[Practical Finance] Should You Bask in the Glow of Large Caps?... Semiconductor, Secondary Battery, and Automobile Small- and Mid-Cap Stocks Expect "Trickle-Down" Benefits

7 out of 9 Semiconductor Equipment Companies Show Increased Performance
Automotive Parts Stocks Worth Considering Amid Future Car Optimism
Small and Mid-Cap Stocks Related to Secondary Battery Materials Also Deserve Attention

[Asia Economy Reporters Oh Ju-yeon, Lee Min-woo] This year, as the domestic stock market rose mainly centered on large-cap stocks, small and mid-cap stocks and KOSDAQ-listed companies were relatively neglected. Although there has recently been a correction phase causing some hesitation, expectations for the KOSPI '3000 era' and KOSDAQ '1000 era' that have already begun remain strong, drawing attention to the movements of small and mid-cap stocks following the large-cap rally. Among large-cap stocks, investment has concentrated in the semiconductor and secondary battery sectors, so there is keen interest in whether related small and mid-cap stocks can benefit from this momentum.

◆Will the Large-Cap Rally Bring a Trickle-Down Effect?= With forecasts that the semiconductor market will enter a boom phase this year, investors' attention has been focused on Samsung Electronics and SK Hynix since the beginning of the year. According to financial information provider FnGuide, the operating profit estimate for Samsung Electronics in Q1 this year, as projected by three or more securities firms, is 8.5977 trillion KRW, expected to increase by more than 33% compared to the same period last year. Recently, the Ministry of Trade, Industry and Energy and the Korea Semiconductor Industry Association announced in their 'Semiconductor Outlook' that semiconductor exports this year will increase by more than 10% year-on-year, surpassing 100 billion USD for the second time after the record high of 126.7 billion USD in 2018, further raising expectations for performance. In line with these forecasts, Samsung Electronics' stock price surged from the 70,000 KRW range in December last year to an intraday high of 96,800 KRW on the 11th of this month, approaching the '100,000 KRW stock' milestone. Although the stock price faltered after Vice Chairman Lee Jae-yong received a prison sentence in the retrial of the political scandal case, the performance momentum is still considered valid.

However, despite the current correction in large-cap stocks, the positive factors have already been priced in, making chasing purchases burdensome. Instead, small and mid-cap semiconductor equipment and materials companies, which were relatively sidelined during the large-cap semiconductor rally, are waiting for their turn.

◆Small and Mid-Cap Semiconductor Stocks: Rising Expectations on Solid Performance= Among nine semiconductor and related equipment companies with Q1 performance estimates announced by three or more securities firms, seven showed increased results compared to the same period last year. There is analysis that the momentum that lifted Samsung Electronics and SK Hynix's stock prices could shift to small and mid-cap stocks.

Solbrain supplies 'high-purity phosphoric acid' to Samsung Electronics and SK Hynix. KTB Investment & Securities forecasts Solbrain's sales at 975.7 billion KRW and operating profit at 242.8 billion KRW this year, representing increases of 11.6% and 16.4%, respectively, compared to last year. The target price was also raised to 350,000 KRW, implying a potential rise of about 28% from the closing price of 273,500 KRW on the 18th.

Wonik IPS and TES are also recognized for their potential. According to FnGuide, Wonik IPS's Q1 operating profit consensus for this year is 52.4 billion KRW, estimated to surge 261% year-on-year, marking the highest performance since its founding. TES is also expected to post Q1 sales of 74.8 billion KRW and operating profit of 14.4 billion KRW, up 26.99% and 30.61%, respectively, compared to last year. Lee Jae-yoon, a researcher at Yuanta Securities, explained, "At a time when both memory and non-memory semiconductor markets are entering a supply shortage phase, not only Taiwan's TSMC but also Samsung Electronics will inevitably increase facility investments. Attention should be paid to the performance momentum of semiconductor-related equipment, materials, and parts companies."

◆As Future Cars Rise, Auto Parts Stocks Also Gain Attention= Recently, the automotive sector has been receiving as much attention as semiconductors. With the value of future cars being reevaluated, Hyundai Motor's stock price surged 50% within half a month from 192,000 KRW at the end of last year to an intraday high of 289,000 KRW on the 11th. Although it has since undergone a correction, it still maintains around the 250,000 KRW level.

Especially, expectations for autonomous electric vehicles, hydrogen cars, and collaborations with Apple have led large-cap stocks such as Hyundai Motor and Kia Motors to lead this year's stock price rally with sharp increases. As structural changes occur in the upstream industry, relatively undervalued auto parts companies are expected to be reevaluated. Yoo Ji-woong, a researcher at eBest Investment & Securities, diagnosed, "For domestic parts companies, demand for electrification parts such as battery packs and drive motors is rapidly increasing both inside and outside the Hyundai Motor Group, entering a phase where the rise is becoming full-fledged."

Major auto parts companies include Hyundai Mobis, Mando, Hanon Systems, and Hyundai Wia. According to Meritz Securities, Mando is expected to post an operating profit of 380 billion KRW this year, a 230% increase compared to last year. Sales are projected to reach 6.39 trillion KRW, marking the largest scale ever. Hanon Systems' Q4 sales last year are expected to increase 1.6% year-on-year to 1.99 trillion KRW, and Hyundai Wia's by 5.3% to 1.9 trillion KRW.

Researcher Yoo said, "With the change of administration in the U.S. this year, the electric vehicle market is expected to expand further, and in this trend, the role of auto parts companies is being highlighted. Parts companies have not only entered the early stage of full-scale new investments but also various additional systems that increase the driving range of electric vehicles will receive significant attention."

◆Secondary Battery-Related Stocks Also Spotlighted for Growth Potential= Following Tesla's sharp rise, domestic secondary battery leaders such as LG Chem and Samsung SDI have also shown strong performance. As global electric vehicle (EV) sales are expected to grow rapidly from 3 million units last year to 5 million this year and 10 million in 2023, it is anticipated that not only the leaders but also other related stocks will benefit.

LN Battery (L&F), a lithium-ion secondary battery cathode material company, is a representative example. On December 16 last year, it announced a cathode material supply contract worth 1.4547 trillion KRW with LG Energy Solution, which was spun off from LG Chem. This contract size exceeds four times L&F's previous year's sales of 313.3 billion KRW. At that time, L&F's stock price jumped 30% from the previous day to 74,100 KRW. Recently, it is reported to be pursuing a contract worth about 1 trillion KRW with SK Innovation, raising expectations for a rebound.

Cheonbo, a producer of electrolyte additives necessary for secondary batteries, is also gaining attention. With the expansion of global electric vehicle sales and increased demand for secondary batteries, it is expected to achieve performance growth exceeding the overall market growth rate. Hana Financial Investment forecasts Cheonbo's sales at 252.9 billion KRW and operating profit at 47.4 billion KRW this year, increases of 66% and 68%, respectively, compared to last year. Accordingly, the target price was raised from 210,000 KRW to 250,000 KRW on the 15th. Considering the closing price of 184,800 KRW on the 18th, there is potential for more than 35% upside. Other companies attracting attention include POSCO Chemical (cathode and anode materials) and Iljin Materials (copper foil).