China's lockdown: Double effect to Korean tech stocks

The COVID-19 lockdown of Shenzhen, the city known as Silicon Valley of China, is increasing concerns over supply disruptions to South Korea’s information technology industry. Experts say if the Chinese city’s pandemic crisis is prolonged, Korea will face worsened supply chain problems. On the other side, some analysts expect the lockdown will benefit the Korean rivals of Chinese substrate and display panel producers.

On Tuesday, the Korea Exchange (KRX) IT index saw a 16.11% plummet, a bigger plunge than the main bourse Kospi’s 10.69% drop. Supply chain concerns over the Russia-Ukraine war have hit Korean tech stocks -- now, the spread of COVID-19 in China is further damaging the shares.

This marks China's worst outbreak since the early 2020 outbreak in Wuhan, with more than 5,000 cases recorded in the country on Tuesday. Shenzhen, home to iPhone supplier Foxconn’s main factory and IT giants Tencent, Huawei and BYD headquarters, has been under lockdown since Monday. The Foxconn factory has suspended operations due to the spike in cases.

“Foxconn’s suspension hasn’t decreased orders from Korean IT companies, including electronic parts manufacturer LG Innotek Co. and flexible printed circuit board producer BH Co., as the Chinese company is increasing iPhone production out of Shenzhen,” said Jong-won Kim, an analyst at Korea’s KB Securities Co. “However, some Korean smartphone parts suppliers to Chinese companies may see decreased orders alongside the drop in smartphone demand in China,” Kim added.  

Korea will have a limited impact from the lockdown in the short term, some IT industry sources said. If the lockdown is extended, however, Korean manufacturers focusing on finished IT products will suffer from a shortage of Chinese IT components, the sources added.

KOREA'S LCD STOCKS MAY REBOUND

Meanwhile, some of the Korean rivals to Chinese IT firms could benefit from the lockdown. As China makes up 55% of the world’s substrate production, the shortage of Chinese substrate may push Korean substrates' prices up, according to the sources.

“When Hubei province was under lockdown in January 2020, some of the Korean mainboard substrate prices surged thanks to increased orders from global companies,” said Hyung-woo Park, an analyst at Shinhan Investment Corp. “Similarly, Korean substrate companies will have benefit from the lockdown this time,” said Park in a recent report.

The report said stocks of Simmtech Co. and ISU Petasys Co. both printed circuit board makers of Korea, will be promising under the Chinese substrate shortage. On Wednesday, Simmteck's stock closed at 50,800 won ($41.95), up 5.18%, and ISU Petasys increased 5.67% to close at 6,900 won. Other printed circuit board stocks also went up in the market – Korea Circuit Co. surged 10.20% to 29,700 won. Daeduk Electronics Co. jumped 6.07% to close at 24,450 won. Haesung DS Co. increased 5.04% to 47,900 won on the same day.

If the lockdown is extended, Korean liquid crystal display (LCD) panel prices may rebound in the second quarter, said Shinhan Investment’s analyst Chan-woo Kim.

“China Star Optoelectronics Technology (CSOT) Co., which makes up 10-15% of the world’s LCD production, will be slow to operate its Shenzhen-based facilities. This will benefit Korean LCD makers, which have been impacted by oversupply from China,” said Kim. “LG Display Co. and LX Semicon Co. are particularly attractive as their corporate values remain in the lowest range,” Kim added.

Write to Hyeong-Gyo Seo at seogyo@hankyung.com
Jihyun Kim edited this article.