Samsung Electronics (OTCPK:SSNLF) & SK Hynix (OTC:HXSCL) take the crowns as the top 2 companies in South Korea. Samsung making the top 2 is hardly a surprise, as it is also the world's 16th largest company by 2019 market cap ($278.7 bln) and the world's largest semiconductor company by 2018 total revenue ($221.5 bln). In terms of South Korea, Samsung holds the no. 1 position for total revenue, while Hynix with $36.8 bln holds the only the 10th position. However, when looking at 2018 net earnings, Hynix jumps to 2nd place with $14.1 bln in net income, behind Samsung with 39.9 bln in net income. Accordingly, this feat translates into these 2 companies accounting for 21.9% of the entire Korean Stock Exchange market capitalization. Hence, we refer to these 2 companies as the Korean Duo or K2.
The fact that K2 are extremely profitable, is no surprise as they are both semiconductor companies (which have extremely high margins). The semiconductor industry is the forefront of technology, digitalization and automation. These companies enable new technologies for emerging markets such as Artificial Intelligence, Cloud Computing, 5G, Internet of Things, Autonomous & Electric Vehicles and Augmented & Virtual Reality. What is amazing is that the combined net income of K2 ($54.0 bln) in 2018 surpasses that of the combined net income of the remaining 48 of the top 50 companies in South Korea ($43.9 bln). Finally, both companies operate under a larger group or chaebol - defined as a family-controlled industrial conglomerate of South Korea (a common occurrence in the country).
South Korea is the world's 12th largest economy, and Asia's 4th largest economy (behind China, Japan and India). According to the International Monetary Fund, South Korea is classified as an advanced economy, being just one of six Asian countries on the list (excluding the remote China states - Hong Kong, Taiwan, Macau). Its GDP has been growing at an average annual rate of 2.76% over the past 5 years. The country's interest rates averaged at 1.48% in the past 5 years but has been recently cut to a record low of 0.75% by the Bank of Korea to mitigate the negatives impacts of the pandemic in tandem with other advanced Asian economies such as Singapore, Hong Kong ('China'), and Taiwan ('China'). South Korea's interest rate is the second lowest among these advanced Asian economies, only Japan has a lower interest rate.
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South Korea has an average debt-to-GDP ratio of 36% over the past 10 years but has risen to 41.4% this year and could rise further, as the government introduced several economic stimulus packages to boost the economy but the ratio still remains much lower relative to other advanced economies such at Japan at 200.6% and Singapore at 114.1% debt-to-GDP. In terms of employment, the country's unemployment rate stood at 4.15% in 2019 higher than its 10 year average of 3.59% and is expected to rise sharply this year as business sentiment is severely affected globally and widespread layoffs become inevitable.
South Korea has been a net exporter for the past 10 years, growing at an average 4% rate per year as, the semiconductor industry benefited from rising chip demand for cloud computing and telecommunication applications. Nevertheless, net exports fell by 70% in 2019 due the memory market downturn and growing threats of trade disputes between major economies. Additionally, the country's current account surplus fell by 22% to $59.97 bln in 2019 from $77.47 bln in 2018, representing a 7-year low.
The country has also witnessed a strong uptrend in foreign direct investments, increasing 26% per year on average to $23.3 bln in 2019, the trend is attributed to growing capital flows from emerging nation partners under its free trade agreements with Asian and Middle Eastern regions as well as growing number of multinational companies such as Apple, BP, Toyota establishing headquarters and investing in R&D facilities across the country.
