Ants that are picky eaters of semiconductors, Hyundai Rotem, Nchem, Samsung Heavy Industries, look for hints in foreigners’ shopping carts

Mr. Kim (37), an office worker who was all in on Samsung Electronics, recently sold half of his stocks when the stock price was adjusted this month. He also joined the selling trend of individual investors this month, predicting that the closing price would not exceed the all-time high of 88,000 won.

As of April 22nd, the net selling amount of Samsung Electronics by individuals amounted to 324.8 billion won. The selling by individuals was mainly due to the fact that the first report cards of the year by foreign semiconductor companies such as Netherlands’ ASML and Taiwan’s TSMC were weaker than expected.

TSMC, the world’s No. 1 company in semiconductor foundry (consignment production) sales, including artificial intelligence (AI) chips, lowered this year’s consignment production growth rate from 20% to the mid-10% range, creating fear in the market. High-performance semiconductor equipment manufacturer ASML’s first quarter performance gave support to the theory of a semiconductor bubble. This is because sales in the first quarter decreased by 27% compared to the fourth quarter of last year.

Individual investors believe that their poor performance will ultimately lead to a worsening outlook for Samsung Electronics. Mr. Kim said, “AI-related semiconductor orders have already been completed and demand for electronic products is also sluggish, so the correction of semiconductor stocks is likely to continue for the time being.” He added, “I want to withstand the stock price correction period by including representative stocks from other industries.”

Recently, there has been a movement among investors to protect their portfolios by purchasing stocks representing industries other than semiconductors. The people they refer to are foreigners. This month, foreigners have been quietly accumulating stocks that are representative stocks in the industry but are relatively neglected or undervalued. These stocks include Hyundai Rotem in the defense industry, Enchem, a secondary battery materials company, and Samsung Heavy Industries in the shipbuilding industry.

Investors like Mr. Kim who are looking to diversify their portfolios by exiting semiconductors are paying attention to these stocks. This month (April 1-22), foreigners net purchased 144.7 billion won worth of Hyundai Rotem stocks. As Iran and Israel exchange missiles and escalate into an all-out war, domestic defense industry stocks are shaking together. Meanwhile, Hyundai Rotem is receiving attention from foreigners as it is undervalued compared to Hanwha Aerospace, a leading defense stock.

According to FnGuide on the 23rd, Hanwha Aerospace’s price-to-earnings ratio (PER) based on net profit for the next 12 months is 18.25 times. By the same standard, Hyundai Rotem’s is 16.03 times. This is because Hanwha Aerospace’s stock price rose 79% as of the 23rd this year, but Hyundai Rotem’s rise rate was less, at 53%. Securities analysts believe that Hyundai Rotem will fill this gap. The driving force behind this is the ‘surprise performance’ in the first quarter. Analysts at major securities companies have raised Hyundai Rotem’s operating profit estimates by 50% in the past month. Hyundai Rotem’s performance is explained by Poland. In preparation for war, Poland has ordered a large number of weapons from Hyundai Rotem, and the delivery of 18 K2 tanks is expected to be reflected in the first quarter performance. Hyundai Rotem, represented by the K2 tank, is expected to sign an additional contract for 820 units in the future. 500 units will be produced locally, and discussions regarding tank technology transfer are underway with Poland.

An official from a securities company said, “There is no information asymmetry in the information related to weapons exports, either everyone knows it or everyone does not.” He added, “It is suitable for general investors to invest based only on performance.” Hyundai Rotem’s estimated operating profit for the first quarter is 54 billion won. This is a 69.2% increase from the first quarter of last year.

There is also the good news that the company is the biggest beneficiary of the law revision. Arms exports are so large that the importer often requests financial support. Last year, Poland significantly increased its arms imports, but additional exports were delayed because the bank’s funding limit was reached. Financial support is provided by the Export-Import Bank of Korea (Eximbank), and the capital limit is expected to increase significantly due to the revision of the Mercury Act this year.

