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China power crisis, US tightening chill sentiment on Korea IT sector

China’s widening electricity outages to interrupt global IT supply; Apple, Tesla’s suppliers suspend production

By Sep 30, 2021 (Gmt+09:00)

Microchip integrated on motherboard
Microchip integrated on motherboard

Sentiment on the South Korean IT sector has deteriorated on rising US interest rates and a severe shortage of electricity in China. The 10-year US Treasury yield surged on expectations of monetary policy tightening in the near term, hurting technology stocks around the globe. Meanwhile, Chinese power outages are expected to interrupt global supply of IT parts, cutting production of finished goods, which will also hurt demand for other components.

The yield on the benchmark 10-year US Treasury bond rose to 1.56% on Sept. 28, the highest since June, according to foreign media reports. That slammed shares of major semiconductor makers such as Micron Technology Inc., Nvidia Corp. and Advanced Micro Devices Inc. (AMD). Chip equipment producers, including ASML Holding NV, also tumbled on the day.

MICRON’S GRIM OUTLOOK

In addition, Micron, one of the world's biggest memory chip suppliers, impaired sentiment further with a grim business outlook. It forecast revenue of $7.65 billion, plus or minus $200 million in the quarter from September to November, far missing analysts’ prediction of $8.5 billion. The company’s forecast was 8% lower than the previous three months.

Micron said sales of its memory chips were expected to fall in the near term as its customers producing PCs are suffering from a shortage of non-memory chips.

The expectations of slower shipments added to pressure on its stock prices, which have been weighed down by falling memory chip prices.

CHINA POWER OUTAGES

South Korea’s IT sector is also struggling as China’s electricity supply crisis is widening amid surging oil and natural gas prices. The power shortage shut plants of core parts, affecting Apple Inc. and Tesla Inc.

Apple supplier Unimicron Technology Corp. and Eson Precision Ind Co. have suspended factories in China, for example.

“A sustained power crisis in China cuts the supply of parts, interrupting production of finished goods,” said a Shinhan Investment Corp.’s analyst Park Hyung-woo. “That is expected to lead to lower demand for IT parts overall, including electronic components, semiconductors and displays.”

“The year-end is high season for the IT industry, but rising raw material costs, parts supply shortages and increasing logistics costs will hurt the sector just as the auto industry suffered from the automotive chip shortage,” said Jeong Myung-ji, head of investment and research at Samsung Securities.
(Graphics by Jerry Lee)
(Graphics by Jerry Lee)


TOO WORRIED?

Some analysts say such concerns over South Korea’s electronics and electric sectors are excessive.

“Soaring US Treasury yields hit tech companies whose shares had risen a lot, dragging down Korea’s IT hardware sector,” said Kiwoom Securities’ research head Kim Ji-san. “Domestic IT hardware stocks are value stocks that are sensitive to the economic cycle, not growth stocks. So, their recent falls looked excessive.”

Some companies are expected to benefit from a protracted power crisis in China.

“Beneficiaries will include printed circuit board (PCB) and camera module makers with smaller production bases in China, which compete against producers on the mainland,” Shinhan’s Park said.

Those South Korean companies are already enjoying strong profits amid a shortage of semiconductor substrates. Samsung Electro-Mechanics and LG Innotek are expected to post record-high earnings and/or stronger profits than forecast in the third quarter.

Write to Jae-yeon Ko at yeon@hankyung.com

Jongwoo Cheon edited this article.

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