Morgan Stanley Defends Downgrades of Asia Tech Titans After Rout

(Bloomberg) -- Morgan Stanley has responded to what it terms “strong” pushback it received from some investors after recent downgrades to Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. as both technology firms slumped this week.

Analyst Shawn Kim, who lowered Samsung to an equal-weight from overweight Nov. 27 while also slashing the price target to 2.8 million won ($2,577), has had to defend his call against a wide body of investors about the South Korean tech giant’s valuation, earnings growth, and the memory chip cycle. Kim had called for a pause after the technology giant’s record-breaking run this year. Samsung fell 5.1 percent the day of Morgan Stanley’s downgrade.

Samsung “has a large institutional ownership and we received significant pushback to our call given the consensual bullish view, with the majority of investors highlighting a secular growth story in data centers and cheap multiples,” Kim said in a Nov. 30 note. “The pushback to our call has been strong, though many agree on the need for a pause.”

Here’s a breakdown of the arguments, and Kim’s rebuttals:

This time is different for memory chips

While computer chips will benefit from the long-term secular growth trend, the vast majority of global demand remains cyclical -- mobile, personal computers and consumers, and history tends to repeat itself.

Everyone knows NAND prices will fall

While Samsung’s flash memory business is often dismissed due to its size, it still accounts for a fifth of the company’s profits.

Cheap valuation

Kim argues revenue is more important for the chip cycle as it tells you how much the market is paying for the product, and their analysis shows sales multiples are at a decade high.

Strong earnings growth

Morgan Stanley shares market expectations for robust earnings in 2018, but the breadth of earnings revisions has turned negative, curtailing the odds of more upside surprises.

Meanwhile, in a separate report also dated Thursday, analysts Charlie Chan and Daniel Yen published their responses to six key investor pushbacks to their decision to lower their recommendation of TSMC to equal-weight on Nov. 26. The stock plunged 7.4 percent this week through Thursday after the downgrade. The pair said their decision was based on “rich” valuations, while they also lowered their revenue forecasts for 2018 and 2019 amid shrinking chip sizes, slowing demand and rising competition.

Samsung is up 41 percent this year, touching a record Nov. 1 to drive gains in South Korea’s benchmark Kospi Index. TSMC has rallied 27 percent in the same period, to a record of its own Nov. 7.

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Divya Balji, Richard Frost

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