As of the end of last year, Hyundai Rotem’s cash equivalents were 396.1 billion won. You can also estimate the stock price level based on cash equivalents. As of the 23rd, Hyundai Rotem’s market capitalization was 4.4475 trillion won, which is 11 times higher than its cash equivalents. By the same standard, Hanwha Aerospace’s market capitalization compared to its cash equivalents is 6 times. This is the result because Hanwha Aerospace’s cash assets are 1.8064 trillion won, which is 4.6 times more than Hyundai Rotem. This means that although Hyundai Rotem is undervalued in terms of net profit, Hanwha Aerospace is a cheaper stock in terms of cash equivalents.

Enchem is a secondary battery materials stock. Four major materials, including electrolyte, are key materials in making secondary batteries. Other key materials include anode materials, cathode materials, and separators. Enchem is Korea’s largest electrolyte producer and the 4th largest global market share.

As we develop our existing electrolyte material technology, we are expanding our business from electric vehicle-focused products to energy storage systems (ESS). To this end, it continued to issue convertible bonds last year to raise investment funds, and continues to grow through the acquisition of the domestic unlisted company ‘TDL’ and investment in facilities in Tennessee, USA.

From an investor’s perspective, it is a typical high-risk, high-reward stock. The stock price is bound to plummet as soon as growth stops. As these risks are reflected, securities analysis of stocks such as Enchem is rare. Daishin Securities is the only company that published a report on Enchem this year. Considering its unrivaled position, the stock market’s lack of analysis of Enchem is close to a ‘dereliction of duty.’

As the United States is keeping Chinese electrolyte companies in check, Enchem is expected to establish itself as the only electrolyte company in North America. Even if other companies want to enter the market, it will take a considerable amount of time, so Enchem’s performance this year is expected to improve significantly.

In 2023, Enchem’s sales and operating profit were 424.7 billion won and 3 billion won, respectively. Daishin Securities predicts that Encom’s sales will more than double and reach 1 trillion won in 2025. Yang Ji-hwan, a researcher at this securities firm, said, “Enchem will advance into the U.S. with battery customers and significantly improve production capacity after 2025. In Europe, we will receive local supplies from LG Energy Solutions and SK On, focusing on Poland and Hungary. “Performance will continue to increase,” he predicted.

Along with Hyundai Rotem and Nchem, stocks receiving attention in the first quarter include Samsung Heavy Industries. This is because the three major domestic shipbuilding companies, HD Korea Shipbuilding & Marine Engineering, Samsung Heavy Industries, and Hanwha Ocean, are expected to achieve surpluses in the first quarter. It is the first time in 13 years since 2011 that they have made a surplus together. Now, it is expected that the long-term recession will emerge and the low price competition will stop, focusing on eco-friendly, high value-added ships.

Among the three companies, the ‘first pick’ of foreigners this month was Samsung Heavy Industries. The net purchase amount of Samsung Heavy Industries by foreigners is 84.1 billion won. During the same period, foreigners were net selling HD Korea Shipbuilding & Marine Engineering and Hanwha Ocean. The reason why foreigners sent love calls to Samsung Heavy Industries this month is because of its performance and profitability. Samsung Heavy Industries’ operating profit in the first quarter is estimated at KRW 84.4 billion, a rapid increase of more than four times from KRW 19.6 billion in the same period last year.

High margins compared to other shipbuilders also increase Samsung Heavy Industries’ investment appeal. Samsung Heavy Industries’ operating profit ratio was 2.91% in 2023, but this year’s forecast is 4.35%. HD Korea Shipbuilding & Marine Engineering and Hanwha Ocean’s expected operating profit ratios for this year are only 3.79% and 2.69%, respectively. Samsung Heavy Industries’ high margins are also the result of its aggressive ship sales. A representative example is the signing of a joint construction contract for 22 liquefied natural gas (LNG) carriers with Russia’s Zvezda Shipyard in 2021. The down payment alone amounts to 7.5 trillion won, which is comparable to Samsung Heavy Industries’ annual sales (8.094 trillion won in 2023). A securities company official pointed out, “As the United States sanctions Russia for starting a war against Ukraine, the Samsung Heavy Industries contract may be questioned.”

[문일호 기자]