KOSPI earnings at a glance:Unexciting 2Q15 earnings ahead

Event.

The 2Q15 earnings season has begun with Samsung Electronics’ preliminaryresults released on 7 July, which came lower than expected. Based on thelatest consensus changes, we expect KOSPI 100 companies’ 2Q15 earningsto be weaker than expected.

Impact.

Lower earnings expectations for 2Q15E and 2015E.

Consensus estimates for 2Q15 EPS for KOSPI 100 have been loweredby 1.2% over the last 1M. The outbreak of MERS seems to have affected2Q15E earnings revisions since June.

Consensus estimates on 2015E EPS have also decreased by 3.1%,driven largely by deteriorated earnings outlook on export-driven sectors,such as IT, Autos and Industrials amid rising external risks related toChina and Greece.

Biggest downward EPS revisions made to Consumer Discretionary,Information Technology and Industrial sectors.

-8.4% revisions to Consumer Discretionary were largely led by -9%revisions to Autos/Consumer durables.

-7.4% to IT: Most of sub sectors from Semiconductors, Hardwareequipment to Display were significantly lowered on 2Q15 EPS exceptSoftware.

-3.7% revisions to Industrials were driven by significant downwardrevisions to Machinery, Shipbuilding and Transportation.

While downward revisions are predominant, meaningful upwardrevisions were made to Energy (Oil & Gas), Financials and Utilities.

+52.8% revisions to the Energy sector to reflect potential inventory relatedgains and strong GRM amidst heavy maintenance shutdowns.

+11.1% to Financials: All sub sectors (Securities/Insurances/Banks) wereraised on their 2Q15 EPS.

Massive foreign outflow vs domestic institutions’ focus on mid-smallcaps.

Foreign investors’ outflow from the KOSPI reached Won1.9trn over thelast 1M and Won256trn over the last 1 week amidst rising external risksrelated to Greece and China. Energy/Materials/Utilities were the only afew sectors that foreign investors accumulated.

Domestic institutions sold large-cap names (KOSPI100) worth Won1.0trnover the last 1M, and instead loading Won1.0trn worth of mid-to-smallKOSPI names and KOSDAQ companies with better earnings outlook.

Outlook.

We expect the domestic recovery to continue but sluggish exports to remainas a lagging factor. We maintain our overweight position in domestic cyclical,such as consumer, insurance, chemical and domestic property plays.