Tensions on the Korean Peninsula have escalated once again after Pyongyang said it successfully tested a hydrogen bomb, its most powerful nuclear bomb, which could be mounted on a ballistic missile that can reach the US.
It was Pyongyang’s first nuclear test since Donald Trump took office in January. And it is likely to further raise pressure on the US to act more forcefully.
North Korea’s nuclear threat is still bubbling, causing South Korea’s benchmark Kospi index to close 1.2 percent lower on Monday. There have been plenty of headwinds for Korean stocks and the country’s tech giant Samsung Electronics, with the group’s heir Jay Y. Lee’s conviction on bribery charges.
Samsung without Lee
Samsung has been down about 10 percent from its record high and the stock price remains at around 2.3 million won (US$2,032).
Lee was sentenced to a five-year jail term. But as he admitted publicly that he had not been heavily involved in the group’s business, I believe there is no need for investors to overreact to his absence. Operating independently of the Lee family, Samsung can run on its own thanks to its deep ranks of professional managers.
Instead of the bribery scandal, the recent pullback in Samsung’s stock price should be attributed to the negative outlook from investors worrying the memory chip growth cycle has peaked. The country’s second biggest manufacturer of memory chips, SK Hynix, has also dropped 15 percent from its recent high.
In my opinion, this “super cycle” in memory chips looks like it has further to run. I have hopes on the country’s two memory chip manufacturers, Samsung Electronics and SK Hynix.
Super cycle in memory chips
New technology areas such as Artificial intelligence (AI), Internet of Things (IoT) and cloud computing have led to a huge surge in demand for dynamic random-access memory (DRAM) chips and NAND flash memory chips used for processors in servers, PCs, and mobile devices, delivering a super cycle for the semiconductor industry.
Demand for server DRAM chips is growing, along with the multifold increase in new servers established by internet giants worldwide. Both Google and Amazon have added one million servers in their data center each year, with Microsoft adding 600,000 and 300,000 for Facebook. Also, there is huge demand from China’s BAT (Baidu, Alibaba and Tencent) as well.
By far, demand in the server market constitutes 20 percent of the total DRAM demand. The market size of DRAM would likely increase by about 20 percent next year, while that of NAND will grow over 40 percent.
Moreover, demand would be further driven by Apple’s upcoming anniversary edition iPhone 8. The device is said to be available in NAND 64GB and 256GB storage capacities with 3GB DRAM. It would be a critical source of demand for the DRAM and NAND market.
While the Korean Peninsula’s tensions would undoubtedly influence the share prices of Samsung and SK Hynix, investors are waiting for the coming adjustment of the average selling price (ASP) of DRAM and NAND chips, which is expected to take place next year.
According to market consensus forecasts, the ASP of DRAM chips is projected to drop by 10 to 15 percent. But with Moore’s Law in improvements in price/performance slowing pace, I expect the price drop would be within 5 to 10 percent. For NAND chips, Samsung would likely take the lead in the wave of price reduction next year, possibly with a 20 percent price cut.
Generally speaking, given the market projection of profit growth, Samsung Electronics and SK Hynix are by far trading at a forward PE ratio barely eight times and five times, respectively. Both stocks are apparent bargains as they both have the potential to increase by 30 to 50 percent.
Safe bet in DRAM industry
Among the leading manufacturers in the DRAM market, US-based Micron Technology is the only one outside South Korea. The company accounts for 20 percent of the market worldwide.
Headquartered in Boise, Idaho, Micron would be regarded as a safe-haven asset amid the North Korean nuclear worries. If tensions continue to escalate, Micron’s share price coud rally, along with a surge in DRAM and NAND prices.
Micron’s stock has experienced a 15 percent correction in past two months. It surged on Friday, topping at a year-to-date high of US$32.60. It seems to me that the stock has already attracted investors looking for a safe bet.
This article appeared in the Hong Kong Economic Journal on Sept. 5.
Translation by Ben Ng
[Chinese version 中文版]
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