A new group of market leaders could emerge alongside Samsung Electronics (005930.KS) and SK hynix (000660.KS) on South Korea's stock market next year, according to a brokerage forecast. Competition for the No. 3 spot by market capitalization is expected to intensify even as large-cap chip stocks remain strong.
KOSPI Net Profit Seen at 1,053 Trillion Won as Leadership Shifts
Hana Securities said in a report titled "2027 Market Leaders: U.S. Earnings Scale, Korea's New No. 3 by Market Cap" that leadership on the domestic market could broaden next year from semiconductors to secondary batteries, information technology hardware, pharmaceuticals and biotech, and automobiles, according to the financial investment industry on the 25th.
Lee Jae-man, an analyst at Hana Securities, said changes in earnings growth rates and the potential for share-price rerating, rather than the absolute scale of earnings, will be the key factors determining which stocks lead the market.
Net profit at KOSPI-listed companies is forecast to reach a record 1,053 trillion won next year, surpassing this year's estimate of 794 trillion won. The year-on-year growth rate, however, is expected to slow sharply to 33% next year from 265% this year.
That means investor attention could shift toward sectors with the most pronounced earnings improvement, even as overall results continue to strengthen but at a slower pace.
Lee said KOSPI net profit also hit record highs for two consecutive years in 2011 and 2016 while growth rates declined, and that sectors with accelerating earnings growth led the market in those periods.
LG Energy Solution and Samsung Electro-Mechanics in First Half, Samsung Biologics and Hyundai Motor in Second
Hana Securities named LG Energy Solution (373220.KS) and Samsung Electro-Mechanics (009150.KS) as candidates for the No. 3 market cap spot in the first half of next year.
LG Energy Solution, the leading secondary battery stock, is expected to see an earnings turnaround. The company is forecast to swing to a net profit of 1.99 trillion won next year from a net loss of 242.1 billion won this year.
Samsung Electro-Mechanics was cited for earnings growth that does not rely on base effects. Its net profit is expected to roughly double to 3.25 trillion won next year from 1.62 trillion won this year.
Pharmaceuticals and biotech, along with automobiles, are expected to draw attention in the second half, with Samsung Biologics (207940.KS) and Hyundai Motor (005380.KS) as the leading candidates.
Samsung Biologics was flagged for possible rerating because its shares have lagged for an extended period despite steady earnings growth.
Hyundai Motor is expected to improve its return on equity (ROE) while its price-to-book ratio (PBR) remains relatively low, which could highlight its undervaluation, the report said.
"Even if semiconductor-driven earnings growth continues, investors should watch for the possibility that a non-semiconductor company with improving earnings growth and room for valuation rerating emerges as the new No. 3 by market cap," Lee said.
The rotation could be fast, however. Hana Securities said periods of earnings improvement and expansion in non-semiconductor sectors last an average of five months, shorter than the eight months for semiconductors.
Samsung Electronics Down 41% From Peak: When Will Chips Rebound?
That does not mean Samsung Electronics and SK hynix will immediately surrender their leadership.
Hana Securities expects the two companies to drive KOSPI gains from late this year through the first quarter of next year on a technical rebound.
Samsung Electronics closed at 213,500 won on the 23rd, down 41.1% from this year's peak of 362,500 won.
Similar sharp declines have been followed by rebounds in the past. Samsung Electronics shares have fallen more than 40% from a peak on five occasions since 2000, after which they rose a cumulative 40.1% on average over the following five months, the report said.
The earnings outlook is also favorable. Hana Securities estimated next year's operating profit at 561 trillion won for Samsung Electronics and 404 trillion won for SK hynix, ranking second and third globally behind Nvidia at 616 trillion won.
High earnings do not translate directly into share-price gains, however. The correlation coefficient between expected KOSPI net profit and the price-to-earnings ratio (PER) has been minus 0.5 since 2010, in contrast with 0.7 for the U.S. S&P 500 index.
The analysis suggests that in South Korea's market next year, companies with faster earnings improvement and undervaluation appeal are likely to draw attention in sequence after large-cap chip stocks rebound.