Concerns of 2Q19 Return in 2Q20
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively. -- Ed.
Concerns increased in 2Q19 over a possible drop in semiconductor prices in 2H19 amid US-China trade disputes and the US trade ban on Huawei. DRAM prices did fall in 2H19 and DRAM makers posted sluggish earnings. In 2Q20, we see concerns rising that semiconductor prices will decline in 2H20 due to macro issues such as the COVID-19 outbreak. With server DRAM prices on the downtrend, DRAM earnings momentum is seen weak for 2H20.
2H19’s rally despite price and earnings declines reflects earnings prospects
In 2H19, semiconductor stocks rallied sharply despite weak earnings, reflecting prospects for steep earnings growth in 1H20. Their share price weakness in 2Q20 already priced in the slowing earnings outlook for 2H20. From now on, stocks will start to reflect 1H21 earnings prospects.
We believe DRAM prices will resume a steep rally from 1Q21. Demand deferred by COVID-19 is expected to recover and supply bit growth for 2021 is likely to hit a historical low (roughly 10%). In addition, the level of technological difficulties is rising and no capex is planned this year.
Most negatives already known to the market, slew of positives on the horizon
Semiconductor shares have already reflected concerns over weaker demand for mobile DRAM in 2Q20 and for server DRAM in 3Q20. Valuations are cheap enough. Confirmation of DRAM demand recovery for mobile and server uses will give reason for strong earnings in 1H21. We revise up our target prices for Samsung Electronics and SK Hynix.