The price of SK Hynix Inc. shares fell more than 4 percent on August 6 after global investment bank (IB) Morgan Stanley downgraded its recommendation on South Korea’s second-biggest memory chip manufacturer. As Morgan Stanley trimmed its price target on the stock by more than 10 percent from the current level, it has stirred up controversy again that a boom in memory chips is likely to peak soon.
The price of SK Hynix shares tended to drop regardless of its performance in the past whenever foreign IBs presented negative reports. Some IB market experts note that it is inappropriate that stock prices suffer a sharp drop due to one-eyed views of foreign IBs.
SK Hynix shares closed at 79,400 won (US$70.58) on the main KOSPI bourse on the 6th, down 4.68 percent from the previous trading day. Foreign investors’ large-scale selling spree dragged down its stock prices. After Morgan Stanley lowered its price target on the stock to 71,000 won (US$63.11) and downgraded its view of SK Hynix to "underweight," foreigners turned from buying to net selling in just one day.
Morgan Stanley dramatically decreased SK Hynix’s target stock prices for increased supply of server DRAMs in the fourth quarter, sluggish growth of DRAMs and the beginning of an oversupply of NAND chips. Sean Kim, an analyst of Morgan Stanley, said, “As the price of DRAMs will slightly increase in the third quarter, SK Hynix will make short-term profits exceptionally. However, the DRAM cycle will be balanced in the fourth quarter. With an overall downward tendency in the NAND sector, SK Hynix, which is relatively weak in NAND chips, can face difficulties.”
However, the domestic IB industry says that Morgan Stanley's lowering of the target stock price is too much. Kim Dong-won, an analyst from KB Securities Co., said, “The price of SK Hynix shares fell because a foreign IB decreased its target stock prices. However, Morgan Stanley’s concerns over intensifying competition on the DRAM market are highly likely to prove groundless.”
It also added, “Since Samsung Electronics is expected to maintain its profitability-centered strategy in the memory business in 2019, market concerns are excessive. In particular, such concerns are largely due to the fact that it is in the middle of paradigm shift of the central axis of the DRAM industry from business to consumer (PC and mobile) to business to business (server).”
This is not the first impact on the market by foreign IBs’ subjective reports. The price of SK Hynix shares showed a sharp drop in February and October last year after UBS and CLSA announced negative reports on the firm. CLSAdowngraded its view of SK Hynix from “overweight” to “underweight” in October last year as it expected the price of memory chips will fall starting with the fourth quarter. With the impact of CLSA’s reports, the price of SK Hynix shares dropped from some 80,000 won (US$71.11) to some 70,000 won (US$62.22). Foreign investors were the one that dragged down the stock prices at that time. However, the price of SK Hynix shares increased to 97,700 won (US$86.84) during the intra-day trading on May 25 this year, reaching a new record high, with the biggest-ever sales record. This is why there are growing doubts that foreign IBs, which have a considerable amount of short stock selling, are trying to lower share prices through their negative reports.