☀️☕️ Samsung E’s Massive Downcycle Investing

📊 Also: Japan getting high; Switch 2 coming; SEC hacked (spot Bitcoin ETFs priced in?) 🎓 Business Cycles

📈 Market Roundup [10-Jan-24]

US large-cap S&P 500 closed 0.15% DOWN 🔻

Tech-heavy Nasdaq Composite closed 0.09% UP ▲

Pan European STOXX Europe 600 closed 0.19% DOWN 🔻

HK/China's Hang Seng Index closed 0.21% DOWN 🔻

Japan's broad TOPIX closed 0.82% UP ▲

📝 Focus

  • Samsung E’s Massive Downcycle Investing

📊 In the Markets

  • Japan getting high; Switch 2 coming; SEC hacked (spot Bitcoin ETFs priced in?)

📖 MoneyFitt Explains

  • 🎓 Business Cycles

💸 Personal Finance Corner

📝 Focus

Samsung E’s Massive Downcycle Investing

Samsung Electronics, the world’s largest memory chipmaker and South Korea’s most valuable company by far, is plugging ahead with its semiconductor investment plans despite reporting operating profits plummeting 35% in the October-December quarter, missing the best guesses of Seoul’s Finest and marking lows last seen in 2008. The loss of KRW1.2tn was lower than the KRW4.4tn and KRW3.8tn lost in the second and third quarters.

Demand for DRAM and NAND memory chips fell more sharply than expected, leading to inventory pile-ups amid sluggish computer and smartphone sales. Competitors like Micron Technology and SK Hynix in memory and TSMC in contract manufacturing (a strategic growth area for Samsung), have cut back capital spending sharply in response to the imbalance between supply and demand.

But not Samsung, which is using its immense cash reserves to keep investing strategically in ever more advanced chip-making equipment in preparation for the market rebound when it comes. Investing through the cycle risks exacerbating the oversupply situation and prolonging the downturn… but Samsung reached its position at the top by doing just that. 

In highly cyclical industries, such a strategy, like initiating price wars, is always either a disaster or a masterstroke. With fourth-quarter prices already starting to pick up, it could be the latter, but after a 42% rally in 2023, much may already have been priced into the share price, particularly with Samsung late to the AI party and lagging local rival SK Hynix in HBM chips.

It could be a master stroke- Image credit: The Smurfs 2 (2013) / Columbia Picture, Peyo via Tenor

..... ▷ SK Hynix and Samsung Electronics together dominate 90% of the global market for "high bandwidth memory" (HBM) chips.

HBM chips are critical components in AI servers needed to train systems such as OpenAI’s ChatGPT. AI servers need from two to eight times more memory than traditional servers.

Unusually, SK Hynix is leading Samsung in this niche memory subsector, having pioneered the technology in 2015. Its fourth-gen HBM3 is used in Nvidia’s super in-demand, top-of-the-line H100 GPUs, and its market share of 50% is expected to grow even as next-generation capacity from all players increases.

..... ▷ Semiconductors have historically experienced extreme business cycles 🎓due to the cyclical nature of the industry. There have been 6 chip cycles since 2000, for an average of one every 3.7 years. Memory chip "boom and bust" cycles tend to be even more extreme and have historically swung wildly for two main reasons: supply shocks and volatile demand.

Since building new chip factories takes billions of dollars over many years, ramping up production to meet growing demand is slow. This creates temporary shortages and skyrocketing prices. But once new fabs (chipmaking plants) come online, the market is suddenly flooded with lumpy new supply, crashing prices until demand catches up.

Memory chips are needed for everything from smartphones to servers, making demand sensitive to the broader economy. When consumer or business spending slows, chip prices plummet. 

Conversely, a boom can trigger frantic buying since memory chips, in particular, are relatively commoditised and typically make up only a small portion of the sale prices (or cost of goods), further amplifying the cycle.

The memory chip cycle is more extreme- Image credit: Tenor

..... ▷ Samsung Electronics is a subsidiary of the Samsung Group, a South Korean multinational conglomerate. It was founded in 1969 and has since grown to become one of the world's largest electronics companies.

The company is divided into three main business units: Consumer Electronics, Device Solutions (which includes memory chips), and IT & Mobile Communications (which includes smartphones.)

Samsung Electronics is arguably the most important part of the Samsung “chaebol.” These are large industrial South Korean conglomerates run and controlled by an individual or family. The term chaebol means "wealth or property" and "faction or clan" in Korean. 

The chaebol structure has played a significant role in the development of South Korea's economy, with several dozen large family-controlled corporate groups falling under this definition. 

Before the 1997-98 Asian Crisis, Korea’s investment-based growth model was structured around the chaebols, with the government supporting them through de facto preferential access to credit, explicit and implicit bailout guarantees, and by limiting domestic and foreign competition. Between 1963 and 1997, GDP per capita grew by 7% per annum.

After the crisis, explicit and implicit chaebol support was removed, opening the Korean economy up to competition and spurring growth based more on innovation rather than brute force investment in plant and equipment. 

Some of the major chaebols in Korea include Samsung, LG, Hyundai, SK and Lotte. 

Memory chip rival SK Hynix was founded in 1983 as Hyundai Electronics (HYundai electroNICS) and, after a 1999 acquisition of LG Semiconductor, merged with SK Group in 2012, the third largest chaebol at the time.

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