Goldman Sachs and UBS cut their earnings forecasts and share target prices on Samsung Electronics Co Ltd and Hynix Semiconductor Inc, underscoring a weakening outlook for the chip maker sector.
A recent deterioration in prices for DRAM memory chip prices used in computers on the back of excess supply has raised expectations earnings will peak in the current quarter, and then worsen and remain weak through the first half of next year.
Investors are also growing worried that suppliers are responding by increasing production of NAND memory chips, which power gadgets such as digital music players, also causing price falls in that sector.
Goldman Sachs analysts noted DRAM memory chip prices had seen inventories rise as companies such as Samsung and Japan's Elpida Memory Inc increased production.
For the DRAM industry to see a more sustainable recovery, we would need to see DRAM companies reducing capex levels, Goldman's Seung Hoon Han and Caris Lee wrote in a report dated on Thursday.
Goldman Sachs cut its target price on Samsung Electronics to 731,000 won from 807,000 won, while lowering its 2007 net profit forecast by 4 percent and 2008 estimate by 12 percent.
The investment bank cut its target price on Hynix Semiconductor to 35,000 won from 41,200 won and cut its 2007 net profit estimate by 4.5 percent and its 2008 forecast by 14.2 percent. Samsung Electronics fell as much as 1.6 percent during the day, before ending up 0.4 percent at 562,000 won in a last-moment surge, against a 1.9 percent gain in the wider KOSPI.
The world's top maker of memory chips is down 8.3 percent for the year, compared with the KOSPI's 28.8 percent gain.
Second-ranked Hynix Semiconductor dropped 2.9 percent to 30,500 won, bringing its loss for the year to 16.3 percent.
Separately, UBS said DRAM average selling prices (ASPs) likely peaked in the second half of August, two months before its expectations, and said current levels were not profitable for most makers of the memory chip.
We believe most pure play DRAM makers should be at or below break even profitability and may face more pressure in Q4, UBS analyst Christian Dinwoodie in a report dated on Wednesday.
UBS cut its target price on Samsung to 675,000 won from 740,000 won while lowering its 2007 and 2008 net profit forecasts by 4.8 percent and 3.9 percent, respectively.
For Hynix, UBS cut its target price to 38,000 won from 47,000 won while cutting its 2007 and 2008 net profit forecasts by 12 percent and 22.6 percent, respectively.