The latest results of Korean chipmaker SK Hynix ( (HXSCL) and KR:000660) indicate the tech sector is in for a tough winter and an even tougher 2023 as the company here on Wednesday reported a sharp downturn in its third-quarter earnings, causing it to slash its capital expenditure plans.
Seoul-based Hynix said it would cut its investment spending in 2023 by more than 50% compared with this year, in particular reducing production volume of lower-margin products.
Hynix said the semiconductor industry "is facing an unprecedented deterioration in market conditions" as uncertainties in the business environment continue. Smartphone and personal computer makers, some of the company's chief customers, are seeing declining sales, it said.
Hynix is the world's second-largest memory chipmaker, behind Samsung Electronics (KR:005930). Although Samsung accounts for a hefty 20% or so of the Korean benchmark stock index, the Kospi, Hynix itself contributes around 4%. The companies tend to move in tandem and drive the Korean market.
Hynix specializes in DRAM chips, making up 64% of sales, and NAND chips, at 31% of sales. Those are the products where it will cut back on capacity in lower-margin lines. It will invest in the chips that it considers the drivers of future demand, such as thinner, higher-density DDR5 and LPDDR5 ranges of DRAM chips, and High Bandwidth Memory 3, or HBM3, chips.
Hynix said its third-quarter revenue fell 7% year over year while net profit plunged 67%. Its operating margin shrank to 15%, down from 30% in the previous quarter and 35% this time last year.
Supply exceeds sluggish demand
That reduction in margin reflects the woes of the electronics sector. Hynix's DRAM chips are used for circuits first and foremost in computer servers, as well as in mobile phones, personal computers, graphics cards and smart products for the home.
The NAND chips are used for flash memory, in mobile devices as well as Solid State Drives, or SSDs, and USB flash sticks and other memory cards. Hynix predicts "that supply will continue to exceed demand for the time being."
Hynix saw both sales volume and prices fall in the third quarter due to sluggish demand for DRAM and NAND products. The worsening macroeconomic picture worldwide is largely to blame.
A glut of supply led to a price decline in the third quarter of around 20% for DRAM chips and more than 20% for NAND chips, Hynix said. Shipments of personal computers will likely be down in the "mid-teens" in percentage terms in 2022, the company forecasts, with further correction next year. Smartphone shipments are down in the high single digits in percentage terms this year, although there's solid demand for higher-end and flagship models.
Hynix is upbeat about prospects for memory chips that go into data center servers. "Hyperscale" data centers are boosting investment to serve functions such as Big Data, Artificial Intelligence and the metaverse.
Hynix shares rose 0.4% on Wednesday, a slight underperformance of the Kospi's 0.6% gain. Tech shares in Asia benefited today from the follow-through from Nasdaq's 2.3% advance the day before.
Samsung saw a more wholehearted participation in that rally. Its shares climbed 3.0% on Wednesday. It is scheduled to release its third-quarter earnings on Thursday.
Both Hynix, down 26.9% so far in 2022, and Samsung, down 24.4%, have been strong indicators of overall tech performance because the companies supply so many consumer and industrial electronics. Though down, they actually have fared slightly better than the 29.3% decline for the Nasdaq Composite Index so far this year.
The two companies set all-time share highs in early 2021, when they were benefiting from the strong electronics sales stemming from the earlier stages of the pandemic. After slumping this time last year, the stocks saw a resurgence again at the turn of the year, when the companies benefit from holiday spending. Since January, every rally has been undone by another selloff, with both companies setting a 2022 low in late September.
Nomura noted in a report last week that there's plenty of discussion of a bottom forming in tech hardware shares in Asia. "However, the 'bottom' is one thing, a sustained recovery in stocks is another," a team led by equity strategist Chetan Seth said.
No recovery is likely while the U.S. economy appears heading for recession, the Nomura team concluded. Stocks typically bottom during a recession, not before, their analysis of the last 12 U.S. recessions show. With the Fed likely to hike rates through at least March 2023, a mild but long recession may end in the fourth quarter of 2023, they conclude.
Chip stocks tend to run ahead of a bottom in the chip cycle and any increase in sales growth. Asian tech stocks could run ahead of their U.S. counterparts, they predict.