Posted : 2016-01-24 16:13
Updated : 2016-01-24 16:29

Samsung, SK hynix feel the pinch in profit

By Kim Yoo-chul

The world's two biggest memory chip makers ― Samsung and SK hynix ― are adjusting their output, investment and profit forecasts due to weak demand, another sign that increased volatility is hitting the industry.

The two Korean companies have long dominated the memory chip industry. Amid continued troubles in the country's backbone industries ― steel, shipbuilding and cars ― the growing expectations for falling profits, even in chips, will further dampen the national economy's vitality.

"All company numbers are revised down given pricing and cost headwinds this year," Bernstein Research reported to clients last week. "We are now below consensus for most memory stocks."

Mark C. Newman, a senior analyst at the researcher, said it expects all companies except Samsung Electronics will see margins fall this year in the flash memory chip segment, chips that enhance the functionality of digital devices.

"In conventional DRAM chips for use in reading and writing data, we believe the margin gap between Samsung and others will narrow this year," Bernstein said. "But margins for SK hynix may not show as much upside as hoped."

It lowered its target price for Samsung to 1.4 million won from 1.75 million won, while its target for SK hynix was downgraded to 40,000 won from 70,000 won.

Evidence of weak demand has raised fears of another severe downturn in the sector. The release of the research note comes after many consumer electronics companies struggled to clear inventories before the new season.

Robert Yi, head of the investor relations team at Samsung Electronics, earlier said the world's biggest chip maker did not rule out the possibility of cutting its investment, though he said the company's detailed investment plan in the segment will depend on the market situation.

Client risk

While this year's industry profitability should come down now that last year's profit-share gain is over, some analysts still take comfort in the stabilizing of chip pricing over the past few months.

That stability will help DRAM prices decrease only marginally this year compared with last year, helping Samsung and SK secure their bottom lines.

Given moves by the top maker Samsung for a smoother migration to three-dimensional (3D) vertical (V-NAND) chips, worries over a big profit fall in the company may have been exaggerated.

But a local analyst said a cut in iPhone shipments by Apple was posing another threat, strengthening bearish views on the two Korean chip giants.

"Expectations for sales of the iPhone 6S have been lowered and we believe a price cut by Apple for the latest iPhones to reduce inventories will result in Apple ordering fewer components from Samsung and SK hynix, which will be negative for their profits in the first half of this year," Jin Sung-hye, an analyst at KTB Investment, said.

Samsung supplies mobile DRAMs and NAND flash chips to the Cupertino-based Apple. It also fabricates application processor (AP) chips, the brain that controls the entire computing system in gadgets designed by Apple.

"Coupled with weak demand and not-so-strong sales of the iPhone, Samsung's chip business may be in trouble," said the analyst, adding it expects the company's chip division to generate 11.82 trillion won this year, a cut of 8.9 percent compared with a year earlier.

The SK Group's semiconductor affiliate is also expected to generate less profit, hit by decreased shipments of mobile DRAMs and a DRAM price fall for PCs.

An executive at one SK Group affiliate said there was little indication on memory chip sales for the rest of this year.

"The release of Microsoft's new computing system failed to create new demand," the executive said. "Moves by companies to buy more for their corporate servers for use in cloud computing weren't accelerating as earlier expected. It's going to be painful over the next few years."

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