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Zero-carbon, self-driving still in distant future for top Kospi stocks

Top 50 Kospi stocks yet to price in new growth drivers given lack of consensus valuation methods

By Oct 22, 2021 (Gmt+09:00)

(Courtesy of Samsung Engineering)
(Courtesy of Samsung Engineering)


Shares in Samsung Engineering Co., a leading South Korean plant builder, have skyrocketed about 90% year to date, far outstripping the average rise of 28% of domestic construction companies during the same period.

In particular, the bulk of the gains in Samsung Engineering shares, or a 65% surge, were made over the past six months when the broader Kospi market had been flat to lower.

The stellar performance reflects investor expectations of the construction and engineering company's advance into zero-carbon and hydrogen plant projects, which it picked as its new growth pillars. The Samsung Group unit ranks 68th on the main Kospi market with a market capitalization of 5.1 trillion won ($4.3 billion).

By comparison, the country's 50 largest stocks, including Hyundai Motor Co., LG Chem Ltd. and POSCO Co., have unveiled ambitious plans to push forward into the carbon-neutral and hydrogen markets as well, in search of new growth drivers. They are trying to write new growth stories beyond their previous sprawling and integrated expansion. 

Unlike Samsung Engineering, however, their venturing into uncharted territory has yet to win the hearts and minds of investors, which some analysts blamed on the lack of consensus methods to value the new and unknown businesses.

According to market tracker FnGuide, the top 50 companies listed on the main Kospi market traded at 20.8 times 12-month forward earnings on average as of Oct. 21, up slightly from 17 times at end-2019. That falls short of the average PER of 25 for Nasdaq-listed companies. 

For some of them, including POSCO, SK Telecom Co. and Lotte Chemical Corp., their PE ratios declined during the period.

By contrast, shares in Tesla Inc leaped by sevenfold last year. Its share price has factored in its buoyant electric vehicle business, as well as expectations of its planned transformation into a robotics, future energy and space company.

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Analysts cited the difficulty of estimating the value of new businesses, which have yet to contribute to the companies' earnings, as the companies still rely heavily on their traditional businesses such as combustion engine cars and petrochemical products.

According to a survey of the top 50 Kospi-listed companies by The Korea Economic Daily, 22 companies prioritize new businesses as their growth drivers. Among them, chemical and steel manufacturers are shifting direction toward rechargeable batteries and eco-friendly energy fuels.

"Valuations on traditional companies, which have been long traded on the stock market, have not yet reflected their new businesses. It may be because they have so far failed to shed their past business images, even after undergoing a business transformation," said DB Financial Investment research head Jang Hwa-tak.

"They are now spinning off businesses into new companies to get their businesses revalued."

SK Group is at the forefront of corporate spin-offs. SK Innovation Co. this month announced the split-off of its battery and petrochemical businesses into two separate entities.

Among automakers, Hyundai has been pivoting toward electric and hydrogen-powered vehicles. After acquiring an 80% stake in Boston Dynamics for $880 million last year, Hyundai is now applying the US robotics firm's technology to its autonomous driving and urban air mobility projects.

Auto parts makers, including Hyundai Mobis Co., Hanon Systems Co. and Mando Corp., are also pushing into autonomous and electric car components, in tandem with the vehicle markets' transformation. 

"The current share price of Hyundai Motor has not priced in its future mobility business at all," said HI Investment & Securiteis research head Koh Tae-bong. "Considering its competitiveness in the electric vehicle market, the time is coming to revalue the company."

For chemical, steel and shipbuilding companies, hydrogen has become the next big thing. And nuclear plant builder Doosan Heavy Industries Co. has joined them to make its foray into the hydrogen energy market.

                                      Price-to-earnings ratios

Company at end-2019 Oct. 21, 2021
SK Telecom 12.6 7.6
POSCO 8.5 5.0
Lotte Chemical 7.8 5.6
Hyundai Motor 8.0 8.6
Kospi 11.7 10.9
Top 50 Kospi stocks 17 20.8

Samsung Electronics Co., the world's top memory chipmaker, is expanding its footprint in the non-memory segment. KB Securities forecast non-memory businesses to account for 7% of Samsung Securities' operating profit in 2022 and then take up a double-digit share in the years following, versus an estimated 3% this year. 

"With the non-memory chip business taking a bigger share of operating profits, Samsung Electronics shares will factor into the valuation of non-memory chip operations," said KB Securities analyst Kim Dong-won. 

By comparison, EV battery makers have been benefiting from the growth prospects of the EV market, which are now taking shape. Shares in EV battery materials are trading at 60-70 times 12-month forward earnings on average.  

Write to Yoon-sang Koh at kys@hankyung.com

Yeonhee Kim edited this article.

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