KOSPI Falls More Than 3% on AI Profitability Concerns, Focus Turns to Memory and Corporate Governance

KOSPI and KOSDAQ Fall More Than 3% as Foreign Investors Sell The KOSPI fell more than 3% intraday, sliding to the 5,658 level, while the KOSDAQ dropped about 3.1% below 710. Losses widened late in the session, with the KOSPI down 3.6% near 5,646 and the KOSDAQ down 3.7% near 707. A global pullback in AI investment sentiment and weakness in semiconductor stocks weighed on the domestic market. Foreign investors sold net shares worth more than 900 billion won on the Korea Exchange and more than 100 billion won on the KOSDAQ, while also selling nearly 600 billion won in the futures market. Institutions, which had supported the market in the previous session, also turned to selling; financial investment firms and pension funds joined the selling late in the day. Foreign net selling expanded to the trillion-won range intraday. The won-dollar exchange rate fell about 7 won from the previous session to around 1,337 won. Reports that currency conversions related to Nvidia’s strategic investment in Naver had entered the Seoul foreign-exchange market were cited as a factor behind the won’s rise. The market struggled to find direction as concerns about AI investment coincided with uncertainty over interest rates, global oil prices and geopolitics. Oracle and Meta Face Scrutiny as AI Funding Needs Grow Oracle said it plans to raise $10 billion through a common stock offering and another $10 billion through a bond sale. The company said investment was needed to fulfill contracts it had already won, but the prospect of rising debt through bond issuance and equity financing heightened concerns over the cost of AI data-center investment. Not long after saying it would limit additional fundraising through 2030, Oracle announced another plan to raise $20 billion. Although not all of the amount would be debt, the market questioned whether the company was backing away from its commitments to investors. Meta was also pursuing a $20 billion bond sale, while other funding announcements from big tech companies, including Alphabet, followed. A revised filing related to Anthropic’s planned listing showed third-quarter revenue 3.4% below its previous disclosure, while its operating margin was revised down from 19% to 15%. Computing commitments rose from $855 billion to $895 billion, and computing costs as a share of revenue increased from 48% to 58%. The filing also put cash and short-term investments at $131.8 billion, indicating that the company was not immediately running out of capacity to invest. Palantir Grows Enterprise Revenue, While Apple Faces Higher Memory Costs Palantir reported revenue of more than $2.3 billion, beating market expectations, while earnings per share and adjusted operating income also exceeded forecasts. Its adjusted operating margin was 62%, and its Rule of 40 metric, which combines revenue growth and profit margin, came in at 158%. Free cash flow was positive, and the company raised its guidance for both the fourth quarter and the full year. Particular attention focused on U.S. commercial revenue surpassing government revenue for the first time. This signaled that Palantir’s revenue base, previously concentrated in government and military-related business, was expanding into the private sector. Analysts said the company’s work applying AI to the operations and production processes of individual businesses, and improving efficiency as a result, was translating into actual revenue growth. Apple beat expectations with revenue of $114.5 billion and earnings per share of $2.10, though analysts noted that the results included the benefit of tariff refunds. iPhone revenue was better than expected, but services, iPads and wearables were weak, while revenue in China also fell short of expectations. Gross margin was about 48%, but the company’s forecast for the next quarter was below market expectations. Apple said rising memory costs were the main reason for the expected decline in margins. Apple said it would work with key suppliers to ensure stable supply but did not specifically mention long-term supply agreements. The company is also considering product price increases in response to the need to secure memory and rising prices. Apple said it would pursue both on-device AI and private cloud approaches and consider additional computing resources, but did not provide investment figures or a clear business plan. Marvell-Lumentum Merger Targets Data-Center Optical Communications Demand Marvell and Lumentum agreed to merge. Under the announced terms, Lumentum shareholders will receive 4.5 Marvell shares for each Lumentum share, and the companies said the combined business could generate more than $1 billion in annual cost synergies. They forecast that earnings per share would increase starting in the first year after the deal closes. Marvell specializes in digital signal processors, a key component of optical transceivers, while Lumentum focuses on laser modules. As optical communications become increasingly important for moving data within and between data centers, the combination of the two companies drew attention as an example of AI infrastructure investment extending toward optical connectivity technology. The deal was described as a major