When Would Korea's Bull Market Exit?

Hana Securities Says the Bull Market Exit Signal Would Be When SK hynix Overtakes Samsung Electronics in Market Cap

Samsung Electronics and SK hynix account for a staggering share of nearly 72 percent of the total projected KOSPI net profit based on estimated earnings over the next 12 months.

As the KOSPI continues its upward rally and optimism spreads across the financial industry, a new analysis is drawing attention by suggesting that the key signal marking the end of the current bull market would be the point at which SK hynix surpasses Samsung Electronics in market capitalization.

The report argues that a reversal in market capitalization rankings driven solely by surging share prices without a corresponding reversal in earnings performance is a classic sign of overheating similar to the pattern that preceded the collapse of the technology bubble in 2000.

Hana Securities disclosed the analysis in a report released on May 19 examining the potential risk factors behind the KOSPI bull market.

Lee Jae-man, an analyst at Hana Securities, identified “the moment when SK hynix’s market capitalization surpasses Samsung Electronics” as the signal that the current earnings-driven rally has reached its limit. He argued that if the top market capitalization ranking changes solely because of stock price overheating without a reversal in the scale of actual earnings, it would represent the peak of a bubble and a precursor to collapse.

He cited historical precedent from the collapse of the information technology bubble in 2000 as evidence.

At the end of March 2000 in the U.S. stock market, Cisco Systems became the largest company in the S&P 500 by market capitalization after reaching $551.6 billion in market value and surpassing Microsoft and General Electric.

However, Cisco’s annual net profit at the time stood at just $2.7 billion, equivalent to only 20 percent of General Electric’s earnings and 28 percent of Microsoft’s. Shortly after the company became No. 1 solely because of stock price overheating despite the gap in the scale of earnings, the Nasdaq Composite entered a prolonged downward trend and the technology bubble collapsed.

Current estimates still show Samsung Electronics ahead of SK hynix in net profit scale, with projected 2026 earnings of 280 trillion won (approximately $186.27 billion), compared with 208 trillion won for SK hynix. However, the report advises investors to prepare for the end of the market rally if the market capitalization rankings reverse solely because of a sharp rise in stock prices without meaningful changes in the companies’ earnings fundamentals.

Nevertheless, Lee assessed the current concentration in market capitalization as a justified phase based on fundamentals. At present, the combined share of Samsung Electronics and SK hynix in total KOSPI market capitalization has surged to 48 percent.

Contrary to market concerns, the two companies account for a staggering share of nearly 72 percent of the total projected KOSPI net profit based on estimated earnings over the next 12 months.

The report explained that because their contribution to profit generation is far greater than their share of market capitalization, the current concentration of liquidity in the two stocks remains rational.

SK hynix, which now accounts for 22 percent of total KOSPI market capitalization, has already surpassed the previous record held by SK Telecom, whose market capitalization weight reached 13 percent in May 2000 as the second-largest company in the market. SK hynix has now narrowed the gap to about 85 percent of Samsung Electronics’ market value. The report noted that Samsung Electronics still maintains stronger earnings power, supporting the continuation of the bull market, but added that the appropriate time for risk management would come if capital expenditure growth among U.S. technology companies falls below the pace of oil price increases or if the market capitalization rankings between the two companies reverse.

Meanwhile, Lee’s report assessed that the earnings strength of South Korean companies remains robust enough for the KOSPI to reach 10,000 points over the medium to long term. The report argued that corporate earnings, rather than liquidity, are the key variable determining the direction of the current market rally.

This year's estimated KOSPI net income is projected to increase to 689 trillion won, and next year's estimated net income is expected to grow to 853 trillion won. Applying the KOSPI’s average price-to-earnings ratio of 9.96 times since 2010 would imply a market capitalization of 8,499 trillion won once the market begins pricing in next year’s projected earnings in advance. Converted into index terms, the calculation suggests the KOSPI could theoretically reach 10,380 points even without valuation rerating.

Yoon Young-sil