20160713-三星证券-Perspectives_Weekly_2Q_to_show_profit_gains,_albeit_unsustainable_21页_1mb

Samsung Market Strategy Summary

Core Content

This document provides an analysis of the performance and outlook for the Korean stock market, particularly focusing on the MSCI Korea index and its constituent sectors. It outlines the expected earnings growth for the second quarter (2Q) and the likely slowdown in the second half (2H) of 2016. The report also discusses global market conditions and provides a list of top stock picks based on earnings forecast changes and valuation metrics.

Main Points

• Earnings Growth in 2Q:

  • MSCI Korea operating profit (excluding financials) is expected to rise to KRW29t in 2Q, driven by Samsung Electronics and Samsung SDI.
  • The growth is largely attributed to the IT hardware & equipment sector, with Samsung Electronics contributing significantly to the increase.
  • The correlation between the one-month change in operating profit forecasts and the operating profit surprise ratio is 0.6, indicating a strong link between forecast revisions and actual results.

• Earnings Sustainability in 2H:

  • Earnings growth in 2H is expected to be weaker, with a projected increase of KRW1.2t q-q for MSCI Korea, but excluding the utilities sector, the growth is expected to be negative.
  • The growth in 2H is primarily due to the base effect from the significant losses in the second half of 2015.
  • Earnings improvements in 1H were mainly due to margin gains from cost-cutting measures, which are unlikely to continue in 2H due to rebounding commodity prices.

• Market Conditions:

  • The Korean stock market is facing challenges due to Brexit concerns, and corporate fundamentals need to improve for the Kospi to break out of range-bound trading.
  • The P/B multiples for the steel, shipbuilding/machinery, and energy sectors are attractive (below 1x), and EPS forecasts have been revised upwards.
  • Earnings forecasts for the semiconductor, pharmaceutical, retail, and securities sectors remain weak.

• Global Market Outlook:

  • Japanese firms have seen repeated cuts in earnings forecasts, while Chinese firms have experienced slight rebounds.
  • The Japanese government is expected to reduce its GDP forecast for 2016, and the stock market has rallied due to anticipated economic stimulus measures.
  • The S&P 500 closed at a record high, driven by strong job data and expectations of economic recovery, but some caution is advised due to ongoing challenges in US investment banks and negative bond yields.

Key Information

• Top 10 Stock Picks:

  • These include companies such as LG Display, Samsung Electronics, and Naver, which have shown positive EPS forecast changes.
  • The report highlights companies with strong fundamentals and growth potential based on P/B multiples, forward P/E, and other financial metrics.

• Sector Valuations and Fundamentals:

  • The IT hardware & components sector is expected to benefit from the base effect, with Samsung Electronics leading the way.
  • The operating margin for MSCI Korea is projected to improve until the end of 3Q but will decline in 4Q.
  • The P/B z-scores and EPS forecast changes indicate that certain sectors are undervalued and may offer good investment opportunities.

• Market Calendar:

  • The report includes a market calendar, which outlines key dates and events affecting the market.

Summary and Top Picks

• Top Picks:

  • Korea Zinc (Materials): Strong EPS forecast changes and attractive P/B multiples.
  • Korea Aerospace Industries (Industrials): Expected to see improvements in EPS forecasts and fundamentals.
  • Hyundai Mobis (Consumer Discretionary): Positive EPS forecast changes and growth potential.
  • KT&G (Consumer): Strong EPS forecast changes and solid P/B multiples.
  • AmoreG (Consumer Staples): High market cap and strong EPS forecast changes.
  • Samsung Electronics (IT): Leading contributor to earnings growth and strong market position.
  • Naver (IT): Expected to see significant EPS forecast changes and growth potential.
  • LG Display (Large Cap): Strong EPS forecast changes and positive market outlook.
  • LG Electronics (Large Cap): Expected to see positive EPS forecast changes.
  • Amorepacific (Large Cap): Strong EPS forecast changes and good valuation metrics.

• Bottom Picks:

  • Hyundai Motor (Large Cap): Negative EPS forecast changes.
  • S-Oil (Large Cap): Negative EPS forecast changes.
  • SK Innovation (Large Cap): Negative EPS forecast changes.
  • SK Hynix (Large Cap): Negative EPS forecast changes.
  • Samsung Life Insurance (Large Cap): Negative EPS forecast changes.
  • Celltrion (Large Cap): Negative EPS forecast changes.

Conclusion

The Korean stock market is expected to see solid earnings growth in 2Q driven by the IT hardware & equipment sector, particularly Samsung Electronics. However, this growth is unlikely to be sustained into 2H due to the base effect and the rebound in commodity prices. Investors should be cautious about the sustainability of earnings improvements and consider the valuation metrics and forecast changes for potential investment opportunities.