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Chips, auto, display stocks rebound as supply shortage eases

Earnings expected to improve as better supply conditions are likely to ramp up production

By Oct 29, 2021 (Gmt+09:00)

SK Hynix employees in South Korea check wafers
SK Hynix employees in South Korea check wafers

Shares in South Korea’s chipmakers, automakers and display producers have begun to rebound on growing signs that the global supply shortage will ease from the fourth quarter, alleviating investor concerns that the supply disruption may hurt production and earnings.

SK Hynix Inc., the world’s second-largest memory chip maker, on Oct. 28 soared 4.93% in the local stock market to end the day at 106,500 won ($91) as the share was the day's top pick among domestic institutional investors and foreigners. Industry leader Samsung Electronics Co. closed up 0.86% at 77,000 won, reversing earlier losses.

CHIPMAKERS SHINE

Such strength came as those chipmakers had assured investors that the supply of information technology components is improving in the current quarter. In the July-September period, insufficient system chips and a power crisis in China disrupted the production of personal computers and smartphones. Investors had expected rising inventories to deteriorate memory chip makers’ earnings.

But Samsung and SK Hynix allayed their worries, stressing during their third-quarter earnings calls that the supply shortage is likely to ease in the fourth quarter and they will focus more on profitability with smaller investments. They also said inventories remained at low levels. Their shares on the day extended gains following Samsung’s earnings call.

“Investor sentiment improved after Samsung stressed that the market’s worries were excessive,” said Roh Geun-chang, head of research at Hyundai Motor Securities.

LIGHT AT THE END OF THE TUNNEL FOR AUTOMAKERS

Hyundai Motor Co. and Kia Corp., which have been suffering from the global automotive chip shortage, are gearing up for ramped-up output.

The world’s fifth-largest carmaker duo said the shortage peaked in September and supply improved in October. South Korea’s top two automakers aim to minimize the disruption in car production, given requests for more shipments from overseas markets.

“Their profit estimates continue to rise as their cars are selling so well,” said Korea Investment & Securities analyst Kim Jin-woo. “Their stocks have additional momentum since they plan to keep the dividend payout ratio at 25-30%, helping realize hopes for shareholder returns.” Kia gained 1.18% to 86,000 won on the day.
The EV6, Kia's first dedicated electric vehicle
The EV6, Kia's first dedicated electric vehicle

TEMPORARY PRODUCTION PROBLEMS

“Some companies suffered temporary disruptions from the supply side, not from weak demand, but due to unexpected global supply chain disruptions on a spread in the Delta variant of COVID-19,” said Jung Sung-han, the director of the Alpha Investment Center and leading active stock investment at Shinhan Asset Management Co.

“As the issue is being resolved, sectors that had been expected to rebound a few months ago are belatedly preparing to run again,” Jung said.

LG Display jumped 6.76% to 19,750 won even as the company’s third-quarter earnings missed analysts’ forecast on Oct. 27. A lack of key parts such as display driver ICs (ICs) and power management integrated circuits (PMICs) kept the company from delivering display modules for laptops and tablets to customers on time. Its revenue is, however, expected to perform well in the fourth quarter as manufactured goods are piled up in the form of semi-finished products.

The company upgraded its profit structure by shifting it main business to organic light-emitting diode (OLED) panels from liquid-crystal display (LCD) panels. Its OLED TV unit is predicted to turn to the black this year, helping the company post profit even when LCD prices may have fallen.

“The company created a structure that allows profit from the OLED TV unit to offset weak performance of the LCD TV unit,” said a HI Investment & Securities analyst Jung Won-seok. Global LCD market conditions that were previously highly correlated to the company’s stock may not affect its share price, Jung added.
LG Display’s 40-inch bendable Crystal Sound OLED
LG Display’s 40-inch bendable Crystal Sound OLED

Samsung Electro-Mechanics’ stock jumped 5.03% to 167,000 won after the company reported record earnings in the third quarter. The share has been stagnant on the shortage of various components and fears of weakening demand.

It is better to pay attention to growth in the company’s semiconductor substrate business that had been undervalued due to the concerns, analysts said.

“The market has been excessively worried about the global multi-layer ceramic capacitor (MLCC) market,” said Kiwoom Securities’ research head Kim Ji-san. “We need to pay attention to the reorganization of the package substrate-oriented business portfolio.”

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

Jongwoo Cheon edited this article.
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