Despite Industry Improvement, Temperature Differences Among Companies, Industries, and Classes "Polarization Deepens" (Comprehensive)

Hana Financial Research, Industrial Environment Report
Semiconductor, Secondary Battery, IT Industry on the Rise
Traditional Industries and Domestic Services Face Challenges
KOSPI Companies Expected to See Sharp Revenue Growth This Year
Widening Competitiveness Gap Anticipated

[Asia Economy Reporter Jo Gang-wook] Even if the economy recovers this year, the polarization between industries is expected to become more pronounced due to the shock of the novel coronavirus infection (COVID-19), leading to a stark divide in fortunes among sectors. It is pointed out that the performance gap between IT industries and traditional industries, export manufacturing and domestic service industries, and large corporations and small businesses will deepen. In particular, concerns are growing that confusion surrounding the extension of loan principal and interest repayment deferrals will continue, causing a sharp divide in fortunes across industries and social classes.

Improvement in Business Conditions This Year Due to Government Investment Expansion and Recovery of Major Economies

On the 18th, Hana Financial Management Research Institute forecasted in its report titled ‘The Bright and Dark Sides of the Industrial Environment in 2021’ that the industrial sector’s business conditions will improve this year due to expanded government investment, vaccine development, and the recovery of major economies. In particular, IT industries such as semiconductors, secondary batteries, and information services are expected to lead the growth trend.

Kim Young-jun, the research fellow who authored the report, explained, "With continued government investment related to the 4th Industrial Revolution such as the Korean New Deal, and the easing of lockdown measures in major countries due to vaccine development, both domestic and international economies are expected to recover together, leading to an improved corporate environment in 2021 compared to last year."

After experiencing negative growth last year, the Korean economy is widely expected to recover a GDP growth rate of around 3% this year. According to FnGuide, the sales revenue of KOSPI-listed companies is estimated to increase sharply from 1858 trillion won last year to 2017 trillion won this year, an 8.5% rise, and operating profit is expected to surge from 127 trillion won to 179 trillion won, a 41.0% increase. The recent breakthrough of the KOSPI index past the 3000-point mark for the first time is also analyzed to be supported by confidence in improved corporate performance.

Polarization Between IT vs Traditional Companies - Manufacturing vs Service Industries - Large Corporations vs SMEs

However, the problem lies in the deepening polarization. First, between IT companies and traditional companies, the performance of IT sectors benefiting from untact (contactless) trends such as semiconductors, secondary batteries, and online distribution is expected to improve significantly, whereas the performance improvement of traditional manufacturing and service industries is expected to fall short. In particular, the production scale of traditional manufacturing industries such as automobiles, shipbuilding, steel, and petroleum is expected to remain below 2019 levels this year.

The recovery trend also differs between manufacturing and service industries. Export-oriented manufacturing is recovering performance thanks to demand recovery in overseas markets, while domestic-oriented service industries such as wholesale and retail, transportation, and restaurants have been hit hard by the resurgence of COVID-19 and strengthened social distancing measures since mid-November.

Within the service industry, the competitiveness gap is widening by company size. Large corporations are leading the market through active online expansion and new product development, but small and medium-sized enterprises (SMEs) lacking sufficient financial resources are excluded from this trend.

Concerns Over Defaults of Marginal Companies When COVID-19 Support Ends

The approaching end of COVID-19 support funds and loan principal and interest repayment deferrals at the end of March is also cited as a risk factor. According to the Financial Services Commission, the liquidity support provided by financial institutions to companies since February last year amounts to 277 trillion won. In particular, the amount supported by private financial institutions through loan maturity extensions and interest deferrals is about 126 trillion won.

Thanks to this liquidity support from the financial sector, companies’ financial conditions have improved, with the delinquency rate falling to 0.42% (October), down 0.18 percentage points compared to the same month last year, and the number of companies applying for corporate rehabilitation until November last year decreased by more than 100 to 809 compared to the same period in 2019.

However, Research Fellow Kim pointed out that this is merely an optical illusion caused by liquidity support. According to a recent analysis by the Bank of Korea, without liquidity support, the corporate delinquency rate last year would have risen to an estimated 0.93%. Furthermore, if financial support is not extended amid the ongoing COVID-19 shock, the liquidity shortage amount for companies is projected to reach 7.7 trillion won, and the proportion of companies facing liquidity shortages is expected to reach 7.0%. Liquidity shortages are anticipated mainly in industries such as aviation, petrochemicals, and wholesale and retail.

Research Fellow Kim said, "If liquidity support is cut off, marginal companies hit by COVID-19 are highly likely to be driven to default. However, unlimited liquidity support cannot continue either, as it would increase the burden on financial institutions and is likely to produce more insolvent companies, delaying corporate restructuring and industrial reorganization."

This content was produced with the assistance of AI translation services.