Semiconductor Stocks Passing Through a Tunnel, It's Time to Be Courageous

Semiconductor Stocks Plunge Amid PC Demand Slowdown Concerns
Attention Needed on Server and Mobile Demand Changes
Equipment Stocks Expected to Rebound with Expanded Facility Investment and Localization

On the afternoon of the 13th, dealers are working in the dealing room of Hana Bank in Jung-gu, Seoul. On this day, the KOSPI index closed at 3,171.29, down 1.16% (37.09 points) from the previous day. The KOSDAQ also closed at 1,040.78, down 1.26% (13.31 points).
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As concerns grow over PC Original Equipment Manufacturer (OEM) companies reducing their DRAM inventory, DRAM spot prices are falling and industry stock prices are plummeting. However, with server and mobile demand accounting for 71% of total DRAM demand rapidly recovering, and DDR5 mass production focusing from the second quarter of next year, it is expected that DRAM supply and demand will improve again. Given the increased short-term volatility caused by the temporary sharp drop in DRAM spot prices, analysts suggest considering the timing for bargain buying in next year's DRAM outlook.

Concerns Over PC Demand Slowdown Rise... Attention Needed on Server and Mobile

On the 14th, Kiwoom Securities analyzed the current DRAM market as such. Recently, as DRAM orders from PC OEM companies have decreased, purchasing trends in the market have worsened, increasing downward pressure on prices. Samsung Electronics, the largest by market capitalization, saw its closing price drop about 10.6% from 82,900 KRW on the 4th to 74,100 KRW the previous day. During the same period, SK Hynix also fell 16.1%. Intraday on the previous day, it dropped to 98,900 KRW. This is the first time SK Hynix's stock price has fallen to the 90,000 KRW range since December 1 of last year.

Kiwoom Securities researcher Park Yoo-ak stated, "According to Kiwoom Securities' survey, PC OEM companies' DRAM inventory has been maintained at an average of 8 to 10 weeks since last March, and some companies are holding inventory of 10 to 12 weeks. From the perspective of PC set demand, Google Chromebook sales are expected to decrease by 15% in the third quarter of this year compared to the previous quarter, and total laptop sales are also expected to decline by -3% and -10% respectively in the off-season fourth quarter of this year and first quarter of next year compared to the previous quarter." These demand changes are leading to inventory reductions by PC OEM companies, making short-term volatility in the DRAM market inevitable.

However, he emphasized that it should not be overlooked that PC DRAM accounts for only 13% of the total DRAM market. Attention should be paid to the fact that server and mobile demand, which is recovering, accounts for 71%. While PC DRAM inventory reduction may negatively impact the short-term market, it is not enough to change the overall outlook for next year. Kiwoom Securities expects that the recovery of demand in server and mobile sectors and supply reduction due to DDR5 mass production will lead to a recovery in the DRAM market next year, with the timing expected around mid-second quarter.

A Time to Be Courageous... Expectations for Equipment Investment

Recently, the spot price of 8-gigabit (Gb) DDR4 products began to fall below the fixed price. Since 2004, this phenomenon has occurred about 10 times. Most of the time, it led to a decline in fixed prices after some delay, accompanied by stock price drops of Samsung Electronics and SK Hynix. Samsung Electronics, which also operates smartphone and display businesses, experienced about five short-term sharp declines in its stock price, while SK Hynix saw about eight such short-term drops.

The important point now is the outlook for the DRAM market in the second half of next year. Kiwoom Securities expects a recovery trend to begin after the second quarter of next year. Researcher Park said, "For this outlook to be reflected in stock prices, the sharp decline in DRAM spot prices must first come to an end, and demand recovery in servers and smartphones must appear. We expect to see such market changes starting around mid-August."

When DRAM spot prices fell below fixed prices in May last year, expectations for market improvement emerged eight months later, at the beginning of this year, leading SK Hynix's stock price to show strong downside rigidity at a 12-month trailing price-to-book ratio (PBR) of 1.2 times and a 12-month forward PBR of 1 times. Researcher Park explained, "Therefore, SK Hynix's stock price is expected to show downside rigidity around the 98,000 KRW level, which was the book value per share (BPS) in 2022. This should be used as a bargain buying opportunity." However, reflecting changes in PC DRAM price forecasts, Kiwoom Securities slightly lowered the earnings forecasts for Samsung Electronics and SK Hynix and reduced their target stock prices by -7.6% and -11.8% to 97,000 KRW and 150,000 KRW, respectively.

Although the semiconductor equipment sector's decline is not strongly correlated with the drop in DRAM spot prices, it fell sharply due to deteriorating investment sentiment in the sector. However, with Samsung Electronics' Pyeongtaek Plant 3 investment in full swing and expected investments in the US Texas Austin Plant 2 and Pyeongtaek Plant 4 within the year, semiconductor equipment order growth momentum is expected to resume. Researcher Park recommended, "Also, since the localization rate of equipment is expected to increase significantly during these investment periods, we recommend using the recent sharp decline in semiconductor equipment sector stock prices as an opportunity to increase weighting."

This content was produced with the assistance of AI translation services.