuck in a trading range below 200,000 won since COVID-19, unable to break out. S-OIL's stock price, which briefly rose to the 76,000 won range in June, has slid weakly and barely holds above 60,000 won. Although considered a representative high-dividend stock, it has even given up on interim dividends this year.

The securities industry expects the divergent fortunes among sectors caused by COVID-19 to continue into the third quarter. While the overall fundamentals of companies are expected to recover once the economy normalizes after the development of a COVID-19 vaccine, earnings improvements are likely to be centered on untact-related companies for the time being.

According to financial information provider FnGuide, the estimated operating profit for 224 domestic listed companies in the third quarter, as projected by three or more securities firms, is 37.9632 trillion won, a 17.09% increase from 32.4218 trillion won in the third quarter last year. This shift from negative to positive year-on-year operating profit growth explains the emerging 'second-quarter bottoming theory.'

Semiconductor, secondary battery, software, and pharmaceutical and bio sectors, which saw earnings improvements in the second quarter, are expected to continue increasing operating profits year-on-year in the third quarter. Samsung Electronics' estimated third-quarter operating profit is 9.014 trillion won, up 15.9% year-on-year, and SK Hynix's is 1.626 trillion won, up 244.1%. LG Chem (23.8%), Samsung SDI (19.8%), NAVER (30.7%), and Kakao (84.5%) are also expected to continue improving their earnings compared to last year in the third quarter following the second quarter.

Lee Jae-man, head of investment strategy at Hana Financial Investment, said, "Growth stocks remain valid in the second half of the year. July exports showed signs of improvement, which is positive, but except for semiconductors, healthcare, and secondary batteries, other major export items such as steel, chemical products, and machinery are still recording negative growth rates. Therefore, for cyclical stocks, it is more effective to approach them with individual momentum where some earnings upgrades are occurring, such as in IT and automobiles, rather than expecting a broad-based rotation market."