Top 5 Industries Say "Lower Possibility of Korean Stock Market Correction"... KOSPI Valuation Attractiveness Up

[Asia Economy Reporter Lee Seon-ae] An investment analysis has suggested that if growth continues without significant profit damage to the top five industries, there will be no further correction in the Korean stock market.

According to Hyundai Motor Securities on the 24th, this year the Korean stock market has accelerated its future due to the forced digital environment transition caused by COVID-19, highlighting industries with high benefits for domestic companies such as semiconductors, secondary batteries, and electric vehicles, transforming them into growth stocks. This means that since COVID-19, the Korean stock market has been growing centered on the top five industries by market capitalization (semiconductors, bio, internet & gaming, automobiles, secondary batteries). The top five industries account for 56.5% of the total market capitalization, and as of 2021, their sales and operating profits represent 40.8% and 44.3%, respectively, compared to 'all companies.' Hyundai Motor Securities stated, "If the top five industries continue to grow without significant profit damage, the possibility of further correction in the Korean stock market from a fundamental perspective is low."

The outlook for the top five industries next year is bright. The semiconductor industry is expected to improve as DDR5 adoption expands in the second half of the year, with new demand from Metaverse and Gaming Cloud acting as momentum. The pharmaceutical and bio industries are expected to continue benefiting from the with-COVID-19 phase. Since with-COVID-19 does not mean the end of COVID-19, vaccine and diagnostic businesses are expected to continue. Research results advanced over the past two years during the COVID-19 period are expected to surface, providing positive momentum for the entire bio sector. In the internet and gaming industries, while some stocks face earnings uncertainty due to government risks, considering the solid profit growth of the growth sector, the possibility of profit damage in the internet sector due to regulatory risks is judged to be low. The domestic automobile industry is expected to continue its growth trend despite production delay concerns, as demand growth is projected to be steeper than supply increases. The secondary battery industry is expected to maintain its sales growth trend for the time being, as automakers prioritize the production of eco-friendly vehicles, including electric vehicles.

The valuation attractiveness of the KOSPI is also expected to be high. Hyundai Motor Securities emphasized, "The 12-month forward price-to-earnings ratio (PER) of KOSPI 3000 is 10.5 times, which is 1.8% below the 5-year average," and "Compared to the top five industries by market capitalization, the PER is 4.9% lower, indicating high valuation attractiveness below KOSPI 3000."

They added, "The upper bound of KOSPI was estimated by applying the average analyst target price upside over the past five years (22.0%) as a discount rate," and "The consensus target price upside for the top 10 companies by market capitalization is 36.6%, and after deducting the 5-year average upside discount rate (22.0%), the upper bound of KOSPI is estimated at 3500, about 16% higher than the current KOSPI."