[Q1 Earnings Shock Outlook] ② Hyosung TNC Tops Upward Target Revisions, Krafton Leads Downward Revisions

Securities Firms Raise Hyosung TNC Target Price by 40% This Year
AmoreG and LG Household & Health Care Target Prices Up as Beneficiaries of China's Reopening
Games and Semiconductors: Krafton and Symtek Among Stocks Effectively Rated 'Sell'

[Asia Economy Reporter Minji Lee] Amid high interest rates and concerns over an economic recession, the domestic stock market remains trapped in a trading range, but experts unanimously agree that the answer lies in corporate earnings. In a phase where corporate profit estimates are rapidly being revised downward, investment sentiment is expected to concentrate on companies with increasing profits, leading to rising stock prices.

Chinese Reopening Beneficiaries Become ‘Profit Drivers’

According to financial information provider FnGuide, as of the 14th, the company with the highest increase in the average target (fair) stock price suggested by three or more securities firms compared to the average at the last trading day of last year was Hyosung TNC. At the end of last year, securities firms set the fair stock price at 369,000 KRW, but on the 14th, it was 517,000 KRW, 40.24% higher.

The reason for Hyosung TNC’s highest increase rate is the growing expectation of a return to profitability in the first quarter. Although it recorded an operating loss of 43.3 billion KRW in the fourth quarter of last year, continuing the deficit, the loss was significantly reduced compared to the third quarter of last year (-110.8 billion KRW), raising expectations for a return to profit in the first quarter. The basis for performance improvement is the increased demand for spandex due to China’s reopening effect. Lee Dong-wook, a researcher at IBK Investment & Securities, explained, “Due to increased demand in China, Chinese companies’ spandex exports are declining, so Hyosung TNC’s first-quarter sales volume and operating rate are expected to improve monthly. Although the price of PTMEG, a raw material for spandex, is rising, the company self-supplies PTMEG, reducing raw material cost burdens.”

Notably, since the beginning of this year, there has been an increase in upward revisions of fair stock prices for cosmetics-related companies. The cosmetics sector also benefited from improved demand in the Chinese market. Just a year ago, it was sidelined due to China’s zero-COVID policy, but this year, gradual improvement is expected. The combined operating profit of cosmetics companies (Clio, Aekyung Industrial, LG Household & Health Care, Cosmax, Amorepacific, and Korea Kolmar) in the first quarter of this year is estimated at 350.2 billion KRW, a 45% increase compared to the previous quarter.

AmoreG’s fair stock price rose 33.84% from 39,600 KRW at the end of last year to 53,000 KRW. Operating profits of subsidiaries such as Amorepacific, Innisfree, Espoir, and Amos Professional are all expected to improve. Hana Securities, which set a fair stock price of 60,000 KRW for AmoreG, stated, “This year, the recovery of demand for China will become visible following China’s reopening trend. The concretization of business directions toward Japan and the U.S. in the second half is also positive.” Other companies such as Cosmax (33.49%), Amorepacific (24.02%), Aekyung Industrial (19.67%), LG Household & Health Care (17.14%), Clio (6.92%), and Korea Kolmar (6.82%) also recorded significant increases.

Hugel’s stock price is expected to rise not only due to increased sales in China but also due to toxin sales growth in the U.S. and European markets. The current estimated fair stock price is 205,000 KRW, up 30.85% from 156,667 KRW at the end of last year. Annual expected sales for this year are 339.3 billion KRW, and operating profit is 110.3 billion KRW, expected to increase by 20% and 7%, respectively. Park Jong-hyun, a researcher at Daol Investment & Securities, analyzed, “Corporate value recovery is expected due to China’s reopening and concretization of U.S. business, and aggressive sales expansion in Europe, now in its second year since launch, is anticipated. FDA approval for Retibo (Botulax) in the U.S. is also scheduled for April.”

"It’s Still Early to Approach Gaming and Semiconductor Stocks"

The company with the largest decline in target stock price due to earnings concerns was Krafton, which has fallen about 25% this year alone. Samsung Securities, SK Securities, and Meritz Securities have issued neutral investment opinions, effectively recommending not holding the stock. Samsung Securities, which set the lowest fair stock price at 180,000 KRW, pointed out the absence of factors that could revive the stock price due to a lack of new releases. They emphasized the need to verify efforts such as expanding publishing to recover the stock price. Considering this, Krafton’s expected operating profit for the first quarter is 212.4 billion KRW, down 32% year-on-year.

Other gaming software companies such as Wemade (-13%), Com2uS (-10%), and Pearl Abyss (-2.95%) also saw downward revisions in their fair stock prices. Kim Dong-woo, a researcher at Kyobo Securities, noted, “Although there is hope for additional issuance of foreign game licenses (panho) in China, the global mobile game market is expected to slow down. The failure of most new releases to contribute to earnings is also a concern.”

As the semiconductor sector’s downturn prolongs, the fair stock price of Simtek, a substrate business unit, fell more than 16.5% compared to the end of last year. Although last year’s annual operating profit more than doubled by over 120% due to increased demand in downstream industries and price hikes, this year’s outlook is different. Due to the slowdown in the memory semiconductor market and exchange rate declines, a sharp drop in performance is inevitable. Simtek’s first-quarter operating profit is expected to be 64.6 billion KRW, down 23% year-on-year. Haesung DS also saw its fair stock price drop more than 12% during the same period. Despite growth in the automotive lead frame segment, the IT segment (package substrates, lead frames) is sluggish, making negative growth unavoidable. The company’s expected first-quarter operating profit is 36.8 billion KRW, estimated to plunge 24% year-on-year.