'Valuation retrograde companies' for a Reason...Korean stock market from a credit perspective

Companies that are "valuation regressors" share a number of commonalities, including poor adaptability to external changes and declining competitiveness. In addition to shaky creditworthiness, low asset utilization efficiency is also holding them back. Asset reallocation is a prerequisite for 'corporate valuation'.

According to Nice Credit Ratings on Feb. 2, the sectors whose ratings and outlooks were upgraded in the first half of this year are automobiles (2 companies), shipbuilding (2 companies), and PPPs (4 companies). On the other hand, the downgrades were made to petrochemicals (7 companies), construction (4 companies), and retail (2 companies).

In the big picture, industries with favorable business conditions due to increased exports to the U.S. were positive, while industries that were unable to withstand sluggish exports to China and high interest rates and inflation were negative.
The economy goes through booms and busts like a clockwork. In this process, companies with strong financial buffers and competitiveness tend to fare well, while those without are subject to a vicious cycle of "credit crunch" followed by "credit crunch".

This reaction is also reflected in the stock market. According to big data platform 'DeepSearch', there are a total of 593 listed companies whose price-to-earnings ratio (PBR) and market capitalization have declined and whose PBR is less than 1x compared to the financial authorities' announcement of the corporate valuation program on January 24th.

To exclude cases where capitalization declines relatively quickly relative to market capitalization, resulting in a higher PBR, we selected companies with both PBR and market capitalization declining simultaneously.

	Korean Companies with Declining Market Cap & PBR
	(Based on 24.01.24 vs. 24.07.05 closing price)			(Unit: billion won)
	Company	PBR	ROE	DTE	Market Cap
	POSCO Holdings	0.52	3.13%	69.19%	30,911
	LG Chem	0.86	5.24%	89.23%	24,919
	Hankook Tire & Technology	0.57	7.88%	32.54%	5,370
	Hanwha Solutions	0.58	-1.64%	171.82%	4,392
	LG Uplus	0.50	7.33%	129.54%	4,235
	Hyundai Steel	0.20	2.29%	80.65%	3,837
	KangwonLand	0.77	9.61%	20.96%	2,972
	GS Retail	0.53	0.50%	126.49%	2,126
	CJ Logistics	0.53	6.01%	131.45%	2,115
	Lotte Shopping	0.19	1.55%	182.79%	1,777
	OCI Holdings	0.46	18.15%	56.14%	1,665
	E-Mart	0.13	-1.37%	141.75%	1,625
	Daewoo E&C	0.39	13.39%	176.79%	1,552
	Shinsegae	0.35	4.96%	132.68%	1,543
	YOUNGONE	0.47	15.91%	47.64%	1,533
	Hankook & Company	0.36	4.76%	15.54%	1,436
	Dongwon Industries	0.47	9.01%	146.36%	1,243
	DL E&C	0.27	4.27%	95.94%	1,229
	Lotte Fine Chemical	0.48	7.78%	12.58%	1,174
	Seegene	0.95	0.07%	21.45%	1,092
	Source=DeepSearch(Reprocessing)

The top 10 companies by market capitalization include POSCO Holdings, LG Chem, Hankook Tire & Technology, Hanwha Solutions, LG U+, Hyundai Steel, Kangwon Land, GS Retail, CJ Logistics, and Lotte Shopping.
If we exclude holding companies, telecom companies, etc. that are 'perennially undervalued', we can see that the companies are concentrated in the credit risk industry.

This trend is even more pronounced when we zoom in outside the top 10 market capitalizations. E-Mart, Daewoo E&C, Shinsegae, DL E&C, Lotte Fine Chemicals, etc. are also in the credit insecure industry, which is also known as 'value retrogression'.

Among them, companies with a debt-to-equity ratio (total debt/total capital) of more than 100% are Hanwha Solutions, GS Retail, CJ Logistics, Lotte Shopping, E-Mart, Daewoo E&C, and Shinsegae.

The higher the debt-to-equity ratio, the lower the total capital, so the return on equity (ROE) should be relatively high. The ROE of each company is -1.64% for Hanwha Solutions, 0.50% for GS Retail, 6.01% for CJ Logistics, 1.55% for Lotte Shopping, -1.37% for E-Mart, 13.39% for Daewoo E&C, and 4.96% for Shinsegae.

Based on ROE and debt-to-equity ratios, the retail sector is the most prominent. The industry is expected to intensify as the domestic and international e-commerce offensive continues. High household debt levels and interest burdens are likely to weaken spending power, which could further shake creditworthiness.

Even companies with low debt-to-equity ratios are not safe. They can improve profitability by increasing leverage, but finding the right investments is not easy.

These companies may have no choice but to sell back shares and increase dividends to increase shareholder value. This is a way to increase ROE with relatively less capital.

However, this can be risky. For bond investors, a reduction in capital buffers reduces investment appeal. The more a company focuses on returning capital to shareholders, the harder it is to raise funds in the form of bonds. Companies with declining market capitalization and PBR, including POSCO Holdings, are caught in the so-called "value trap.

"Companies need to properly source, deploy, and utilize capital and debt for growth," said a fixed income manager at an asset management firm. "Korean companies have low asset allocation efficiency, and the purpose behind it is group control," he criticized. "As bond investors focus on the quality of capital and profitability, and equity investors focus on growth and return, companies should strategically allocate assets considering both sides of the equation, rather than just paying lip service to 'returning to shareholders,'" he advised

Lee Sungkyu (lsk0603@fntimes.com)