Semiconductors, Is Now the Time to Buy? “It’s Time to Take a Step Back,” Analyzes CEO Jang Woo-jin of Geum Sigong

Analysis suggests that while shareholder return policies are positive, they alone are unlikely to lead to a complete market re-evaluation of a company. Shareholder returns tend to result in positive market re-evaluation only when a company's earnings remain stable. Jang Woo-jin, CEO of Geum Sigong, pointed out that semiconductor companies like Samsung Electronics and SK Hynix have high earnings volatility, limiting the expectation of long-term re-evaluation based solely on shareholder returns.

While dividends tend to cause a temporary drop in stock price due to ex-dividend dates, share buybacks directly reduce the number of shares, leading to a sustained increase in per-share value. Consequently, it is believed that share buybacks have a greater long-term effect on boosting stock prices than dividends. CEO Jang Woo-jin explained that share buybacks are highly effective in inducing long-term stock price increases.

SK Hynix received positive market reaction with its shareholder return policy focused on share buybacks. In contrast, Samsung Electronics, despite announcing a shareholder return plan worth 90 to 110 trillion won, was evaluated to have slightly underperformed market expectations and disappointed the market by focusing on dividends rather than share buybacks. CEO Jang Woo-jin assessed that Samsung Electronics' shareholder return approach did not meet market expectations.

The financial-industrial separation regulations have been identified as the primary reason Samsung Electronics opts for dividends over share buybacks. Currently, insurance companies like Samsung Fire & Marine Insurance hold significant stakes in Samsung Electronics. If share buybacks were to occur, there's a risk that these insurance companies' shareholding in Samsung Electronics would exceed legal limits. To avoid such legal issues, Samsung Electronics appears to prefer dividends over share buybacks.

While share buybacks have a positive impact on stock prices, the potential release of shares issued as employee incentives must also be considered. Analysis suggests that about 40% of incentive shares could be put up for sale. In the short term, the large scale of share buybacks can have a positive effect on stock prices, but potential selling pressure from incentives in the future needs to be watched closely.

Concerns have been raised that a supply-demand gap could occur in the market once share buybacks conclude, potentially leading to an influx of short-selling. While share buybacks temporarily support stock prices, there is worry that downward pressure on prices could increase once this artificial supply-demand effect disappears. It is necessary to prepare for a situation where the long-short strategies of Samsung Electronics and SK Hynix might diverge.

Using about half of free cash flow (FCF) for shareholder returns is deemed appropriate, but executing this consistently is difficult. It's crucial to hold sufficient cash to prepare for a potential downturn in the semiconductor cycle, and investment in future R&D and technology development is also essential. Therefore, flexible cash flow management is needed rather than excessive shareholder returns.

With midterm elections approaching in the U.S., opposition to data center construction is spreading, increasing market concerns about the possibility of investment deferral. These external variables could affect the entire semiconductor market. Investors are keenly watching whether NVIDIA will directly comment on this issue in its upcoming earnings announcement, as its stance remains unclear.

Nvidia's earnings announcement is generally expected to be positive, but it is unlikely to resolve all market risks, such as future policy concerns. The earnings release is projected to merely alleviate some of the current market worries rather than cause a dramatic market surge. Nvidia's current performance is impeccably strong.

Analysis suggests that if there were no war risk, aggressive investment could be considered in the current market. However, there is a risk that inflation concerns due to the war could spread to AI Capex (capital expenditures). If inflation persists, companies' investment capacity could decrease, negatively impacting AI-related Capex. Due to this potential domino effect of risks, a conservative approach is currently needed.

The U.S. Treasury's long-term bond buyback can be interpreted as a sign of a poor economic situation, similar to government subsidies. The fact that the Treasury, not the Fed, has stepped in suggests that the limits of existing monetary policy have been reached, forcing this action. A buyback occurring amidst significant national debt issuance burdens is likely to be negatively perceived by the market for its effectiveness.

One reason for the recent rise in interest rates is that market investors distrust the Treasury Secretary's policies. So-called 'bond vigilantes' are suspected of dumping bonds, believing the Fed will cooperate with the government to suppress rate hikes. This is leading to a decline in bond values and rising interest rates, indicating that the Treasury's buyback attempts are insufficient to resolve market distrust.

It has been pointed out that the U.S. Treasury's buyback policy alone has limitations in driving down long-term interest rates. Unlike the Federal Reserve, the Treasury cannot control interest rates by buying long-term bonds indefinitely. CEO Jang Woo-jin emphasized that for interest rate stability, direct intervention by the Fed or resolution of fundamental external factors, such as the end of a war, must precede.

A warning has been issued that despite the current lack of market liquidity, aggressive investment driven by positive news like shareholder return policies carries a high risk of losses. It is necessary to meticulously analyze the actual market liquidity situation and maintain a cautious investment stance at this time. Analysis suggests that now is not the time for aggressive investment.

Given that the price attractiveness of leading sectors like semiconductors is not high, advice suggests taking a step back and observing market volatility with a relaxed attitude. Impatience for a surge market can lead to over-investment and losses. CEO Jang Woo-jin emphasized the importance of approaching with sufficient time and caution.

If an investor bought at a high point and is experiencing significant losses of 40-50% or more, it is recommended to hold onto the stock rather than attempt forced trading. There is also a need to be cautious about the possibility of related companies' earnings success stories collapsing if AI demand unexpectedly falters. Therefore, it is better to approach with a long-term perspective rather than trying to recover losses in a hurry.

It is not recommended to sell existing holdings and then try to buy back at the bottom, as this is psychologically very difficult. While the price was mentioned as burdensome at its peak, it has now fallen significantly, so holding is advisable rather than premature selling. It is virtually impossible to accurately time re-entry after selling, so careful judgment is required.

Advice suggests that if you have cash reserves, a phased buying strategy to accumulate stocks over a long period is effective. Lump-sum investment, expecting a short-term recovery, should be avoided. CEO Jang Woo-jin emphasized that given current market uncertainties, it is wise to approach with a relaxed attitude and diversify risk.