May 4, 2021 Korea Equity Strategy Focus on stocks with solid earnings momentum Mirae Asset Securities Co., Ltd. Myoung -gan Yoo [email protected] Hayeon Son [email protected] Model portfolio strategy Focus on stocks with strong earnings momentum Companies characterized by significant differentials between average and top estimates are more likely to see continued upward revisions after releasing positive results. May model portfolio overweight sectors: Chemicals, steel, energy, IT appliances, and semiconductors May model portfolio underweight sectors: Software, utilities, telecom services, healthcare, and consumer staples Key stocks in overweight sectors: Kumho Petrochemical, POSCO, SK Innovation, Samsung SDI, and Samsung Electronics (SEC) Global and domestic economic Continued supply chain disruptions in developed markets to benefit East Asia n exports conditions and industrial production Developed countries continue to face supply chain disruptions and restocking pressures amid the ongoing normalization of the global economy. Meanwhile, East Asian countries, which have faced fewer supply chain disruptions, are exhibiting healthier exports and industrial production than developed economies. Korea’s April exports were up 41.1% YoY, the highest rate of growth since Jan. 2011. Exports to developed markets registered strong growth. Korea’s 1Q21 GDP was stronger than expected, growing 1.6% QoQ and 1.8% YoY. Domestic policy updates Household debt management plan and securities lending overhaul for retail investors The Korean government has announced a medium-term (2021-23) plan aimed at reining in growing household debt. Detailed measures include the reintroduction of the household debt growth target scheme and the implementation of a borrower-based debt service ratio (DSR) rule. As of May 3, rule changes supportive to retail investors have been implemented as part of the partial resumption of short selling. Short selling by market makers has been scaled back. May model portfolio weights vs. KOSPI (%p) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Source: Mirae Asset Securities Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. May 4, 2021 Korea Equity Strategy May model portfolio In April, consensus estimates continued to be revised higher globally. 12-month forward EPS estimates climbed 4.9% in DMs and 4.8% in EMs, with energy (+12.3%) and materials (+8.5%) stocks seeing the sharpest increases. Meanwhile, defensive plays, including healthcare, utilities, and consumer staples, reported relatively modest revisions. The 2021 operating profit consensus for Korean companies climbed 6.1% over the past month, with cyclical stocks displaying solid earnings momentum (as in the global market). Energy (+32.6%), steel (+19.8%), chemicals (+14.2%), display (+13.6%), securities (+12.2%), IT appliances (+11.4%), insurance (+10.7%), and machinery (+8.3%) saw particularly solid revisions. As of today, around 57% of Korean companies (based on market cap) have released their 1Q results. Their combined revenue and operating profit beat consensus estimates by 3.4% and 11.2%, respectively. Notably, 62.6% of them (vs. an average of 34.5% over the past three years) reported positive earnings surprises—i.e., results beating the consensus by 5% or more. With the market continuing to respond to results announcements, we advise investors to focus on stocks with solid earnings momentum. In our view, companies characterized by significant differentials between average and top estimates are more likely to see continued upward revisions after releasing positive results. For our May model portfolio, we overweight chemicals, steel, energy, IT appliances, and semiconductors, and highlight Kumho Petrochemical, POSCO, SK Innovation, Samsung SDI, and SEC as our top picks. Meanwhile, we are reducing the weights of software, utilities, telecom services, healthcare, and consumer staples. Figure 1. May model portfolio weights vs. KOSPI (%p) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Source: Mirae Asset Securities Research Table 1. Sector/stock selection factors Absolute 12MT P/E, 3Y avg. dividend yield Value Relative 12MF P/E, 12MF P/B (vs. 1Y range) Earnings FQ0 revenue growth, FQ0 OP growth Growth Forecasts 12MF OP growth Profit Chg. in consensus earnings and earnings revision ratios (1M) Momentum Net purchases by foreign/institutional investors (1M), net buying Supply/demand capacity by foreign/institutional investors (1Y) Profit stability NP volatility over the past 12 quarters Risk Share volatility Downside risks to share prices Source: Mirae Asset Securities Research Mirae Asset Securities Research 2 May 4, 2021 Korea Equity Strategy