Momentum Expected from Supply Cut or Demand Recovery
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively. -- Ed.
Momentum expected from supply reduction or demand recovery
Semiconductor stocks have underperformed the KOSPI by 16.6%p since March 19 on concerns over a slowdown in semiconductor demand with the outbreak of COVID-19. Investors are awaiting momentum from supply reduction or demand recovery. One would wait to buy into stocks until confirmation of the extent of the demand drop, but by the time momentum shows itself, the share prices would have long passed the bottom.
Current share prices reflect delay in 2H20 DRAM rebound; focus on valuation merit
Chipmakers are currently continuing to cut back capex, unlike during macro shocks endured in the past. Supply is one of the key variables determining the directionality of the DRAM cycle. The COVID-19 pandemic has not affected the semiconductor market up-cycle, only to have delayed the peak. The share prices are at levels seen two quarters ago (4Q19), already reflecting the prospect that DRAM prices will not rise in 2H20 due to the pandemic. Now is the time to approach semiconductor stocks in terms of valuation merit. We expect the shares to gain going forward led by increases in BPS and PBR.
Retain OVERWEIGHT; chipmakers unlikely to further underperform the KOSPI
Supply is a key variable that may differentiate the performance of memory chipmakers from the KOSPI. Chipmakers are expected to actively reduce supply in light of the COVID-19 pandemic or US-China trade disputes. Macro demand and semiconductor demand move in the same direction. If semiconductor supply is reduced when demand is low, chipmakers’ liquidity and share prices are unlikely to underperform the broader market. We thus retain our OVERWEIGHT view on the semiconductor/equipment sector.