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Asia-Pacific’s Week Ahead (Feb 3-7): South Korea’s Semiconductors Remain Vulnerable to Virus

By:

Senior Market Analyst at Interactive Brokers

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Global Sector Can’t Shake Trade Headache

South Korea has been widely touted as the center of the semiconductor universe, with companies such as Samsung Electronics (KRX:005930) and SK Hynix (KRX: 000660) fueling global advancements in consumer technologies.

In fact, chipmakers in general are integral to the development of emerging new technologies, including self-driving cars, artificial intelligence, 5G and the Internet of Things (IoT).

However, the race among developed economies to achieve mass production in these areas has been met with a long list of hurdles, including impacts from recent U.S.-China trade tensions and tariffs, as well as U.S.-voiced security concerns in the Asia-Pacific region – notably about Chinese telecom equipment-maker Huawei, as well as the recent rejection of Qualcomm’s (NASDAQ: QCOM) takeover by Singapore-based Broadcom (NASDAQ: AVGO).

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Although the signing of the so-called ‘Phase One’ trade deal had spurred risk-takers to embrace the chipmaking space, fallout from the past volatility appears to have already caused some financial harm.

The World Semiconductor Trade Statistics (WSTS) organization, for example, expects sales in the global semiconductor market to have plunged nearly 13% to US$409bn in 2019, before recovering less than half that loss, or close to 6%, in the year ahead.

WSTS noted that the decrease in 2019 was primarily due to a lower outlook across all geographies and almost all major categories, highlighted by a 33% drop in Memory, followed by a 7.9% decline in Analog, and a 4.3% dip in Logic.

Meanwhile, the Semiconductor Industry Association (SIA), citing figures from WSTS, said global sales of semiconductors fell 0.3% month-over-month in November 2019 to US$36.7bn and were 10.8% lower than the prior year at US$41.1bn.

SIA CEO John Neuffer pointed out that, regionally, “the Americas market was the only major market to grow on a month-to-month basis, but sales into the Americas were down substantially year-to-year.”

Sales increased by 2.3% in the Americas in November 2019 compared to the prior month, held flat in China, and decreased in Europe (-0.6%), while Asia Pacific/All Other Regions fell -1.8%, and Japan shed -1.9%. When compared to November 2018, sales were down across all regions: China (-6.0%), Europe (-8.0%), Asia Pacific/All Other Regions (-8.3%), Japan (-9.1%), and the Americas (-22.3%).

Losses Hit Samsung’s Semiconductor Sector

South Korean tech giant Samsung witnessed its share of the downturn, with a material decline in revenues and operating profits for the fourth quarter and full year of 2019.

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In Q4’19, sales and operating profits in its semiconductor division fell to KRW 16.79tn and KRW 3.45tn from KRW 18.75tn and KRW 7.77tn from the same-year ago period, respectively, while full year results dropped to KRW 64.94tn and KRW 14.02tn from KRW 86.29tn and KRW 44.57tn year-on-year, respectively.

Total operating profits and revenue in FY 2019 also staged sharp declines year-on-year to KRW 27.77tn and KRW 230.40tn from KRW 58.89tn and KRW 243.77tn, respectively.

Viral Infection

Meanwhile, the industry faces further uncertainties over its near-term operations and sales, amid the newly unleashed, deadly novel coronavirus (2019-nCoV), which, along with several other nations, infiltrated the Republic of Korea earlier in January.

The Centers for Disease Control and Prevention (CDC), which is closely monitoring the outbreak of the respiratory illness, noted there have been thousands of confirmed cases in China, including cases outside Wuhan City, where it was first identified.

To date, cases of 2019-nCoV have also been detected in a long list countries outside of China, including the U.S., Hong Kong, Taiwan, Australia, India, Singapore, Japan, Malaysia, the Philippines, Thailand, Vietnam, as well as Germany, France, Finland, Canada and others. 

As of January 29, the CDC identified 165 cases of the disease across 36 U.S. states, with reported global fatalities in the area of 170.

Against this backdrop, the iShares PHLX Semiconductor exchange-traded fund (ETF; NASDAQ: SOXX) continued its fall, shaving-off nearly 1.5% to US$248.31 intraday Thursday, along with a precipitous fall in South Korea’s Kospi Index (-1.71% to 2,148), as well as the semiconductor-heavy iShares MSCI South Korea ETF (-3.16% to 58.78).

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Over about the same period, prices of South Korea’s current 3-year and 10-year government note future contracts rose, along with yields on the corresponding conventional debt.

Yields on South Korean 3-year and 10-year government notes were bid Thursday at roughly 1.332% and 1.583%, respectively, declines of around 9.2 basis points and 13.6 bps from their most recent highs reached January 22.

The yield on the 10-year U.S. Treasury note was last bid at around 1.539%, a fall of about 34 bps from its high of 1.880% at the start of January 2020, amid flight-to-quality buying.

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Other semiconductor company stocks also took a beating recently, amid the broader risk aversion, including Advanced Micro Devices (NASDAQ: AMD), Qualcomm, Nvidia (NASDAQ: NVDA), Intel (NASDAQ: INTC), Broadcom and Xilinx (NASDAQ: XLNX).

California-based Xilinx, for example, suffered a fall of 3.12% intraday Thursday to US$85.29, after the company said earlier in the week that sales at the firm were down 13% quarter-over quarter in its FY Q3’2020 to US$723m and dropped 10% year-on-year.

The disappointing results spurred the firm to announce cost-saving measures, including aims to reduce its global workforce by an estimated 7% and generate expense savings of between US$17m-US$20m in FY Q4’2020.

Xilinx CEO Victor Peng said his company is “seeing greater than expected weakness in our wired and wireless business due to a slowdown in both 5G and wired infrastructure deployments, in addition to ongoing global trade headwinds.

“We expect some of these headwinds in our wired and wireless business to be persistent, resulting in revenue growth lower than our prior expectations.”

Peng added that these are “difficult actions, but we believe the decisive steps we are taking to reset our operating expenses will allow us to drive our growth strategy and technology roadmap while enabling a more appropriate level of operating profitability.”

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Although fears about the spread of the virus and its effects on global economic growth have generally rattled financial markets, as well as stirred the outlook for the chipmaking industry, some optimism about the health of the sector may come from the recent decline in the Korean won-US dollar exchange, which the Bank of Korea noted has been partly due to expectations of a recovery in semiconductors.

The KRW/USD pair was last trading down -1.16% Thursday at around 0.0838, a fall from its year-ago high of about 0.0902.

Stay Informed

Market participants are likely to receive further clues about the trajectory of the industry in the week ahead, with several technology-related conferences lined-up, including:

February 3

ITF Photonics 2020 (San Francisco, CA)

February 5-7

SEMICON Korea 2020 (COEX Convention & Exhibition Center; Seoul, South Korea)

Among the activities, the SEMICON Korea 2020 event will feature a keynote speech on “Semiconductor Technology for the Future ICT World” from Jinkook Kim, SK Hynix’s head of research and development.

Investors will most likely be keeping an eye on further developments in the sector, amid continued enhancements in new technologies and consumer devices, as well as threats from geopolitical risks and volatility from the coronavirus.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

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