Figure 2. April model portfolio performance Figure 3. April model portfolio performance vs. KOSPI (%) 4 Energy -24.4 Materials -61.9 Industrials -102.1 3 +2.8 -0.4 -1.3 Consumer disc. 10.6 Consumer staples 0.4 2 Healthcare 7.1 +1.1 Financials 11.9 1 IT 27.3 Telcos 3.3 0 (bp) KOSPI Sector effect Stock selection Model portfolio Utilities -1.4 performance effect return -120 -90 -60 -30 0 30 60 Note: Based on 4/30/21 closing prices Source: Mirae Asset Securities Research Source: Mirae Asset Securities Research Figure 4. April model portfolio: Five best/worst performers Figure 5. Model portfolio cumulative return trend (%) Performance (1/12=100) 60 210 Model portfolio KOSPI 41.2 40 190 30.8 28.3 20 15.8 15.5 170 0 150 -7.1 -6.3 -4.6 -4.5 -20 130 -18.0 -40 110 KIH L&F F&F HMD 90 NAVER SEMCO Celltrion Kia Motors CJ Logistics Hyundai Steel 70 12 13 14 15 16 17 18 19 20 21 Source: Mirae Asset Securities Research Source: Mirae Asset Securities Research Figure 6. May model portfolio: Z-score by sector (Z-score) 1.0 High preference Low preference 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 Source: Mirae Asset Securities Research Mirae Asset Securities Research 3 May 4, 2021 Korea Equity Strategy Figure 7. May model portfolio weights (by sector) vs. KOSPI Figure 8. May model portfolio weights (by subsector) vs. KOSPI (%p) Energy 1.0 2.5 2.0 Materials 3.1 1.5 Industrials -0.6 1.0 0.5 Consumer disc. -1.3 0.0 Consumer staples -0.7 -0.5 -1.0 Healthcare -0.7 -1.5 -2.0 Financials 0.1 Steel Retail Autos Banks Telcos Energy Utilities IT 0.8 Display Software Securities Insurance Machinery Chemicals Healthcare IT hardware IT Shipbuilding Hotel/leisure Construction Telcos -0.8 appliances IT Transportation Semiconductors Media/education (%p) Consumerstaples Cosmetics/apparel Utilities -0.8 metals Non-ferrous Trading/capital Trading/capital goods -1.5 -0.5 0.5 1.5 2.5 3.5 Source: Mirae Asset Securities Research Source: Mirae Asset Securities Research Table 2. May overweight sectors and stocks to watch Stocks Notes - For 1Q21, we expect to see record quarterly results and an earnings surprise, thanks to robust NB latex spreads. Chemicals Kumho Petrochemical - Earnings should continue to grow, supported by higher commodity rubber (SBR/BR) prices and margins. - Higher steel prices continue to support earnings growth; 1Q21 operating profit beat the consensus by 20%. Steel POSCO - Steel prices should continue to trend higher, aided by growing demand amid an economic recovery and expectations for Chinese output cuts. - We expect to see a 1Q21 earnings surprise, backed by inventory valuation gains resulting from higher oil prices and Energy SK Innovation improved refining margins. - Refining market conditions remain favorable; battery and separator materials businesses have strong growth prospects. - In the US, EV sales and penetration are anticipated to increase rapidly in 2H21, boosted by government subsidies. IT appliances Samsung SDI - We expect to see full-scale improvement in EV battery earnings thanks to the revenue generation of fifth-gen batteries. - Profitability will likely improve on memory cost improvements stemming from a cost advantage over rivals. Semiconductors SEC - We see potential for additional profit growth if smartphone shipments return to normal on the resolution of foundry capacity shortages. Source: Mirae Asset Securities Research Mirae Asset Securities Research 4 May 4, 2021 Korea Equity Strategy May model portfolio (%, %p) Recommended Sector weight Recommended Sector Subsector Ticker Stock sector weight Diff. MoM (index) stock weight (portfolio) (A) (B) (B-A) Energy 2.3 3.3 1.0 Energy 096770 SK Innovation 2.3 3.3 1.0 3.3 New Materials 10.2 13.3 3.1 Chemicals 011170 Lotte Chemical 6.8 8.9 2.1 3.5 0.2 Chemicals 011780 Kumho Petrochemical 6.8 8.9 2.1 3.2 0.3 Chemicals 011790 SKC 6.8 8.9 2.1 1.6 0.2 Chemicals 298000 Hyosung Chemical 6.8 8.9 2.1 0.6 New Non-ferrous metals 103140 Poongsan 1.0 0.9 -0.1 0.9 -0.1 Steel 005490 POSCO 2.4 3.5 1.1 3.5 New Industrials 12.4 11.8 -0.6 Construction 000720 Hyundai E&C 2.5 2.1 -0.4 2.1 New Machinery 112610 CS Wind 1.5 1.7 0.2 1.7 0.3 Shipbuilding 009540 KSOE 1.2 1.1 -0.1 1.1 New Trading/capital goods 034730 SK Holdings 4.3 3.9 -0.4 3.2 0.3 Trading/capital goods 047050 POSCO International 4.3 3.9 -0.4 0.7 0.3 Transportation 086280 Hyundai Glovis 2.9 3.0 0.1 3.0 New Consumer discretionary 13.1 11.8 -1.3 Autos 005380 Hyundai Motor 6.6 6.3 -0.3 3.7 -0.5 Autos 000270 Kia Motors 6.6 6.3 -0.3 2.6 -1.0 Cosmetics/apparel 090430 AmorePacific 3.9 3.9 0.0 3.4 0.0 Shinsegae Cosmetics/apparel 031430 3.9 3.9 0.0 0.5 New International Hotel/leisure 008770 Hotel Shilla 0.6 0.3 -0.3 0.3 0.1