Operating Profit Forecast for KOSPI Listed Companies Down 16% This Year... Index Shows Upward Trend?

KOSPI Listed Companies' Annual Operating Profit Expected to Decrease by 16% Year-on-Year
Period of Profit Slump Ending...Stronger Profit Momentum Than the US
Stock Market Pauses...Technical Resistance Overcome, Index Direction Expected Upward

On the 27th, employees were working in the dealing room at the Hana Bank headquarters in Myeongdong, Seoul. On this day, the KOSPI closing price was recorded at 2495.66, down 0.97 points (0.04%) from the previous session. The index opened at 2501.83, up 5.20 points (0.21%) from the previous session, but turned downward during the trading session. [Image source=Yonhap News]

Year-end operating profit expectations for KOSPI-listed companies are declining. Year-end operating profit forecasts tend to decrease compared to the beginning of the year. This trend remains unchanged this year. As the earnings outlook for listed companies is continuously being lowered, experts advise that it is advantageous to establish investment strategies based on fundamentals.

According to Hana Securities on the 28th, from 2008 to 2022, year-end KOSPI operating profit estimates were revised downward by an average of 7% compared to the beginning of the year. Upward revisions occurred only five times (in 2020, 2011, 2016, 2017, and 2021). Researcher Jaeman Lee of Hana Securities stated, "In 2019, operating profit estimates were revised downward by as much as 34% by year-end compared to the beginning of the year, marking the largest decline since 2008," and analyzed, "This year is also expected to see a decrease of about 16% on average compared to the beginning of the year."

Most securities firms are lowering their annual operating profit forecasts for KOSPI this year. According to FnGuide, an analysis of the annual operating profits of 185 KOSPI-listed companies with consensus from three or more securities firms as of the third week of November showed a total of 145.131 trillion KRW. This is about a 25% decrease compared to the initial forecast of 192.405 trillion KRW. The annual sales forecast for this year is also expected to fall by 3%, from 2,646.47 trillion KRW at the beginning of the year to 2,567.65 trillion KRW. Compared to 2022, sales are expected to decrease by 2%, and operating profit by 16% respectively.

Cumulative results up to the third quarter have also sharply declined. According to the "2023 Q3 Financial Results Analysis" released by the Korea Exchange and the Korea Listed Companies Association, the consolidated operating profit of 613 KOSPI-listed companies with December fiscal year-end (excluding financial industries) was 94.6982 trillion KRW, down 37.98% compared to the same period last year. Cumulative sales amounted to 2,093.6486 trillion KRW, a 0.29% increase from the previous year, but cumulative net profit sharply dropped by 41.06% to 70.1282 trillion KRW.

The operating profit earnings surprise ratio is also declining. As of the third quarter, the domestic companies' operating profit earnings surprise ratio was 33%, below the average of 37% since 2010. The highest earnings surprise ratio was in the automobile and utility sectors at 80%, while IT hardware (11%), retail & distribution and chemicals (14%), and IT home appliances (including secondary batteries, 18%) were lower.

Experts agree that as the earnings outlook for listed companies declines, investment strategies based on fundamentals are necessary. They advise paying attention to sectors with expected improvements in operating profit margins, rising return on equity (ROE), and upward revisions in earnings per share (EPS) and ROE estimates in 2024. Researcher Jaeman Lee identified sectors such as pharmaceuticals & biotechnology, essential consumer goods, semiconductors, and utilities as fitting these criteria.

Companies with rising annual operating profit consensus are also noteworthy. Kia's recent annual operating profit estimate is 12.0977 trillion KRW, up 56.1% from 7.7501 trillion KRW at the beginning of the year. Hana Tour was expected to achieve an annual operating profit of 12.1 billion KRW this year, but the recent forecast increased by 168.4% to 32.6 billion KRW. Samsung Heavy Industries' operating profit estimate for this year also rose by 110.6% to 235.6 billion KRW from 111.8 billion KRW at the start of the year. LX Hausys (139.5 billion KRW) also increased by 107.6% compared to the initial estimate.

Unlike these companies, many listed companies are experiencing declining earnings, raising concerns about the year-end index direction. However, most experts expect the KOSPI to trend upward toward the end of this year and next year. This is based on the judgment that although corporate profits are decreasing, the market has entered a phase of recovery from recession.

Researcher Suyeon Kim of Hanwha Investment & Securities said, "If a recession occurs in the future, it will pertain to the economy, not corporate profits, and the earnings momentum of the domestic stock market will be stronger than that of the U.S. market," forecasting a possible year-end rally. She added, "Looking at next year's earnings composition, semiconductors are turning around and approaching their previous averages, and profits in other sectors will also increase."

Regarding the recent approximately 10% rise and subsequent pause in the KOSPI this month, the prevailing view is that this is merely a temporary breather and the direction will continue upward. The KOSPI is adjusting its pace as it enters a technical resistance zone. Researcher Kyungmin Lee of Daishin Securities explained, "Ultimately, we expect a trend toward the 2,600 level, but in the short term, it is a time to relieve overheating concerns and digest supply."

Improvement in earnings is also confirmed by other indicators. The 12-month earnings achievement rate of the MSCI Korea Index has turned upward since the end of September and is accelerating recently. The global market's earnings achievement rate has also rebounded since its low point in June. The growing expectation of interest rate cuts in the first half of next year is also expected to be a driving force behind the stock market's rise.

Goldman Sachs also views the domestic stock market positively for next year. It forecast that the KOSPI could reach above 2,800 next year and maintained an overweight rating. Promising sectors include technology hardware and semiconductors, internet media and entertainment, automobiles and parts, healthcare, and telecommunications. Goldman Sachs analyzed, "At the end of 2022, the KOSPI price-to-book ratio (PBR) traded at a low of 0.78 times, and recently the KOSPI's PBR is close at 0.83 times, making it attractive," adding, "The EPS growth rate of Korean listed companies is expected to rebound by 54% next year, with an additional 20% growth anticipated in 2025."

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