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The big trading dichotomy ahead of Samsung earnings

[SEOUL] There's a big divide of opinions on what's next for Samsung Electronics Co.

As the world's largest memory chipmaker gets ready to release quarterly results, questions about the timing of an industry recovery and a market rumour that one of its products is flawed have been circling around. Along with an unusual profit warning last week, that's hurting sentiment. At the same time, Micron Technology Inc's plan to cut output has lifted some spirits.

That's led to a dichotomy: Foreign investors have bought 576 billion won (S$685.4 million) of Samsung shares since Micron's announcement two weeks ago, making it the most-purchased stock on South Korea's benchmark Kospi index. On the other hand, local institutional and retail investors have both gone for the exit as analysts trimmed their estimates, projecting a drop in operating profit to 6.9 trillion won for the first quarter, which would be the worst since 2016. The company is expected to release preliminary results Friday.

"Foreign investors believe markets will be eventually normalised, with a supply control by makers that will adjust inventory," said Shawn Oh, an equity trader at NH Investment & Securities who communicates with overseas investors. "Locals are still staying a bit on the pessimistic side on the near-term outlook."

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Samsung has rebounded 20 per cent this year, almost completely erasing its 2018 plunge. That's partly on hopes that the market for memory chips will recover as exports of Korean semiconductors jumped last month from a two-year low.

Recent Chinese factory data also boosted optimism that the global economic slowdown may not be that bad, a positive for exporters such as Samsung, according to Yoon Joon-won, a fund manager at HDC Asset Management.

"Everyone is discussing when the industry hits its bottom," Mr Yoon said. "Memory-chip prices could probably fall again in the second quarter, but if the decline is within our acceptable ranges, we may be able to hope for a rebound in the industry. Micron's comment is changing the atmosphere."

Views are split on the future of the industry. Firms from Morgan Stanley to Deutsche Bank AG say the downturn is likely to continue amid high inventory and weak chip sales. For DRAM, a chip memory popular in smartphones, DRAMeXchange expects prices to fall 15 per cent in the second quarter and 10 per cent in the third. On the other hand, Subin Lee, an analyst at Daishin Securities, says demand for memory chips may improve in the second half of the year as data centres resume their purchases.

Aside from memory-chip woes, Samsung has been struggling to stem a decline in its smartphone sales as consumers wait longer to upgrade their devices. And its display division, which supplies Apple Inc, was hurt by lower-than-expected iPhone sales.

Then the rumour that a defect was found in one of Samsung's main products hit - some expect the company may confirm it, and now questions are arising about the potential impact. Costs related to the allegation may be spread or expensed evenly as allowance for bad debt, Peter Lee, an analyst at Citigroup Global Markets, wrote in a note.

While the stock has rebounded and foreigners are buying, even if demand picks up, it's hard to believe there'll be another so-called "supercycle" similar to the one that buoyed Samsung shares in the past, according to Jung Sang-jin, head of equities at Korea Investment Management.

"The supercycle of the chip industry is still in our memories," he said, adding he's now betting on stocks tied to domestic consumption. "Even if the demand rises and Samsung's profits improve to probably up to 10 trillion won in operating profit, that wouldn't surprise us that much - unless there's 20 trillion won or 30 trillion won of profit."

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