[Top 100 Companies Report]⑤ Deficit KEPCO, Highest Interest Burden... Interest Also a 'Corporate Risk'

KEPCO 'Deficit→Bond Issuance→Interest Increase→Deficit'

Corporate Interest Burden Increased 41% Last Year Due to Rate Hikes
KEPCO Spent the Most on Interest Costs with 2.8185 Trillion Won
11 Companies Unable to Cover Interest with Operating Profit

Companies Feeling Burden from High Interest Costs Accumulate Cash
Cash Equivalents Increased 11.8% Year-on-Year
Some Invest in Highly Liquid Financial Products
Strategy to Secure Cash Flow Stability and Earn Interest Income

Editor's NoteThe top 100 companies by market capitalization listed on the domestic stock market are like national representatives in sports. They represent each industry in Korea and lead the economy. The public's expectations are also high. Most stock investors buy shares of these top 100 companies. Job seekers dream of working at these top 100 companies. Every year around the time cherry blossoms bloom, the top 100 listed companies submit their business reports. The purpose is to self-assess how they performed as key players in Korea over the past year and whether they kept their promises. Asia Economy examined the health of these companies based on the business reports submitted by the top 100 companies by market capitalization as of the end of Q1 this year. This is to check if they can continue to lead our economy this year, assess any injuries, and help them understand their strengths and weaknesses compared to other companies.

Korea's top 100 companies are struggling with interest expenses. Due to significant interest rate hikes last year, the interest expenses of major domestic companies nearly doubled.

Asia Economy analyzed the '2022 business reports' of the top 100 listed companies (excluding financial firms) by market capitalization as of the end of Q1 this year on the 16th. It found that the total interest expenses of the top 100 listed companies last year amounted to KRW 17.9999 trillion, a 41% (KRW 5.2233 trillion) increase from KRW 12.7762 trillion the previous year. Eighty-five companies spent more on interest expenses than in 2021, while only 15 companies saw a decrease.

The company with the highest interest expenses was Korea Electric Power Corporation (KEPCO) at KRW 2.8185 trillion, up 47.2% from KRW 1.9144 trillion the previous year. Following were Hyundai Motor Company (KRW 2.7119 trillion, 35.7%), Samsung Electronics (KRW 763 billion, 76.8%), CJ (KRW 675.5 billion, 29.7%), and HD Hyundai (KRW 640.5 billion, 118.3%). The combined interest expenses of the top 5 companies amounted to KRW 7.6094 trillion, accounting for 42.2% of the total interest expenses of the top 100 companies.

Companies with the highest interest expense growth rates compared to 2021 were KEPCO Engineering & Construction (760%), Korea Zinc (725%), SK Square (502%), EcoPro BM (399%), and Samsung Biologics (335%). Twenty-two companies saw their interest expenses more than double. One in four companies among these four had interest expenses that more than doubled.

Among the top 100 companies, 11 had an interest coverage ratio below 1. The interest coverage ratio indicates whether a company generates enough earnings to cover interest payments. A ratio below 1 means operating profit is insufficient to cover interest expenses. For example, Emart had an operating profit of KRW 135.6 billion last year but spent KRW 317.5 billion on interest expenses, resulting in an interest coverage ratio of 0.4. This means it could not even cover half of its interest expenses with operating profit.

The main cause of the increase in interest expenses is attributed to the impact of high interest rates. The Bank of Korea's base rate hit a low of 0.5% in May 2020, then rose to 1% after two hikes in 2021. Last year, it was raised seven times to 3.25%. After one more hike in January this year, it has been held steady at 3.5% for four months.

Although the Bank of Korea kept the base rate unchanged on the 11th, it drew a line against the possibility of a rate cut within the year, calling it "excessive." With the Korea-US interest rate gap at a record high of 1.5 percentage points (US base rate at 5%), the domestic high interest rate trend is expected to continue unless the US lowers its rates first.

Companies Increasing Cash Holdings... Some Investing in Short-term Financial Products

Companies burdened by high interest expenses are gradually piling up cash reserves. They are tightening their belts and preparing for crises. At the same time, some have purchased large amounts of highly liquid financial products. This strategy aims to secure cash flow stability while earning considerable interest income.

The total cash equivalents (cash and cash equivalents + short-term financial products) of the top 100 listed companies last year amounted to KRW 362.6945 trillion, an 11.8% increase from KRW 324.326 trillion the previous year. Samsung Electronics held the largest amount of cash equivalents at KRW 114.7836 trillion last year, down 4.93% from KRW 120.7404 trillion the previous year, likely due to the semiconductor industry's downturn. Following were Hyundai Motor Company (KRW 26.6395 trillion), SK Group (KRW 25.1211 trillion), and Kia (KRW 13.608 trillion).

The company with the highest growth rate in cash equivalents was Samsung Biologics, which increased by 515%. Samsung Biologics' cash equivalents rose from KRW 497.4 billion in 2021 to KRW 3.0597 trillion last year. This appears to be a move to significantly increase investments such as factory expansions. Last month, Samsung Biologics announced plans to invest KRW 1.98 trillion to build its 5th plant in Songdo. Following were F&F (458%), LG Energy Solution (363%), and GS Retail (327%), which also significantly increased their cash equivalents compared to the previous year.

Among corporate cash equivalents, 'cash and cash equivalents,' which account for about 70%, reached KRW 251.7183 trillion last year, a 30.7% increase from the previous year. Cash and cash equivalents refer to cash held by companies or instruments treated as cash equivalents such as checks, demand deposits, and financial products with maturities under three months. These funds are reserved for quick liquidity before major mergers and acquisitions (M&A) or large-scale investments. Samsung Biologics had the highest growth rate in cash and cash equivalents last year, soaring 1779%.

Some companies also engaged in financial management by subscribing to short-term financial products to earn short-term interest income amid rising interest rates. Short-term financial products include fixed deposits, installment savings, and certificates of deposit (CDs) with maturities under one year. SKC increased its short-term financial products from about KRW 7 billion in 2021 to KRW 366 billion last year, a 5167% increase. Hyundai Rotem (3498%), Ssangyong C&E (3416%), and Lotte Energy Materials (594%) also significantly increased their investments in short-term financial products.

The company holding the largest amount of short-term financial products was Samsung Electronics. Last year, Samsung Electronics' short-term financial products amounted to KRW 65.1029 trillion. Considering that the one-year fixed deposit interest rate at the five major commercial banks is about 3.5%, the annual interest income alone would be approximately KRW 2.2786 trillion.