Following the rise in global interest rates, the strengthening South Korean won has emerged as a new variable in the domestic equity market, prompting a series of downward revisions to earnings forecasts for major semiconductor stocks. Global investment bank Citi lowered its operating profit estimates and target prices for both Samsung Electronics (005930.KS) and SK Hynix (000660.KS), reflecting the currency impact.

According to the financial investment industry on the 3rd, Citi revised down its third-quarter operating profit estimate for SK Hynix from the previous 76.7 trillion won (approximately $56.4 billion) to 74 trillion won (approximately $54.5 billion) in a report released on the 1st. This falls below the consensus estimate of 78.7166 trillion won (approximately $57.9 billion) compiled by financial data provider FnGuide. The annual operating profit forecast was also lowered from 261.1 trillion won (approximately $192.1 billion) to 254.2 trillion won (approximately $187.1 billion). Citi stated that the downward revision reflects the decline in the won/dollar exchange rate. The target price was also reduced from 3.1 million won (approximately $2,300) to 3 million won (approximately $2,200).

Samsung Electronics’ earnings forecast was also significantly lowered due to currency effects. Citi cut Samsung Electronics’ third-quarter operating profit estimate by approximately 10%, from 115.5 trillion won (approximately $85.0 billion) to 104.1 trillion won (approximately $76.6 billion). The revision reflects unfavorable currency movements and bonus provisions. In this process, the currency impact from the won’s appreciation was estimated at approximately 5 trillion won (approximately $3.7 billion).

The won/dollar exchange rate surged to 1,559 won in May before reversing course, surrendering the 1,500-won level, and last month it broke below the 1,400-won mark as well. On the 1st, the Seoul foreign exchange market closed at 1,370.4 won in weekly trading, down 11.8% from the 1,554.9 won close on July 1st — marking a 13-month low. On the 3rd, the market opened at 1,359 won.

Securities firms are also noting that the rapid won appreciation could exert short-term pressure on South Korean corporate earnings forecasts. Hwang Su-wook, an analyst at Meritz Securities, explained: “In the early stages of sharp won appreciation, historical precedents show that concerns about downward earnings estimate revisions emerge first. While won appreciation is a factor that will ultimately give the Korean market momentum through foreign capital inflows once absorbed in the short term, the initial phase will inevitably require digesting one round of earnings estimate revisions.”

Semiconductors are considered a representative sector vulnerable to won appreciation. This is because revenue earned in dollars shrinks when converted to won as the Korean currency gains value. The recent slowdown in the semiconductor sector’s profit growth rate adds further pressure. According to Mirae Asset Securities, the semiconductor sector’s quarter-over-quarter profit growth rate is estimated to decline from 55% in the second quarter to 29% in the third quarter of this year.

Shin Hyun-yong, an analyst at Yuanta Securities, noted: “The semiconductor sector, which has driven the steep upward earnings trend across the broader market this year, is seeing its earnings momentum weaken, diminishing its leadership role in the market from an earnings perspective.”

Some counter that it is premature to interpret the slowdown in semiconductor profit growth as a sign of a cyclical peak. Samsung Electronics and SK Hynix earnings are still expected to grow, and a declining growth rate against a high base is a natural phenomenon, they argue.

Meanwhile, domestic securities firms have also been releasing reports since last month lowering target prices for Samsung Electronics and SK Hynix. Kiwoom Securities lowered its Samsung Electronics target price from 390,000 won (approximately $290) to 350,000 won (approximately $260) on the 10th of last month, citing “adjustments to earnings forecasts and market interest rates.” For the same reasons, it also cut its SK Hynix target price from 2.2 million won (approximately $1,600) to 2.1 million won (approximately $1,500). LS Securities lowered its SK Hynix target price from 3.3 million won (approximately $2,400) to 2.4 million won (approximately $1,800), citing downward revisions to high-bandwidth memory (HBM) earnings forecasts.

The market is placing greater weight on the possibility of further declines in the won/dollar exchange rate. Despite the recent rapid descent, the exchange rate remains elevated when viewed over the past decade. Lee Sang-yeon, an analyst at Shinyoung Securities, explained: “This appears to be the early stage of the excessively weak won returning to a normal range. While the pace may pose some burden on exporter earnings, the level is favorable for both export competitiveness and foreign tourist consumption demand.”

Woori Bank lowered its won/dollar exchange rate floor from the previous forecast of 1,380 won to 1,340 won on the same day. Min Kyung-won, an economist at Woori Bank, said: “Given the clear recovery in South Korea’s export cycle led by semiconductors and heavy industry, and considering semiconductor prices and sales volumes, the investment appeal of the domestic equity market could re-emerge, which should drive the exchange rate lower through early next year.”

The following table summarizes the forecast adjustments for Samsung Electronics and SK Hynix by major institutions.

InstitutionStockItemPreviousRevisedCitiSK HynixQ3 operating profit76.7 trillion won74 trillion wonCitiSK HynixAnnual operating profit261.1 trillion won254.2 trillion wonCitiSK HynixTarget price3.1 million won3 million wonCitiSamsung ElectronicsQ3 operating profit115.5 trillion won104.1 trillion wonKiwoom SecuritiesSamsung ElectronicsTarget price390,000 won350,000 wonKiwoom SecuritiesSK HynixTarget price2.2 million won2.1 million wonLS SecuritiesSK HynixTarget price3.3 million won2.4 million won

Note: Citi figures based on the report dated the 1st; Kiwoom Securities based on the 10th of last month; LS Securities based on last month’s report. Consensus figures are compiled by FnGuide, with SK Hynix Q3 operating profit consensus at 78.7166 trillion won.