"AI Infrastructure Demand Remains Strong...Buy Samsung Electronics and SK hynix While They're Cheap" [Weekend Money]

Mirae Asset Securities Maintains "Overweight in Semiconductors" View
"Focus on Order Backlog Trend... Up 24% from Previous Quarter"

Mirae Asset Securities stated on July 5 that concerns over a contraction in artificial intelligence (AI) demand are excessive, maintaining its overweight recommendation for the semiconductor sector and reiterating its buy ratings for both Samsung Electronics and SK hynix.

Yonhap News Agency

Kim Younggeon, a researcher at Mirae Asset Securities, explained, "On July 1, Meta’s entry into the cloud business highlighted the potential for surplus AI computing resources, which has led to an overall adjustment in the semiconductor sector. However, Mirae Asset Securities does not believe this issue signifies a decisive reduction in AI infrastructure investment. We consider this a favorable period for value investing in the semiconductor sector."

Based on the latest guidance from global big tech companies, Mirae Asset Securities forecasts that total capital expenditure (CAPEX) for 2026 will reach 806 billion dollars (approximately 1,253.1688 trillion won), representing a 73.0% increase year-on-year. The firm also anticipates that growth of over 20% will continue into 2027. Kim pointed out, "Alphabet has announced that its CAPEX this year will double compared to the same period last year, and it has committed to significant growth next year as well. Meta has also admitted to underestimating computing demand in the past."

Kim emphasized that, with a higher base for CAPEX, the focus should now be on the direction of the order backlog. As of the first quarter, the total remaining performance obligations (RPO) disclosed by global big tech companies stood at 2.1 trillion dollars (3,265.08 trillion won), up 24% from the previous quarter. Notably, the total backlog expected to be realized within 24 months was 656 billion dollars (1,019.94888 trillion won), showing a higher growth rate than the overall total.

Kim noted, "The size of the total order backlog is about 20 times the total cloud sales (or 6.5 times if considering realization within 24 months), indicating substantial potential demand. For example, Oracle increased its backlog from 552 billion dollars last quarter to 638 billion dollars recently, a 16% increase." He added, "There is still potential for the order backlog across big tech firms to expand further."

Based on this analysis, Mirae Asset Securities maintained its buy ratings for Samsung Electronics and SK hynix. For Samsung Electronics, the company estimates second-quarter and full-year operating profit at 8.4 trillion won and 38.3 trillion won, respectively, and kept its target price at 550,000 won. As of July 2, the price-to-earnings ratio (P/E) and price-to-book ratio (P/B) were 6.4x and 2.7x, significantly below the industry averages of 14.1x and 8.6x, respectively. On a target price basis, the P/E and P/B ratios are 11.7x and 4.9x, respectively.

Kim stated, "Samsung Electronics is believed to have secured nearly half of its sales through long-term supply agreements with multiple big tech companies. Furthermore, leveraging its industry-leading production capacity (CAPA), the company is well-positioned to secure additional long-term supply agreements (LTA) with customers in the Greater China region." He continued, "Assuming a 50% shareholder return from free cash flow (FCF) between 2024 and 2026, the 2026 dividend yield is expected to be 3.9% to 6.8% for common shares and 5.9% to 10.3% for preferred shares, compared to the current share price."

For SK hynix, the company estimates second-quarter and full-year operating profit at 7.1 trillion won and 29.9 trillion won, respectively, and maintained its target price at 4.2 million won. Based on the current share price, SK hynix's P/E and P/B ratios are 7.5x and 4.7x, which are significantly below the industry averages. On a target price basis, the P/E and P/B ratios for this year are 12.8x and 8.1x, respectively.

They also view the upcoming listing of American Depositary Receipts (ADR) scheduled for July 10 as a valid momentum driver. Kim commented, "Based on the offering price, the company's market capitalization is expected to rank within the top 25 of the Philadelphia Semiconductor Index (SOX), raising hopes for index inclusion as of September next year. We anticipate that the ADR will maintain a certain premium over the underlying stock, and expect the stock price to move in tandem."

This content was produced with the assistance of AI translation services.