Over 60% of Listed Companies Lower Operating Profit Forecasts in Second Half
Game Stocks Face Increased Costs from Salary Raises and Hiring
"During Earnings Slowdown, Stocks of Companies with Strong Profit Momentum Command Higher Premiums"
[Asia Economy Reporter Minji Lee] The drought in earnings among domestic companies in the second half of the year is becoming a reality. More than half of the major listed companies have seen their earnings estimates sharply decline compared to the beginning of this year.
According to FnGuide, a financial information company, among 86 KOSPI-listed companies with third-quarter earnings estimates from three or more securities firms, 52 companies, accounting for 60%, have had their expected operating profits downgraded compared to early this year. This is due to rising raw material costs increasing the cost of sales ratio and inventory burdens intensifying due to decreased demand, which has weakened companies' profit resilience. This trend is expected to continue into the fourth quarter, with 63% (48 companies) of 76 listed companies with compiled estimates projected to see their operating profits shrink significantly compared to the beginning of the year.
By industry, the second half of the year is expected to be particularly harsh for secondary battery materials and gaming companies. Solus Advanced Materials, a secondary battery materials company, showed the largest gap between the third-quarter estimates at the beginning of the year and current projections. At the start of the year, securities firms estimated a third-quarter operating profit of 24 billion KRW, but now it is expected to incur losses. SK IE Technology is also forecasted to record an operating profit of 4 billion KRW, down 97% over the same period. The prolonged decline in performance is due to the lack of signs of improvement in electric vehicle demand in the European market amid economic slowdown.
Major gaming companies such as Pearl Abyss, Netmarble, Krafton, and NCSoft have also seen their forecasts drop significantly. Despite new game release momentum, their third-quarter profits have decreased by 97%, 78%, 59%, and 56%, respectively, compared to January this year. Fourth-quarter operating profits are also expected to fall by 93%, 64%, 60%, and 65% compared to early-year estimates. The increase in costs due to salary raises and hiring for blockchain business mainly among large companies has hindered conditions for profit growth. Netmarble's labor costs increased by 131.5 billion KRW year-on-year, while Krafton and NCSoft saw increases of 79.6 billion KRW and 47.7 billion KRW, respectively. This can be interpreted as daily game sales decreasing by 360 million KRW, 220 million KRW, and 130 million KRW, respectively. Lee Sojung, a researcher at SK Securities, explained, "Considering marketing expenses and fees, a new game generating an average daily sales of 700 million KRW is needed to achieve profit growth. Both Pearl Abyss's Red Desert and Krafton's Project M, which have high expectations, are expected to be released only next year."
Yoo Myunggan, a researcher at Mirae Asset Securities, said, "In a period when the overall market is expected to see earnings slowdown, companies with positive earnings momentum will continue to receive premium valuations for the time being," adding, "It will be advantageous for returns to focus on companies that recorded earnings surprises in the first half or whose recent earnings estimates have been revised upward."
On the other hand, the refining sector and transportation-related companies are more likely to record earnings surprises. Among refiners, S-Oil and SK Innovation are expected to deliver better-than-expected results throughout the second half. S-Oil is predicted to record a third-quarter profit of 879.7 billion KRW, a 44% increase compared to early-year estimates, and 799.9 billion KRW in the fourth quarter, a 48% rise. Although concerns over short-term demand weakness have caused oil prices to fall, limiting the price increase seen in the first half, tight supply is still expected to drive earnings growth. In the transportation sector, Korean Air's stock price is expected to rise. Korean Air is forecasted to post a third-quarter profit of 557.7 billion KRW, a 153% increase compared to early estimates, and 444.2 billion KRW (44%) in the fourth quarter. Additionally, signs of easing entry and exit restrictions are emerging, suggesting passenger-related revenues in the second half may exceed expectations.
However, experts caution that even if earnings surprises are expected, vigilance against peak-out should not be relaxed. For HMM and Pan Ocean, profits are expected to rise by about 41% and 32%, respectively, compared to early estimates for the third quarter, but recent declines in previously soaring freight rates call for a conservative approach. Choi Go-woon, a researcher at Korea Investment & Securities, said, "The Shanghai Containerized Freight Index (SCFI) and the Baltic Dry Index (BDI) freight market are adjusting due to recession concerns," adding, "These indices have plummeted by more than 25% and 50%, respectively, since the second half of the year."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