merger and acquisition valued at around 150 trillion won. Lumentum also released its earnings alongside the merger announcement, but its shares plunged. The reaction reflected a market environment in which strong results alone are not enough to lift a stock; investors are also weighing deal terms, investment costs and the potential for future monetization. Memory Seen as a Destination for AI Investment, with Focus on Earnings Durability After reviewing big tech earnings, Nomura maintained its view that AI investment is unlikely to stop. Its analysis said internal rates of return on AI projects are improving and that, given the risk that AI could cannibalize existing businesses, big tech companies will have little choice but to continue capital spending over the coming years. This could lead to increased funding not only from operating cash flow but also from debt and share issuance. Memory semiconductor makers were identified as a destination for this investment capital. Nomura said cash was accumulating rapidly at memory companies, while their shares were trading at low valuations that reflected assumptions that earnings had peaked. Samsung Electronics and SK Hynix were valued at a discount of 85–90% to the average for four major big tech companies. This was interpreted as meaning that current prices already reflected concerns that earnings next year could be nearly halved. Price-to-earnings ratios in the memory sector were cited at around two to three times, while Micron was also mentioned at below six times. By contrast, TSMC was valued in the high teens, which analysts said reflected differences in how long companies had demonstrated the durability of their business cycles. The market is seeking further confirmation of how long earnings and cash flow at memory makers can continue. Uncertainty over whether profits will grow in proportion to big tech’s substantial investment, and when free-cash-flow deficits will narrow, has contributed to share-price volatility despite continued spending. Operating cash flow and free cash flow at major big tech companies deteriorated as investment expanded. Views also differed on when AI investment would translate into actual returns, with Goldman Sachs citing 2028 as the point when cash flow would improve. Oil Prices Fall on Hopes for U.S.-Iran Talks International oil prices fell as much as 7% at one point amid continued hopes for talks between the United States and Iran. West Texas Intermediate (WTI) dropped below $100 a barrel and traded around $96 during the broadcast. Lower oil prices could help limit losses in the stock market, but prices moved around flat despite news related to negotiations, indicating a limited market response. War, negotiations and changes in interest rates were all cited as factors increasing market volatility. Hopes for Relief from Uncertainty Ahead of U.S. Midterms Coexist with Policy Risks Voting in the U.S. midterm elections begins on the evening of the 3rd local time. The earliest exit polls can be seen from the morning of the 4th in Korea. Under JPMorgan’s scenarios, the probability of a Democratic sweep of both chambers, or a blue wave, was about 66%, while the probability of a divided Congress in which Democrats take only the House was about 26%. A Republican hold on both chambers was put at about 7%. Markets were focused not only on the election outcome itself but also on the potential relief from the disappearance of uncertainty. The S&P 500 has often risen after past midterm elections, and a tendency for markets to rise for more than three months after an election was also noted. One analysis found that returns were twice as high when the two parties split control of Congress as when one party controlled both chambers. If Republicans retain the Senate, an environment more favorable to data centers and the AI industry than one under Democratic control could persist. However, higher defense spending, the Iran issue, the fiscal deficit and Treasury issuance could add to interest-rate pressures. If Democrats gain more power to check the administration through Congress, support for clean energy and electric vehicles could strengthen, while budget disputes and the risk of a federal government shutdown could also emerge. The KOSPI has also often risen after past U.S. midterm elections, though one interpretation is that such gains may reflect a recovery from pre-election declines once uncertainty subsides. JPMorgan Probabilities by U.S. Midterm Election Scenario — The probability of Democrats controlling both the House and Senate is highest at about 66%, followed by Democratic control of the House at about 26% and Republicans retaining both chambers at about 7%. 