This article was published on Feb. 14, 2025, at 3:37 p.m. on the ChosunBiz MoneyMove site.
"I bought shares because the company posted an operating profit nearly five times higher than the securities firms' projections, but it turned out to be a one-time profit. Now I understand why it made such a large amount in the fourth quarter of 2024 but reported an annual loss. Everyone else seems to be selling except me."A post by an investor in Hanwha Solutions in a stock community stated,
The stock price of Hanwha Solutions, a petrochemical and solar energy subsidiary of Hanwha Group, fluctuated sharply on the day of its earnings announcement and the following day. It was revealed that the 'earnings surprise,' which significantly exceeded securities firms' estimates for the fourth quarter of last year, was actually due to land sales. Investors who believed the performance was exceptionally strong were forced to sell their shares the next day while in tears.
According to the Korea Exchange on the 14th, Hanwha Solutions announced on the 6th that it achieved an operating profit of 107 billion won for the fourth quarter of last year, the largest in its history. This result was 494.44% higher than securities firms' estimates of about 18 billion won. On that day, the closing price increased by 6.45% and had risen nearly 15% during the trading session. However, the following day, the atmosphere changed. The stock price fell by 6.29% at the closing, giving back the gains.
The drop in stock prices the next day was influenced by the revelation that the operating profit of Hanwha Solutions was not actually an earnings surprise. This was because the sale of the Ulsan residential land, amounting to 96.7 billion won, was reflected as operating profit. Excluding this one-time profit, it would mark an 'earnings shock,' falling short of securities firms' forecasts. Consequently, reports from securities firms indicated that operating profit for the first quarter of this year would be sluggish, leading investors to rush to sell.
Lee Jin-myung, a researcher at Shinhan Investment & Securities, projected that "operating profit for the first quarter will decrease by 88% to 12.6 billion won as one-time profits dissipate," and lowered the target stock price to 26,000 won. Ahn Ju-won, a researcher at DS Investment & Securities, also lowered the target price to 25,000 won, stating, "Although there are still uncertainties in policy, improvements in solar energy performance are expected, and the chemical sector is also likely to continue to post losses." Choi Young-gwang, a researcher at NH Investment & Securities, maintained a 'neutral (Hold)' recommendation, believing that the current stock price already reflects high market expectations.
According to Hanwha Solutions' earnings announcement materials, land sale profits were classified under 'other,' which is related to urban development projects. This section recorded operating losses of ▲358 million won for the fourth quarter of 2023, ▲212 million won for the first quarter of 2024, ▲76 million won for the second quarter, and ▲151 million won for the third quarter. However, in the fourth quarter of last year, it achieved a surplus of 102.8 billion won, with an operating profit margin of 31.9%.
Thus, since Hanwha Solutions is already engaged in urban development projects, classifying land sale profits as operating profit does not violate accounting standards.
A source in the accounting industry said, "Since Hanwha Solutions is already engaged in relevant business, it does not violate accounting regulations, but (considering it is a large corporation) this is undoubtedly a rare accounting treatment." This source also analyzed that, "Due to the poor recent market conditions, there seems to be a possibility of measures for financial restructuring, such as selling additional subsidiary equity."
In fact, the situation for Hanwha Solutions is not good. The company shifted to a loss with an annual operating loss of 300.2 billion won due to simultaneous underperformance in the solar energy and petrochemical sectors, becoming a painful burden for Hanwha Group. Along with declining profitability, its financial condition also worsened. Short-term borrowings have significantly increased, and total liabilities and total borrowings recorded the highest levels ever last year. At the end of last year, its credit rating and outlook also fell to 'AA- (negative).'
The market believes that classifying land sale profits as operating profit positively impacted recent funding procurements. Hanwha Solutions received more than three times the purchase orders of its target amount (150 billion won) in the company bond demand forecasting conducted on the 13th. Despite the burden of a downgrade in credit rating and shifting to a loss last year, the company succeeded in raising its profile thanks to the successful fourth-quarter rebound and favorable investor sentiment towards the group.
A representative from Hanwha Solutions said, "During the earnings announcement conference call, Chief Financial Officer Yoon An-sik noted that reflecting the sale of the Ulsan residential site led to a switch to surplus compared to the previous quarter," and added, "According to the company charter, there is a business purpose related to real estate development, and the development and sale of the Ulsan site is recognized as a core business activity of the Insights sector without any alternative accounting treatment."