Investment banks slash price targets for South Korea chipmakers, warn of downturn ahead

Published Mon, Aug 16 202110:28 PM EDT

As the semiconductor industry continues to grapple with chip shortages , investment banks like Morgan Stanley and CLSA have downgraded their valuations for South Korean chipmakers. CLSA downgraded Samsung Electronics from a "buy" rating to "underperform," lowering its price target to 86,000 Korean won (about $73.82). That's still expected gains of 15.59% from Samsung's closing price on Friday. South Korea's markets were closed on Monday for a holiday. Generally, analysts lower price targets when they expect the stock price to drop. The investment bank rates stocks as "underperform" when it expects total return to be positive but below market return. SK Hynix has also been downgraded from a buy to underperform, with a revised price target of 123,000 won ($105.57) — or about 21.18% higher than SK Hynix's Friday close. "Given our view of an upcycle in 2023 we expect the valuation of these stocks to eventually normalise, but in the near term, with ASP (average selling price) declines and consensus downgrades looming, their shares are likely to underperform in our view," CLSA's Sanjeev Rana and Harry Kim said. CLSA outlook on DRAM, NAND chips Investment bank CLSA expects a downturn in the memory chips space from the fourth quarter this year through to the end of 2022, Rana and Kim said in a note dated Aug. 9. As part of the predicted downturn, the average selling price of DRAM and NAND chips — used in devices ranging from laptops and smartphones to data centers — could decline, they added. "Recently finalized DRAM contract ASPs for 3Q clearly indicate that the pace of ASP growth has moderated and customers are pushing back against hikes," the CLSA report said. "As seen in past downturns customers might refrain from restocking unless ASP outlook stabilizes which means pressure on suppliers to flush out inventory at a discounted price," they said. Similar dynamics are seen in the NAND chip business, the analysts said, adding that the average selling price is expected to decline throughout 2022. Semiconductor demand surged in 2020 during the Covid pandemic as demand for video games and computer-related devices rose when most people worked from home. Morgan Stanley: Underweight on SK Hynix Meanwhile, Morgan Stanley analysts warned that there's "more risk than reward" in the global memory chip sector as it enters the late cycle, with expectations of the DRAM business staying "fundamentally oversupplied" in 2022. "Cyclical conditions for DRAM have started to roll over," the analysts said. "While demand has stayed strong on a relative basis, it has worsened in recent weeks which has led to a downtick in pricing expectations." Morgan Stanley currently has a "underweight" rating on SK Hynix, which means it sees the company's total risk-adjusted returns coming in below the relevant country MSCI index or below the average total return of the industry over the next 12-18 months. The U.S. investment bank has a price target of 80,000 Korean won for SK Hynix, the world's second largest memory chipmaker. "While pricing is still moving higher, the rate of change is approaching peak as supply is catching up to demand," the analysts said. "Our cycle indicator has shifted out of 'mid-cycle' to 'late-cycle' for the first time since 2019 and this phase-change has historically meant a challenging backdrop for forward returns." Morgan Stanley: Lower price target on Samsung The firm also revised downward its price target for Samsung Electronics to 89,000 won per share despite remaining "overweight" on the stock. The bank's overweight rating means the stock's total return is expected to exceed the MSCI Korea index, in this case, or exceed the average total return of the industry over the next 12-18 months. "In previous corrections, Samsung has consistently outperformed the memory sector and often the MSCI Asia benchmark, and we believe the business attributes are fundamentally more appealing in the current environment given cost/product leadership as well as optionality on seizing new addressable markets," the analysts said. — CNBC's Chery Kang and Saheli Roy Choudhury contributed to this report.

As the semiconductor industry continues to grapple with chip shortages, investment banks like Morgan Stanley and CLSA have downgraded their valuations for South Korean chipmakers.