Samsung May Ride Chip Rally Longer Than Hyundai: Taking Stock
Seoul, Sept. 15 (Bloomberg) -- Hyundai Electronics Industries Co. and Samsung Electronics Co. are the biggest manufacturers of a product whose price has tripled since July.
Yet only one of the makers of computer memory chips -- Samsung Electronics -- may be a stock worth holding for long.
The arm of Korea's second biggest business group got into the $20 billion market first, and some investors say it still holds the edge in technology and management even after Hyundai Electronics hop-scotched into first place in terms of production this year by acquiring LG Semicon Co. ''Hyundai is more of a near-term play whereas Samsung still has the upper hand in most investors' confidence,'' said Aaron Pong, director at RBC Investment Management (Asia) Ltd., which holds both stocks in its US$200 million portfolio but considers only Samsung Electronics as a 'core' holding.
Samsung Electronics is up 208 percent this year, compared to a 61 percent gain for Hyundai Electronics, yet it's still looking cheap relative to earnings. Samsung Electronics is trading at 9.4 times estimated 1999 earnings, Hyundai Electronics 94 times.
Dynamic random access memory, or DRAM, chips act as short- term storage for information in a computer, while processor chips made by companies such as Intel Corp. work on the data.
Soaring use of the Internet, fading concern about the year 2000 computer bug and discounts for users to upgrade the memory on their existing PCs led to massive demand for memory chips. Second-quarter global personal computer shipments rose 27 percent from a year earlier, while global DRAM sales were up 39 percent in the first half.
Deliveries Stopped
Meantime, many Japanese chipmakers are focusing on the next generation of more powerful chips or chips for mobile phones, video cameras and digital hi-fis, leading to a shortage of supply.
With inventories down to as little as one-week worth of production, many manufacturers are now rationing out orders to regular customers and not delivering to the spot market, analysts said.
Benchmark 64-megabit DRAM chips were sold at $15.00 yesterday, from as low as $4.55 on July 1, according to the American Integrated Circuit Exchange. That low was below most DRAM makers costs of $5 a chip. ''The price appreciation trend will continue into the fourth quarter,'' said Sun Chung-Myung, an analyst at ABN Amro Asia, in Seoul. Chung has a ''buy'' recommendation on the two chip companies.
Other DRAM-makers are also rallying. The third largest memory chipmaker, Boise, Idaho-based Micron Technology Inc. is up 50 percent this year. Japan's NEC Corp. is up 114 percent, Hitachi Ltd. 69 percent and Toshiba Corp. 25 percent. Taiwan's Winbond Electronics Inc. is up 72 percent and Mosel Vitelic Inc. 11 percent.
Technology
Samsung Electronics got a headstart in the DRAM market over its Korean rivals, starting production early in the decade. Hyundai and LG only entered the market when chip prices first began to soar in 1995. However, as new plants flooded the market with new products, chip prices fell more than 60 percent each year from 1996 through 1998.
Samsung Electronics still holds its edge in technology. This year, it will spend about $2.5 billion upgrading and expanding its DRAM facilities, according to Warburg Dillon Read. That's more than twice Micron's $1 billion and nearly five times what Hyundai Electronics will spend this year.
That heavy spending is reaping rewards. Samsung Electronics turned in first half profits this year of 1.34 trillion won, after recording losses of 362 billion won last year and 610 billion won in 1997. In July, it forecast profits of 3 trillion won, beating its previous record of 2.22 trillion won in 1995.
All four analysts who updated their recommendations on Samsung Electronics last month rated the company the equivalent of a ''buy'' or better.
Goldman Sachs Asia, for example, forecasts the share price will rise to between 350,000 won and 400,000 won in the next 12 months. At about 240,000 won now, it estimates the stock is trading at 9.4 times its forecast earnings for this year, below the PE ratio for the Kospi index of 13.5 times earnings. ''Here you've got probably the most admired Korean company trading at a steep discount to the Kospi,'' said Douglas Lee, an analyst at Goldman. ''Its amazing, it been a great stock for us.''
Hyundai
The problem for Hyundai Electronics and its acquisition LG Semicon is debt. The two saddled themselves with over $10 billion in combined debts paying for technology provided by others as they tried to play catch up.
Hyundai Electronics hasn't been profitable since 1996. It lost 125 billion won in the first half of this year as it couldn't cut costs through technical innovation as fast as its rivals. It lost 181 billion won last year and 569 billion won in 1997, down from a peak profit of 834 billion won in 1995.
Hyundai Electronics produces around half of its chips using older 0.25 micron technology compared to less than a quarter of Samsung Electronics' output. Miniaturizing the technology allows manufacturers to produce more chips from the same amount of silicon wafers.
Crosby Socgen Securities analyst Shim Yong Jae rates Hyundai Electronics a ''hold,'' compared to his ''strong buy'' on Samsung Electronics, expecting it to earn 117.7 billion won ($97 million) for this year, giving it a price to earnings ratio of 94.8. ''It can survive for the next two years but I really worry about its long term future as all it's doing is developing its existing lines rather than building new ones,'' said Shim.
Keeping up with technology could become more important as Warburg Dillon Read estimates that more powerful 128-megabit chips will account for a fifth of sales by the last quarter of this year, from about a tenth now, leading to a balance in demand and supply for 64-megabit chips.
While Hyundai Electronics is shedding its other businesses to reduce its debts, Samsung Electronics is hedged against any decline in DRAM prices since it derives only a third of its sales in the business, also making laptop computer screens and mobile phones. ''As long as the chip price rises, we will hold Hyundai but we will have to look seriously at its earnings prospects in the near future,'' said Kim Myoung Dal, chief investment officer at Daehan Investment Trust, whose team manages 8 trillion won in Korean stocks, including the two chipmakers. |