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While South Korea has become known as an electronics manufacturing hub (probably due to K2), its economy is quite diversified across the 11 sectors. The top 15 companies alone include those in
Rank Company Market Capitalization ($US Bln) Sales Profits Sector 1 Samsung Electronics $278.70 bln $197.6 bln $18.4 bln Technology 2 SK Hynix $47 bln $23.2 bln $1.3 bln Technology 3 LG Chem $23.70 bln $24.6 bln $0.13 bln Industrials 4 Naver $23.50 bln $5.8 bln $0.497 bln Communication 5 Celltrion $23.10 bln $0.97 bln $0.26 bln Healthcare 6 Hyundai Motor $20.10 bln $90.5 bln $2.3 bln Discretionary 7 LG Household & Health Care $19.10 bln $6.5 bln $0.67 bln Staples 8 Samsung SDI $15.70 bln $8.6 bln $0.26 bln Technology 9 Samsung C&T $14.30 bln $25.7 bln $0.97 bln Industrials 10 Hyundai Mobis $13.20 bln $31.9 bln $1.8 bln Industrials 11 SK Telecom $12.70 bln $15.2 bln $0.75 bln Communication 12 Korea Electric Power $12.60 bln $50.7 bln $-2 bln Utilities 13 Posco (PKX) $12.10 bln $53.2 bln $1.3 bln Materials 14 Shinhan Financial Group $11.70 bln $33.9 bln $2.9 bln Financials 15 KB Financial Group $11.10 bln $37.3 bln $2.7 bln Financials Click to enlarge
Having said this, the fact remains that K2 makes up a large portion of South Korea. In 2018, revenue from K2 represented 15.96% of the country's GDP.
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Samsung happens to be the world's largest semiconductor company by revenue, and SK Hynix is the fourth largest semiconductor company by revenue. The South Korean semiconductor industry (which is basically just K2) has specialized into memory chip manufacturing. This gives it an edge over other Asian semiconductor companies which are mostly foundries and outsourced semiconductor assembly & test ('OSAT') providers. There are mainly 2 types of memory chips in the market; DRAM and NAND. Samsung hold the large market shares in both markets. Their closest peer competing with them in both markets is US-based Micron Technology (MU). Together with Micron, they form the global DRAM oligopoly, dubbed the 'DRAM Trio' or 'D3'.
2020 Market Share DRAM NAND Samsung 44% 35.5% SK Hynix 29% 9.6% Micron 22% 11.3% Kioxia - 18.7% WDC - 14.7% Intel - 9.7% Others 5% 0.6% Click to enlarge
Both DRAM and NAND account for nearly 30% of the global IC market. While DRAM is a volatile form of memory use, while NAND is a non-volatile form of memory, both are equally important in storage applications and has anticipated greatly in the face of rapid advances in cloud computing, 5G and AI technologies. Although market oversupply in the past few years has impacted revenue across the industry, 2020 is looking to be a year of recovery for the memory market driven by constricting supply from reduced output growth and a surge in demand for server chips as data centers scale up capacity to handle increased bandwidth from work from home and virtual learning. Due to these factors, we expect DRAM and NAND market revenues to grow at an average yearly rate of 8% and 15% respectively.
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The South Korean semiconductor industry is truly the backbone of the global memory market, the country alone accounts for around 70% of DRAM and 50% of NAND output globally. To retain the status of the country as the memory manufacturing hub and fend off competition from China, Samsung and SK Hynix announced that they will invest a combined $33 bln over the next 4 years.
Most people will know Samsung Electronics for their line of consumer electronics products or the flagship Galaxy smartphones, however the group is highly diversified with business segments that encompasses mobile phones, consumer electronic devices, display panels, audio systems (Harman) and semiconductor segments. With over 200 subsidiaries involved in production, R&D and marketing, the company achieves scale unseen among its competitors, allowing the company to reach top customers including Apple (OTC:APPL), Best Buy (BBY), Deutsche Telekom (OTCQX:DTEGF), Huawei, and Verizon (VZ) which combined accounts for about 13% of revenues.
We view its semiconductor business to be most promising. Due to the extremely high margins of the industry, Samsung's semiconductor segment represents 50% of its net income despite making up only 26.17% of its revenue. The company had enjoyed an early technological lead as the first to use EUV process in mass production of memory chips which allowed the company to gain share and achieve market leadership in DRAM and NAND. With the introduction of V-NAND, the company maintains its technological leadership while extending its reach in premium memory markets in high performance computing and data centers. We expect growth to be driven by strong demand in data centers and smartphone launches with higher storage capacity in latest models.
