Exports soar, domestic demand holds — but exchange-rate risk looms for midsize firms in H2

First-half earnings among South Korea's midsize companies diverged sharply depending on overseas performance and margin improvement. Export-oriented firms targeting the popular cosmetics industry and North American markets expanded both revenue and profit, while paper and household-goods makers improved their product mix and cost structures to lift margins. Furniture companies exposed to construction and domestic demand managed to protect profits through cost cuts even as sales fell.

The biggest concern heading into the second half is the exchange rate. Companies that benefited from a high won-dollar rate in the first half now face the prospect of eroding price competitiveness as the won strengthens. The won-dollar rate, which had surpassed 1,555 won per dollar, has since fallen sharply to the low 1,400s. "We built our business plan around 1,400 won to the dollar, so there is still some room," one industry official said. "The bigger problem is the uncertainty — the sharp swings up and down."

The standout performer in the first half was the export sector. Kolmar Korea posted consolidated sales of 1.59 trillion won ($1.12 billion) and operating profit of 189.2 billion won for the first half, up 14.8 percent and 41.8 percent, respectively, from the same period last year. In the second quarter alone, sales reached 861.3 billion won and operating profit hit 110.3 billion won — both quarterly records for the company. The results were driven by growing overseas sales of domestic indie brands and a surge in orders for sun-care products.

Cosmax also posted record figures, with first-half sales of 1.48 trillion won and operating profit of 126.8 billion won, up 21.8 percent and 13.0 percent year-on-year, respectively. Second-quarter sales of 794.9 billion won and operating profit of 73.7 billion won were both quarterly highs. Growth came not only from South Korea but also from subsidiaries in China, the United States and Southeast Asia. Notably, Cosmax's US unit turned a profit for the first time in the second quarter of this year.

Kyung Dong Navien also drew support from global sales, particularly in North America. Second-quarter sales dipped 1.0 percent year-on-year to 388.2 billion won, but operating profit jumped 64.6 percent to 84.2 billion won, aided by strong North American demand and tariff refunds that boosted profitability.

Some companies improved their results through margin gains rather than export expansion. Hansol Paper posted second-quarter consolidated sales of 592.7 billion won and operating profit of 50.8 billion won. Sales grew just 4.9 percent, but operating profit surged 162.8 percent, driven by higher sales of food-packaging materials, rising prices for thermal paper and tariff refunds.

KleanNara returned to profit in the second quarter, with sales rising 10.3 percent to 136.3 billion won and operating profit of 600 million won, recovering from an operating loss of around 6.2 billion won in the same period last year. For the first half as a whole, the company recorded an operating loss of 3.4 billion won, but the deficit narrowed by 6.7 billion won from the year-earlier period as manufacturing cost reductions and operational efficiencies fed through to the bottom line.

Furniture makers heavily exposed to domestic demand and the construction cycle held on through cost discipline rather than revenue growth. Hanssem's second-quarter sales fell 9.2 percent year-on-year to 417.2 billion won, but operating profit surged 400.2 percent to 11.3 billion won. Hyundai Livart Furniture also saw sales decline 9.0 percent to 373.1 billion won, while operating profit edged up 9.4 percent to 5.6 billion won. Both companies continued to suffer from weaker business-to-business sales amid a sluggish housing market but offset the impact by cutting selling, general and administrative expenses and operating costs.

Export growth, a high exchange rate and cost efficiency underpinned midsize companies' performance in the first half, but the exchange rate has emerged as a new variable for the second half. The won-dollar rate climbed to 1,555.8 won on July 2 before falling to 1,409.5 won on Aug. 8 — a drop of more than 10 percent in roughly a month.

Companies with a high share of overseas revenue are particularly vulnerable: continued won appreciation would weigh on won-denominated sales and profitability. Many firms drew up their annual business plans using a benchmark rate of 1,400 won to the dollar. A rate around 1,500 won is seen as favorable for earnings, but a move below 1,400 won could significantly increase the burden.

An official at a midsize company where exports account for more than 70 percent of total sales said the firm had also based its business plan on a rate of 1,400 won to the dollar. "We start with a conservative assumption," the official said. "Recently the rate has fallen to the low 1,400s, and there are concerns about price competitiveness in the second half. The sharp swings in the exchange rate are what worry us most going into the second half."

A survey by the Korea Middle Market Enterprise Federation bears out that concern. While 56.0 percent of respondents expected their second-half exports to increase from the same period last year, the average projected growth rate was just 0.5 percent. Economic recovery in key export markets was cited as the top driver of export improvement at 43.6 percent, while exchange-rate volatility topped the list of constraints at 47.3 percent.