Updated January. 06, 2014 06:22
Concern over Korean conglomerates weakening performance poses threat to the Korean securities market from early days of the New Year. Negative outlook suggesting that top companies in market capitalization will see their operating profit decline in the first quarter from the fourth quarter of last year adds to woes in the stock market. Korean stock hopelessly fell again on Friday amid worries over Samsung Electronics possible "earning shock." Fears over Korean firms slumping performance are spreading from electronics and automobile companies to other industries, as they are fueled by the weakening yen of late.
○ Top market cap firms take beating, poised to face further decline
According to the financial information service provider FnGuide on Sunday, the average operating profit of the top 30 companies in market capitalization in the fourth quarter of 2013 came to 805.6 billion won (764 million U.S. dollars), down 4.1 percent from 839.9 billion won (796 million dollars) in the previous quarter. These companies had constantly improving performance over the past year, with their operating profit growth hitting 3.4 percent on average in the second quarter of last year, when the global economy was in a crunch.
Notably, business performance is slowing more conspicuously among electronics and IT firms led by Samsung Electronics than other sectors. Samsung Electronics average outlook of earnings in the fourth quarter of last year as projected by securities companies comes to 10.07 trillion won (9.55 billion dollars), down from 10.1635 trillion won (9.634 billion dollars) of the previous quarter. Some foreign securities firms including BNP Paribas even predict Samsung Electronics fourth quarter operating profit will fall to the 8 trillion won (7.58 billion dollars) level. LG Electronics earnings are also projected to edge down to 215.5 billion won (204 million dollars) from the third quarter (217.7 billion won or 206 million dollars).
Slumping performance at large electronics companies have also pulled down earnings of affiliated companies. LG Display, which produces LCD panels, is projected to post 210.9 billion won (200 million dollars) in operating profit in the fourth quarter of 2013, only 54 percent of the earnings in the previous quarter, due to lackluster demand for TVs and smartphones. SK Hynix, which posted more than 1 trillion won (950 million dollars) in earnings in the third quarter of 2013, is also projected to post 768.5 billion won (728 million dollars) in the fourth quarter, down 34 percent, due to a flurry of negative developments including fire at its production plant in China.
Amid the protracted trend of a low interest rate, financial companies are also expected to see their profitability deteriorate as well. Shinhan Financial Groups earnings forecast for the fourth quarter of 2013 came to 611.2 billion won (579 million dollars), down 20 percent from the third quarter. KB Financial Group is also projected to post 444.2 billion won (421 million dollars) in operating profit, down 25 percent from the previous quarter.
○ Forex hike adds to woes from economic slump
Companies say that they had hard time generating earnings due to a lingering slump in domestic consumption and protracted recession in the Korean market. Companies with a larger domestic operation including LG Household & Health Care, SK Telecom and KT, were dealt a bigger blow than other players. Automakers that enjoyed good performance in export despite tough business environment also struggled in the local market.
The appreciation of the won, which has continued in recent months, is also fueling deterioration of corporate performance. The exchange rate that companies consider to be bearable levels are 1,050 won to the dollar and 1,000 won to 100 yen, but the rate fell below these levels, said Lee Jae-hoon, a researcher at Mirae Asset Securities. For this reason, expert-driven companies could face earning shock, or worse-than-expected earnings.
Analysts say that since the trend of such unfavorable exchange rates will unlikely end anytime soon, business performance may not rebound for a considerable period of time. Paul Tivnan, global chief of foreign exchange, goods and electronics trading at Bloomberg, said, A simulation that comprehensively analyzed global foreign exchange experts views suggested that the won-dollar rate could fall to the 1,040 won level within the first quarter (January to March) this year.
In addition to the exchange rate risk, there is a string of other factors that could cast dark cloud over companies earnings. Factors that could increase variability of corporate earnings include the U.S. tapering of quantitative easing, slowing growth in China, and slow recovery of the Eurozone economy, among others.