Stronger Won Drives First Cut This Year in Listed Firms’ Operating-Profit Outlook

Annual operating-profit forecasts for South Korea’s listed companies retreated last month for the first time this year, ending a steady run of increases. A stronger won, reflected in a lower won-dollar exchange rate, reduced exporters’ earnings in local-currency terms, weighing heavily on third-quarter profit estimates for Samsung Electronics Co. and SK Hynix Inc. As the third-quarter earnings season opens with Samsung’s preliminary results on Oct. 8, sector performance is poised to diverge, with semiconductor profit forecasts weakening even as shipbuilders and refiners improve.

FnGuide said on Oct. 5 that the average third-quarter consolidated operating-profit estimate for 233 listed companies tracked by at least three brokerages stood at 25.52279 trillion won. That was down 5.2905 trillion won, or 2.03%, from 26.05184 trillion won a month earlier. Full-year profit forecasts also slipped 0.4%, to about 985 trillion won at the end of September from about 989 trillion won at the end of August.

The decline in third-quarter estimates was driven largely by the country’s two biggest chipmakers, Samsung Electronics and SK Hynix. Samsung’s third-quarter operating-profit estimate fell 3.2% over the past month to 10.94939 trillion won from 11.31142 trillion won. SK Hynix’s estimate declined 1.6% to 7.75495 trillion won from 7.88035 trillion won. Together, the two companies accounted for 4.8743 trillion won, or 92.1%, of the total decline.

The won-dollar exchange rate averaged 1,426 won per dollar in the third quarter, down sharply from 1,483 won in the first half, and that cut earnings expectations for the two companies, which rely heavily on dollar-denominated sales.

Net Income Can Drop Despite Strong Operating Profit as FX Revaluation Bites

Korean Air’s Net Profit Outlook Seen Soaring Fivefold

More companies may post net income that misses expectations this third-quarter earnings season even if operating profit beats market forecasts. The sharp drop in the won-dollar exchange rate affects not only core operations but also valuation gains and losses on foreign-currency assets and liabilities. Judging an earnings surprise on operating profit alone could miss broader shifts in corporate profitability.

Yuanta Securities said the average won-dollar exchange rate in the Seoul foreign-exchange market during the third quarter, from July 1 to Sept. 30, was about 1,426 won per dollar. That was down 5.05% from 1,502 won in the second quarter. Since 2005, there have been only five quarters in which the average exchange rate fell more than 5% from the previous quarter, fueling concern that exporters’ profits translated into won will drop sharply.

The third-quarter plunge in the exchange rate is likely to have a bigger effect on net income than on operating profit because exchange-rate moves hit different line items at different times. Revenue and costs are booked using exchange rates at the time of each transaction, making the average move during the quarter the key factor.

Foreign-currency cash, accounts receivable and borrowings, however, are revalued using the exchange rate at the end of the quarter. For companies with more dollar-denominated assets than liabilities, a lower exchange rate reduces the won value of those holdings and leads to valuation losses.

The won-dollar exchange rate finished at 1,352.8 per dollar in the Seoul foreign-exchange market on Sept. 30, the final trading day of the third quarter. That marked a 12.68% drop from 1,549.4 won at the end of the second quarter. Shin Hyun-yong, an analyst at Yuanta Securities, said that historically, in quarters when the won-dollar rate at quarter-end fell more than 8% from the previous quarter-end, 48.0% of companies that beat operating-profit estimates still missed net-income expectations. This earnings season is therefore likely to reveal many companies with solid operating profit but a net-income shock.

A stronger won can also lift net income for some companies. Airlines, which carry large foreign-currency liabilities such as aircraft lease obligations and borrowings, can book valuation gains as the won value of that debt declines. Korean Air Lines Co.’s third-quarter net-income consensus has jumped nearly fivefold over the past month, to 501 billion won from 103.7 billion won.

Jeon Beom-jin and Oh Hyun-ah, Korea Economic Daily reporters forward@hankyung.com