A visitor walks across the Samsung Electronics Co. exhibition space at the IFA consumer electronics fair in Berlin, Germany. (Photographer: Tim Fadek/Bloomberg)

$3 Billion Hedge Fund Bets Samsung’s Woes Are Bad News for South Korea’s Stock Market

(Bloomberg) -- For a $3 billion hedge fund, the consequence of analysts growing increasingly pessimistic about Samsung Electronics Co. is clear: South Korea’s stock market is poised to suffer.

That’s why Lime Asset Management Co. is planning to add to bearish bets on the nation’s shares, expanding its long-short equity strategy as a long-only one is unlikely to work this year, according to the firm’s chief executive officer, Jongjun Won. The chipmaker is expected to announce preliminary results on Tuesday, and analysts in Seoul have been rushing to cut their fourth-quarter earnings forecasts, he said.

2019 has started on the wrong foot for Samsung, which dropped 3.2 percent after a 24 percent plunge last year driven by concerns that the global chip-industry “supercycle” is ending. Following record earnings in the third quarter, analysts have lowered their operating-profit estimates for the final three months of 2018 to 13.9 trillion won ($12.4 billion) on average, which would be the least since the first quarter of 2017, data compiled by Bloomberg show.

“I can’t buy the stock for now, no matter how cheap it is, as earnings estimates are falling faster than I expected,” Won said. “Some people say profit will fall again to around 10 trillion won for the first quarter. I can’t buy a stock if there’s no dream.”

$3 Billion Hedge Fund Bets Samsung’s Woes Are Bad News for South Korea’s Stock Market

Memory-chip shipments, which account for 70 percent to 80 percent of Samsung’s total profit, appear to be fewer than expected, and their selling price is falling at a faster pace than forecast, said Jongwoo Yoo, an analyst at Korea Investment & Securities. He estimates bit growth -- the amount of memory produced -- fell 2 percent in the fourth quarter for DRAM, while gaining as much for NAND.

Contract prices have fallen more than 10 percent for 32-gigabyte DRAM server modules since September, and 31 percent for 128-gigabit MLC NAND flash memory chips in all of 2018, according to InSpectrum Tech Inc.

The increase in DRAM supply that’s resulted in a drop in chip prices is making major data centers “strategically” delay purchases, according to Hyun-Woo Doh, an analyst at NH Investment & Securities. South Korea’s semiconductor exports, which account for up to a fifth of the nation’s total exports and are led by Samsung and peer SK Hynix Inc., fell 8.3 percent in December from a year earlier, the first year-on-year drop since September 2016.

Samsung’s other businesses such as home appliances, smartphones and screens are unlikely to improve soon, Lime Asset’s Won said. Apple Inc., a Samsung rival in the smartphone market but a client of its chips, lowered its revenue outlook last week for the first time in nearly two decades, and that will hit Samsung Display Co., a majority-owned business that exclusively supplies organic light-emitting diode (OLED) panels to Apple, according to Hana Financial Investment.

Won said he will watch whether Samsung or any other chipmaker including Micron Technology Inc. will announce plans to reduce supply in their earnings conference calls, which could lead to a stock-buying opportunity. Samsung already said it will lower inventory, Maeil Business Newspaper reported Jan. 3, citing unidentified company officials.

While Lime Asset is increasing bearish bets on the South Korean stock market, Won sees opportunities in 2019 and has hired managers recently, including a new head of equities. His hedge fund’s assets -- which include bonds and derivatives -- have risen by almost six times in two years, he said.

“The Korean market where the long-only strategy works has gone,” Won said. “It is time for a long-short play.”

©2019 Bloomberg L.P.