Korean semiconductor parts, equipment stocks plunge on weak demand

[Image source: Gettyimagesbank]

South Korean semiconductor parts and equipment stocks, which briefly rebounded on expectations for an industry led by U.S. chip maker NVIDIA Corp., are on a downward spiral on the prospect of a prolonged sluggish demand.

Short selling is also on a rise on weaker-than-expected second-quarter earnings, suggesting that a rebound is unlikely in the near future.

According to the Korea Exchange on Monday, three semiconductor materials and equipment stocks were among the stocks with a high proportion of short-sale between August 11 and 18 - Tokai Carbon Korea Co. (30.4 percent), Wonik IPS Co. (25.1 percent), and Soulbrain Co. (16.9).

The short sale share of the stocks is very high compared with the Kosdaq average of 0.5 percent and SK hynix Co.’s 4.9 percent.

Short selling is a position opened by borrowing shares of a stock that the investor believes will decrease in value to pay them back at a lower price when the stock price falls.

In other words, if short sales account for a large portion of the total trading volume, it means there are many investors who predict the stock price to fall.

Semiconductor materials and equipment stocks have undergone a downward trend since the second-quarter earnings season began in full swing.

They reported much lower sales and operating profit than the downgraded consensus as a result of production cuts at Samsung Electronics Co., SK hynix, and other global semiconductor companies.

Analysts note that semiconductor materials and equipment stocks became the target of short sellers as they maintained the value reflecting a recovery outlook despite the overall stock decline in the sector.

TCK, a manufacturer of silicon carbide (SiC) rings used in the memory chip etching process, posted a second-quarter operating profit of 13 billion won ($9.7 million), down 41 percent from the previous quarter, falling short of market expectations.

“The impact of memory chip makers’ production cuts and semiconductor equipment makers‘ inventory adjustments was greater than expected,” said Park Yoo-ak, an analyst at Kiwoom Securities Co. “Demand for SiC rings should start to recover this quarter as shipments can increase once Samsung Electronics’ Pyeongtaek 3 plant begins mass production.”

Employees of Wonik IPS, a partner of Samsung Electronics, are checking semiconductor equipment production facilities. [Courtesy of Samsung Electronics]

Wonik IPS posted an operating loss of 18.2 billion won in the second quarter, significantly below the market consensus of 8 billion won. The decline came as the company’s sales of about 60 billion won was carried over to the third quarter due to delays in orders from foundry clients at home and abroad.

As a result, brokerage estimates for the company’s operating profit dropped as much as 60 percent to 6.4 billion won from 16.4 billion won.

“The operating margin is expected to turn positive at 7.6 percent as sales recognition in the second quarter is carried over to the third quarter,” said Lee Min-hee, an analyst at BNK Securities Co. “We expect equipment orders from Samsung Electronics‘ foundry fab starting next year.”

A bleak outlook remains yet that the scale of capital expenditures for the front-end semiconductor processes will not recover quickly next year. The prolonged delay in display investment is also a factor limiting the stocks’ momentum.

“Considering the artificial intelligence (AI) semiconductor technology utilizing next-generation packaging, the next round of investment is likely to focus on back-end processes,” said Lee Jong-wook, an analyst at Samsung Securities Co. “The Wonik IPS stock already reflects the turnaround outlook to a great extent, but it will take time for the company to deliver meaningful sales.”

Soulbrain, which produces chemicals used for the chip etching process, also reported an operating profit that is about 20 percent below the market consensus. The company’s third-quarter operating profit was estimated at 46.3 billion won a month ago but has recently been lowered to 45.5 billion won, according to FnGuide.

“Overall demand for semiconductor materials declined due to utilization adjustments at our major clients, and the lowest annual earnings will be seen in the third quarter instead of the second quarter due to additional NAND flash production cuts,” said Park Sung-hong, an analyst at Korea Investment & Securities Co. “The utilization recovery of Samsung Electronics and SK hynix and the foundry momentum will translate into strong stock prices going forward.”