151 Low-PBR Companies Disclosed; Improvement Plans and Implementation in Focus The Korea Exchange disclosed companies in the bottom 25% of their KOSPI industry groups by price-to-book ratio (PBR) over the past three years, as well as companies in the bottom 10% of the KOSDAQ. After screening the lower-ranked companies among approximately 779 KOSPI-listed firms and excluding those that had submitted improvement plans, among others, the exchange named 151 companies: 96 on the KOSPI and 55 on the KOSDAQ. The companies’ average PBR was approximately 0.24 times. PBR compares a company’s market capitalization with its net assets. Net assets are calculated by subtracting liabilities from assets, so a low PBR means the market assigns a low value to a company’s net assets. The companies may be identified as low-PBR firms on HTS and MTS platforms, with the disclosure intended to encourage voluntary improvements. Financial authorities plan to require companies to submit improvement plans and monitor whether they are implemented. Measures to press companies to change through the stewardship code and the exercise of shareholder rights by pension funds were also raised. The challenge is to continue reviewing disclosures and board decisions, as in cases of undervalued companies in Japan, and assess at the end of next year whether the number of disclosed companies has actually fallen. Number of Companies Subject to Low-PBR Disclosure — The disclosure applies to 96 KOSPI companies and 55 KOSDAQ companies, with more on the KOSPI. Low-Valuation Disclosure Must Not End as Public Shaming A PBR of around 0.2 times means that the market recognizes only a fraction of the net assets a company holds. In a country with a properly functioning stock market, this is a figure that should be considered humiliating, and investors should examine why the gap exists. The first step is to change the attitude that treats undervaluation as a long-standing norm. Governance and inheritance issues were cited as factors behind companies’ preference for low share prices or indifference to share-price gains. Examples included controlling shareholders who are uncomfortable with share-price increases because of inheritance tax burdens, and companies that view assets such as real estate as being held for business purposes and unrelated to their market valuation. But listed companies must be accountable for the investment value of ordinary shareholders, not the circumstances of controlling shareholders. Disclosing low-PBR companies alone will not complete the process of change. If authorities only strengthen reporting requirements and penalties, companies may not act. Incentives such as tax benefits for companies that make progress are needed alongside measures to hold accountable those that do not. Shareholders in the disclosed companies should also determine why the value of their investments is being rated so poorly and demand change. Hanjin KAL Control Battle Rekindled as Cho Won-tae and Hoban Close Ownership Gap Hanjin KAL shares hit the daily upper limit, and its market capitalization surpassed that of Korean Air. The stake held by Chairman Cho Won-tae’s side stood at 20.57%, compared with 20.15% for Hoban Group, narrowing the gap. The contest for control returned to the spotlight after Hoban Group applied to the Fair Trade Commission for a business-combination review following a change in the largest shareholder. Chairman Cho Won-tae disclosed plans to spend about 37 billion won to acquire an additional 0.49% stake in Hanjin KAL. The purchase is expected to be carried out through a block deal and was interpreted as a move to maintain his position as the largest shareholder in response to Hoban Group’s growing stake. Hoban has steadily increased its Hanjin KAL holdings since 2022 by acquiring related funds and shares held by Pan Ocean, among other assets. Neither side has a majority stake, leaving the positions of the National Pension Service, Korea Development Bank and Delta Air Lines as variables. Delta has been considered a friendly shareholder for Cho because of its partnership with Korean Air, while Hoban has also been cited as a possible buyer if Korea Development Bank sells its stake in the future. The latest share purchase is closer to an initial move to defend the position of largest shareholder than a resolution of the control battle. Hanjin KAL Major Shareholders’ Stakes — Chairman Cho Won-tae’s side holds 20.57%, more than Hoban Group’s 20.15%, though the gap between the two is narrow. [Kwangsoo's Take] Build Shareholder Trust, Not Just Control The Hanjin KAL case highlights the vulnerability of Korea’s chaebol structure, in which large business groups can be controlled with relatively small stakes. Even when an owner asserts control, a low ownership percentage can leave that control vulnerable to share purchases by outside investors. Building a stable stake must go hand in hand with earning shareholder trust over the long term. Rather than scrambling for friendly shareholders in a crisis, controlling shareholders should broaden their support base through business performance and shareholder-return policies in normal times. They could also consider governance reforms such as mergers or treasury-share cancellations, but first they must reward shareholders through dividends and improvements in corporate value. If a company is well managed and respects its shareholders, they may voluntarily become allies in a control dispute. Hoban Group has also faced criticism that it should use capital accumulated through its real estate business for industrial investment and job creation rather than a contest for shares. The underlying concern is that corporate funds should be used to raise productivity and create jobs. The Hanjin KAL control dispute could become a test case not only for an individual company but also for the direction of change in corporate governance and capital markets in Korea.