Korea Capital Market Institute: "The Bottom Has Passed... Operating Profit of Listed Companies to Increase by 54% This Year"

Foreigners' Net Buying Continues... Amount Decreases
Construction Industry Slowdown Expected Amid Real Estate PF Concerns

The Korea Capital Market Institute (KCMI) forecasted that the operating profit of listed companies will increase by 54% compared to the previous year. Riding on the trend of net foreign buying, operating profit margins are expected to improve across multiple sectors, including the information and communication technology (IT) industry. The instability in real estate project financing (PF) that has persisted since the end of 2022 is pointed out as a potential risk factor for both the financial market and the real economy this year. It was also diagnosed that the risk spreading to construction companies and PF projects could lead to a contraction in the construction industry and negatively impact private consumption.

Economic Recovery Phase This Year... Profit Margin Improvement Led by IT Sector

Kang Sohyun, head of the Capital Market Office at the Korea Capital Market Institute, said at the '2024 Capital Market Outlook Seminar' held on the 25th at the Yeouido Financial Investment Center, "Operating profits of listed companies will rise after hitting a low point in 2023," adding, "Quarterly forecasts are expected to be 54% higher than the previous year." According to financial information provider FnGuide, the total estimated operating profit of KOSPI-listed companies in 2024 is 233 trillion KRW.

Kang said, "Even considering analysts' tendency to overestimate earnings forecasts, an increase is expected," and added, "The economy is in a recovery phase, and net foreign buying is expected to decrease."

This year, profit indicators are expected to improve mainly in the IT industry. The forecasted operating profit margin for the IT sector this year is 10.5%, a significant improvement compared to 1.0% last year. Profit margins are also expected to improve in various sectors such as industrial goods, materials, energy, healthcare, telecommunications, consumer staples, and finance. The utility sector is expected to turn profitable, moving away from a deficit trend. From a supply-demand perspective, net foreign buying is analyzed to decrease. Last year, foreigners net purchased 10.501 trillion KRW worth of domestic stocks.

Across the capital market, trends such as ▲expansion of individual investor influence and ▲improvements in shareholder rights protection systems are anticipated. ▲Concerns over real estate PF defaults, increased uncertainty in the credit bond market due to cases like Taeyoung Construction's workout (corporate financial restructuring), ▲full-scale transition to a multiple trading market system, ▲reorganization of the token securities system, and ▲strengthening of unfair trade sanctions and establishment of victim relief measures are expected to follow.

Real Estate PF Risk? Possibility of Construction Industry Contraction

On the 11th, when the fate of Taeyoung Construction, which applied for a workout (corporate restructuring) after failing to repay real estate project financing (PF) loans worth about 9 trillion won, is decided, employees are arriving at Taeyoung Construction in Yeongdeungpo-gu, Seoul. Photo by Jo Yongjun jun21@

The instability in real estate PF that has continued since the end of 2022 has been identified as a risk factor for both the financial market and the real economy. Baek Inseok, head of the Macro-Finance Office at the Korea Capital Market Institute, said, "Following last year, the profitability of real estate PF continues to deteriorate and construction is delayed," adding, "This year, the risk factors for the financial market and real economy are real estate PF."

Baek further explained, "Last year, the average annual construction cost rose by 27% compared to 2020, causing profitability deterioration that led to conversions to bond financing (bonPF) or difficulties in progressing construction at existing PF sites," and added, "With accumulated construction cost increases and burdens on existing PFs, the number of permits and construction starts has sharply declined, raising the possibility of a prolonged contraction in the construction industry."

He also said, "This year, the crisis of construction companies and PF projects is the source of risk," and emphasized, "Considering the characteristics of real estate PF, policies are needed to prepare support measures such as restructuring construction companies, select profitable PF projects, and induce smooth construction progress."

He added, "Given the high employment effect of the construction industry, negative ripple effects on private consumption are expected," and warned, "If real estate PF risks spread to financial institutions, a credit contraction could lead to a slowdown in real economic activities."

Aftermath of Hong Kong ELS Incident... Increased Bond Market Volatility Including Corporate Bonds

Lee Hyoseop, head of the Financial Industry Office at the Korea Capital Market Institute, said, "This year, the issuance of equity-linked securities (ELS) and derivative-linked securities (DLS) based on the Hong Kong H Index (HSCEI - Hang Seng China Enterprises Index) is expected to decrease," adding, "With the maturity of Hong Kong H Index ELS this year, investment losses of approximately 4 to 6 trillion KRW are anticipated."

Lee also said, "The issue of incomplete sales of ELS will contribute to a decrease in ELS sales through bank channels," and predicted, "The decline in ELS sales will lead to funding risks for securities firms and increased volatility in the bond market, including corporate bonds."

He continued, "Securities firms need to diversify their funding channels to derivative-linked bonds (ELB, DLB), repurchase agreements (RP), commercial paper (CP), and issuance of promissory notes," and suggested, "Efforts are necessary to reduce the proportion of high-risk corporate bonds, including corporate bonds, to strengthen risk management of held bonds."

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