Fundamental value of Samsung Electronics (005930.KS) is decreasing with plunging DRAM and NAND.

Short Comment

The market is flowing as market participants were anticipating. Main products of Samsung Electronics (005930.KS) and SK Hynix (000660.KS), DRAM and NAND memory have plunged. Average price of DDR4 8G, a kind of DRAM, is around $3.2 nowadays, according to DRAMexchange. Peak of the price was around $8.19 in last year. Average price of 128Gb MLC, a kind of NAND memory, is now around $4. It was $5.78 at peak of the price cycle.

Brokers are expecting that the deterioration of the semiconductor market would continue for a while. Goldman Sachs published a report. According to the report, demand for the chips will be decreasing for much longer period than before, tangled with trade-war between the US and China. The bottom of the market will be 2Q20, which was 4Q19 in former report. Plunging semiconductor market is deteriorating anticipated performance of the sector. UBS suggested that SK Hynix will record net loss more than $100million during 4Q19.

However, the participants' movement in stock market is different from the fundamental situation, specially for Samsung Electronics. The foreigners have bought ordinary shares and preferred shares, 6million and 2.7million respectively, from June 3 to June 25. Price of ordinary shares of Samsung Electronics has risen by 7.3%. The number is larger than 4.3% of the rate of the rise of KOPSI200. SK Hynix has risen by 2.1% during the same period, but the foreigners have sold 1.8million ordinary shares of it.

Someone is suggesting that the reason of the contrast is business portfolio of Samsung Electronics. The company is covering businesses of mobile phone and telecommunication equipment too, which are main products of Chinese Huawei, main target of the attack from the US.

In fact, the potential gain from the rising businesses cannot offset the potential loss from the semiconductor. The semiconductor business took the share of more than 75% in the company's net income during 2018. On the other hand, scale of Smartphone market, another home ground of Samsung Electronics, is decreasing. Tangled with the decreasing smartphone market, the uncertainty of Chinese rivals in business of Smartphone will be another obstacle for Korean semiconductor players too, because they also are customers of the company's semiconductor products.

The brokers are expecting operating income of Samsung Electronics will be lower than KRW30trillion for this year, less than half of the number for last year. Fundamental advantage of Samsung Electronics is not strong as much as the media is yelling. We need to see the recent rise of the shareprice in point of technical side, the clearing uncertainty of cycle of the industry.