KB証券 on the 6th said the semiconductor sector's steep decline that persisted throughout July has come to an end and that, starting in August, the market will enter a full-fledged earnings-driven phase. It said excessive leverage unwinding and supply-demand shocks have been offset, while global big tech's conviction in AI investment and a structural supply-demand imbalance will propel share prices.
KB証券 assessed that semiconductor stocks fell an average of 34% in July, surpassing the declines seen during past financial crises and the COVID-19 period. It projected that, starting this month, a rebound led by the semiconductor sector with clearly improving earnings will unfold.
According to KB証券, the July plunge in the semiconductor sector occurred after speculative positions had piled up amid a global semiconductor concentration from April to June and an excessive expansion of margin leverage.
As concerns grew over the sustainability of artificial intelligence (AI) investment due to big tech's free cash flow (FCF) deficits and as geopolitical risks such as the Iran situation surfaced at the same time, the largest bout of panic selling in four years since 2022 unfolded.
However, the negative factors that had pressured the market are quickly being resolved. As cloud reservations by major North American big tech companies have effectively been filled through 2028, concerns about FCF deficits have turned into conviction about expanding AI demand and investment.
With the possibility of a truce between the United States and Iran increasing, the burden on international oil prices and long-term U.S. interest rates is also expected to ease.
Compared with the explosive growth of the AI market, supply capacity is far from sufficient. As of the third quarter of this year, the fulfillment rates for memory and AI substrates among big tech customers have been tallied at only the 60% to 70% level.
KB証券 explained that unmet demand exceeding supply will be carried over each year to the next, leading to a chain of demand carryovers from this year to next year and then to 2028.
Considering that it takes at least two to more than three years to complete new memory and substrate production lines, supply shortages over the next three years appear unavoidable.
Kim Dong-Won, head of research at KB証券, said, "Through earnings releases, major big tech and AI substrate companies recently said that sales reservations are effectively completed through 2028 and that free cash flow is improving sharply on the back of high utilization rates and price increases," adding, "All customers are accepting price hikes while simultaneously requesting large-scale capacity expansions."
The burden from Korea's relatively overheated stock market has also eased significantly. In the first half, the KOSPI rose more than 100% from the start of the year, posting a gain more than double that of Taiwan's Taiex. However, as of Aug. 5, the year-to-date gain fell to 57%, narrowing the gap with the Taiex (54%) considerably.
KB証券 viewed July's sharp drop in the KOSPI not as a bull market collapse but as the conclusion of an unwinding of excessive concentration and supply-demand shocks.
Kim said, "The KOSPI's valuation for next year currently stands at a price-earnings ratio (PER) of 5.0, a price-to-book ratio (PBR) of 1.26, and a return on equity (ROE) of 28%, remaining at historically low levels," adding, "In particular, Samsung Electronics(005930)'s P/E for next year is only 3.6, and SK hynix(000660)'s is just 3.5."