Short Sellers Duel Fans of Samsung Memory Chip Rival SK Hynix

When it comes to the world’s second-largest maker of memory chips, analysts and short sellers are poles apart.

(Bloomberg) — When it comes to the world’s second-largest maker of memory chips, analysts and short sellers are poles apart.

A week after a spike in bearish bets caused the South Korean stock exchange to halt short-selling of SK Hynix Inc., analysts remain universally positive, with all 42 of those tracked by Bloomberg having a buy-equivalent rating on the stock.

So far, the bulls appear to have the upper hand. Since sliding in the wake of the short-selling rush, caused by an upsized convertible-bond issue, the stock has rebounded. Rival Samsung Electronics Co.’s announcement last week that it’s cutting chip production further padded those gains, which now stand at 20% on the year.

As more production is taken offline, it may eventually “help the entire chip industry,” according to Baik Gilhyun, an analyst at Yuanta Securities Korea Co.

Now comes the next test. Results due in two weeks will shed light on the industry outlook, which has been aided by Samsung’s production curbs that the firm had long resisted. While the cuts should help accelerate the recovery in the memory chip market, some investors fret that SK Hynix may now have to follow suit.

“The demand in the industry – PC and mobile — is not so favorable,” said Shin Jinho, co-chief executive officer of Midas International Asset Management.

Weak demand has created a supply glut for memory chips that has depressed prices. The backdrop isn’t helped by a combination of rising interest rates, surging inflation and a banking crisis which have dented consumer sentiment. On Monday, Taiwan Semiconductor Manufacturing Co. said it missed sales estimates for a second consecutive quarter in a sign of continued weakness in global electronics demand.

Most analysts are bullish on SK Hynix given that the memory market is expected to recover in the second half of this year as inventory pressures ease and cuts in production and capital spending limit supply.

According to Wi Minbok, an analyst at Daishin Securities, there’s a high probability of rebound in memory chip prices in the second half. “And I believe there will be a shortage in 2024.”

Yet the company looks to be facing a tougher road than others. For one, the Apple Inc. supplier is expected to post a net loss in each quarter of the 2023 fiscal year, according to analyst estimates compiled by Bloomberg. In contrast, Samsung and TSMC are set to stay in the green all year.

And while SK Hynix’s shares have risen alongside technology stocks more broadly this year, they are still 38% below their 2021 peak as the company works through an outsized amount of inventory following its acquisition of Intel Corp’s flash memory business.

The stock is priced at 2.4 times sales projected over the next 12 months, greater than an average of 1.7 times over the past decade, according to data compiled by Bloomberg.

The key to the stock’s immediate performance is likely to be held in the upcoming results announcement.

One should “pay more attention to further announcement on production cuts rather than short-term sluggish performance,” said Yuanta’s Gilhyun.

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