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Although facing intense competition from Chinese manufacturers, Samsung's mobile segment retains its lead as the world's leading smartphone manufacturer with slightly below a quarter of market share while contributing 40.7% of revenues. Notwithstanding, the outlook on the mobile handset market is challenging due to market saturation and lengthening product life cycles resulting in stagnating industry sales, growth will highly dependent on 5G product launches and while the company is enjoying an early lead in terms of 5G sales in 1Q2020, we anticipate the launch of the 5G Apple iPhone to pose
Samsung happens to be the world's largest semiconductor company by revenue, and SK Hynix is the fourth largest semiconductor company by revenue. The South Korean semiconductor industry (which is basically just K2) has specialized into memory chip manufacturing. This gives it an edge over other Asian semiconductor companies which are mostly foundries and outsourced semiconductor assembly & test ('OSAT') providers. There are mainly 2 types of memory chips in the market; DRAM and NAND. Samsung hold the large market shares in both markets. Their closest peer competing with them in both markets is US-based Micron Technology (MU). Together with Micron, they form the global DRAM oligopoly, dubbed the 'DRAM Trio' or 'D3'.
2020 Market Share DRAM NAND Samsung 44% 35.5% SK Hynix 29% 9.6% Micron 22% 11.3% Kioxia - 18.7% WDC - 14.7% Intel - 9.7% Others 5% 0.6% Click to enlarge
Both DRAM and NAND account for nearly 30% of the global IC market. While DRAM is a volatile form of memory use, while NAND is a non-volatile form of memory, both are equally important in storage applications and has anticipated greatly in the face of rapid advances in cloud computing, 5G and AI technologies. Although market oversupply in the past few years has impacted revenue across the industry, 2020 is looking to be a year of recovery for the memory market driven by constricting supply from reduced output growth and a surge in demand for server chips as data centers scale up capacity to handle increased bandwidth from work from home and virtual learning. Due to these factors, we expect DRAM and NAND market revenues to grow at an average yearly rate of 8% and 15% respectively.
Invest To Kospi
The South Korean semiconductor industry is truly the backbone of the global memory market, the country alone accounts for around 70% of DRAM and 50% of NAND output globally. To retain the status of the country as the memory manufacturing hub and fend off competition from China, Samsung and SK Hynix announced that they will invest a combined $33 bln over the next 4 years.
Most people will know Samsung Electronics for their line of consumer electronics products or the flagship Galaxy smartphones, however the group is highly diversified with business segments that encompasses mobile phones, consumer electronic devices, display panels, audio systems (Harman) and semiconductor segments. With over 200 subsidiaries involved in production, R&D and marketing, the company achieves scale unseen among its competitors, allowing the company to reach top customers including Apple (OTC:APPL), Best Buy (BBY), Deutsche Telekom (OTCQX:DTEGF), Huawei, and Verizon (VZ) which combined accounts for about 13% of revenues.
We view its semiconductor business to be most promising. Due to the extremely high margins of the industry, Samsung's semiconductor segment represents 50% of its net income despite making up only 26.17% of its revenue. The company had enjoyed an early technological lead as the first to use EUV process in mass production of memory chips which allowed the company to gain share and achieve market leadership in DRAM and NAND. With the introduction of V-NAND, the company maintains its technological leadership while extending its reach in premium memory markets in high performance computing and data centers. We expect growth to be driven by strong demand in data centers and smartphone launches with higher storage capacity in latest models.
Stock Market Crash
Although facing intense competition from Chinese manufacturers, Samsung's mobile segment retains its lead as the world's leading smartphone manufacturer with slightly below a quarter of market share while contributing 40.7% of revenues. Notwithstanding, the outlook on the mobile handset market is challenging due to market saturation and lengthening product life cycles resulting in stagnating industry sales, growth will highly dependent on 5G product launches and while the company is enjoying an early lead in terms of 5G sales in 1Q2020, we anticipate the launch of the 5G Apple iPhone to pose
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