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  1. Home
  2. / Investing
  3. / Global Equity

Asian Chipmaker Shares Rally as Sector Appears to Bottom

With share prices having corrected sharply, companies such as TSMC and Samsung are now refusing to move lower, and even showing signs of a rebound.
By ALEX FREW MCMILLAN
Jul 13, 2022 | 09:15 AM EDT
Stocks quotes in this article: TSM, HXSCL, MDTKF, MU, AMD, AAPL

Chipmaker share prices continue to rally in Asia, as earnings season suggests the brief lull in the sector may be rectifying. The correction of overstocking in memory chips may give manufacturers better control over prices, while the pessimism over consumer-electronics sales appears overdone.

The world's largest chip foundry, Taiwan Semiconductor Manufacturing Corp. (TSM) and TW:2330, moved ahead 4.7% in Taipei trade on Wednesday ahead of earnings for the company on Thursday. That leaves it looking at an 8.0% advance in the last week.

TSMC, the largest contract chipmaker globally, is by far the biggest company listed in Taipei. Its move was enough to drive the entire market higher, with the benchmark Taiex index up 2.7% on Wednesday. The Taiex has now twice tested its bottom in July, and found support each time, suggesting its 21.6% year-to-date slide may have stopped.

Investors have been buying on the rumor ahead of earnings, predicting a strong showing after a decent quarter for Samsung Electronics KR:005930. Although Samsung shares fell 0.2% in Seoul on Wednesday, they are up 3.8% so far this month.

Samsung's share price movement also suggest a bottom to the sector. The company's stock has tested and retested lows on July 1 and 6. Samsung shares are down 26.2% so far this year but show no inclination to continue that bad form.

Likewise, TSMC is off 25.4% in 2022. Besides Samsung, its main Korean rival SK Hynix (HXSCL) and KR:000660 is also worth watching. In Taiwan, MediaTek (MDTKF) and TW:2454 also offers exposure to the fabless semiconductor sector, making chips for smart devices, smartphones and navigation systems.

Hynix shares are up 7.4% so far this month, having apparently struck a bottom on July 1. They're still down 26.9% in 2022, so there's plenty of rebound upside to capture if they have indeed changed momentum.

MediaTek shares rose 3.3% on Wednesday in sympathy with TSMC. They are down 44.9% so far this year and look particularly well-poised for a rebound.

Samsung Electronics on July 7 posted its best June quarter since 2018, with memory-chip sales to server providers strong even if smartphone sales have cooled. Samsung shares bounced 3.2% on that day.

Not everyone is convinced that the turnaround is complete. Nomura noted that Samsung missed its operating-profit forecast of 15 trillion Korean won, coming in at 14 trillion won, albeit up 11% from the same time last year. Analysts had forecast operating profit of 14.45 trillion won, according to Refinitiv. Revenue rose 21% to 77 trillion won, in line with estimates.

Although a strong U.S. dollar is helping Samsung with its U.S. sales, as it translates the bulk of them back into Korean won, its costs are rising, eating into the operating income. Consumers are also seeing their purchasing power weakened by inflation, so consumer tech and home appliance sales are declining.

The saving grace, Nomura notes, is that Samsung is already trading at "trough valuation." Macro uncertainties may still create turbulence for the company, but there may come a positive catalyst if memory sales look strong, and companies such as Samsung are able to protect memory prices through preemptive adjustments in their capex spending.

Memory-chip prices have been flagging due to slowing consumer demand. At the same time, supply of certain kinds of chips is very tight.

Samsung shares ended Korean trading today at 58,000 won. Nomura reckons a sum-of-the-parts calculation shows they're worth 84,000 won, a potential 44.8% upside.

That's crazy for a company as large and established as Samsung. The prime U.S. chipmakers caught in the same memory-chip price downcycle are Micron Technology (MU) and Advanced Micro Devices (AMD) , who have generally fared far worse than their Asian brethren this year. Micron shares are down 38.2% in 2022, with AMD down 49.2%.

Micron sent the sector south on July 1 after it forecast far-worse sales in the current quarter. The company said the market had "weakened considerably in a very short period of time."

The U.S. chipmakers have indicated flagging demand as inflation bites. With those factors baked in, the next move for the shares may come as they control supply, build inventory, and raise shipments and prices as demand recovers heading into 2023.

DRAM prices used for devices and servers are likely to fall close to 10% in Q3, according to figures from market tracker TrendForce. Since server demand has stayed strong, DRAM manufacturers had previously resisted price cuts but are now indicating they intend to cut prices to relieve inventory pressure, TrendForce states.

Smartphone sales are currently particularly depressed. Mobile DRAM chip prices will likely fall between 8% and 13% in the September quarter, the data provider predicts, with smartphone makers pessimistic about sales and unlikely to stock up on materials.

There's currently oversupply of the NAND flash chips used for data storage. NAND flash-chip prices will therefore fall 0% to 5% in the September quarter, TrendForce predicts.

It's not all bleak news in consumer electronics, however. Foxconn TW:2317 on July 5 raised its full-year forecast thanks to strong smartphone and server sales, saying it was still seeing solid demand in the face of inflation.

Foxconn shares rose 2.0% in Taiwan, and are bouncing around the bottom of their price range. They have fallen 11.3% since early June but remain essentially unchanged in 2022, down 0.5% year-to-date.

Foxconn has battled with chip shortages that restricted its output for clients such as Apple (AAPL) . But supply-chain management has improved and is sustaining a steadier flow of components. It said sales for June leapt 31% from the same time last year, leading it to predict "significant growth" for Q3. It had previously anticipated zero growth for this year but now believes the situation is improving.

(AMD and AAPL are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

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At the time of publication, Alex Frew McMillan had no position in the securities mentioned.

TAGS: Investing | Markets | Stocks | Trading | Semiconductors & Semiconductor Equipment | Technology | Global Equity

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