The chips may be turning - TechCentral

The chips may be turning

Investors have grown increasingly bullish on Samsung Electronics ahead of its Tuesday results report, betting that the global memory-chip cycle is near a bottom.

The company’s shares have rallied 24% this year, overcoming three straight quarters of disappointing earnings and delayed shareholder return improvement on hopes for an end to the years-long semiconductor downcycle. That’s left some punters questioning how much upside can be left amid concerns including the US-China trade war and South Korea’s spat with Japan.

“The stock may face a short-term correction after the earnings announcement, as the expectation of a rebound in earnings has already been priced in,” said Heo Pil-Seok, CEO at Midas International Asset Management. “Still, from a medium-term perspective, we have confirmed that the semiconductor industry has reached a bottom.”

Shares of Samsung fluctuated on Monday, ahead of the company’s preliminary third quarter results on Tuesday. Analysts estimate it will post operating income of 6.9-trillion won, compared to the record 17-trillion won it reported a year earlier.

While most of the disappointment has been due to declining prices for memory chips, which account for nearly 80% of the company’s operating income, there have been some signs of improvement recently. Spot prices for 4GB DRAM chips fell 0.8% in the third quarter, less than than the 24% drop in the previous quarter.

“The situation in the global memory-chip industry seems to be good, and I guess the third quarter earnings will be slightly better than the current market consensus,” said Lee Jin-Ho, a fund manager at Eugene Asset Management in Seoul.

Optimistic

Analysts were similarly optimistic on signs of a chip cycle bottom after a weak forecast last week from US peer Micron Technology. The third-biggest player in the global memory-chip industry — after Samsung and its Korean compatriot SK Hynix — said it’s vulnerable to the US-China trade war and that recent improvements in orders may not be driven by sustainable demand.

The T Rowe Price Science & Technology Fund boosted its holdings of Samsung and Micron in June. Ken Allen, who manages the US$6-billion fund, which has beaten 95% of its peers in 2019 and over the last five years, said he saw an opportunity.

“Our focus is less so on trying to predict short-term movements in memory prices and more so on evaluating the longer-term merits of the companies and industry relative to the stocks’ valuations,” Allen said. “We believe great investment returns can often come from buying when others are wary — for cyclical, secular — or other reasons.”

In addition to global concerns, the Korean makers face a homegrown threat in their government’s feud with Japan, which has placed restrictions on exports of key materials used in chip production. Some observers such as Won Ju-young, a fund manager at Shinyoung Asset Management, see this as more of an opportunity for Korean suppliers to Samsung and Hynix than a threat to the local industry. Still, the overall outlook for the industry is less than clear.

“I know the demand for chips will be good, from servers, 5G technology and artificial intelligence,” Won said. “But if global growth remains stagnant and the trade war remains, the recovery could be delayed for longer than expected.”  — Reported by Heejin Kim, with assistance from Sohee Kim, (c) 2019 Bloomberg LP

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