MU: A butterfly flaps its wings in Korea
South Korea casts an outsized shadow on the global electronics supply chain. The shocking series of events in S Korea over the past 24 hours, a country known for its political stability, is sending shivers down the supply chain in Asia, already on edge due to the trade uncertainty radiating from the US. MU may be an accidental beneficiary.
–xx–
The Won lost: The Korean Won was down as much as 2.8% overnight after the surprise declaring of martial law by the President. Over the next 24 hours as the lawmakers of both parties voted down the President’s declaration and after the President lifted martial law, the Won recovered to down 1% from its pre-martial law level. We note that forex shocks on the order of 100bps is hugely problematic for global supply chains.
Cost of imports: Even if Korean politics return to status quo, the damage to the credibility of the nation’s currency may linger. Overnight, the Japanese Yen strengthened against the Korean Won. The Japanese Yen may matter more directly to the Korean economy than the USD. Cost of imports from Japan, a major supplier of raw materials to Korea’s silicon fabs, is likely to spike up. And as a result, the price of silicon chip exports out of Korea too is likely to move up.
Feedback from the Taiwan supply chain suggests that there is marked concern. The prices of commodity memory products in Taiwan reacted almost immediately. While it may take days for prices to settle down, we are hearing commodity NAND flash prices jumped 2%-3% overnight. The abrupt jump in flash price is an added burden to PC ODMs, whose margins run typically below 10% and are faced with a weak demand environment.
MU – an accidental beneficiary: Upward movement in Korean memory prices could be a positive for MU, especially as its USD denominated input prices are relatively insulated from the Won volatility. On the flip side, currency fluctuation could have knock-on effect of suppressing end demand for consumer goods, which may reduce the demand for MU’s memory products.
Trading call: A stabilization in falling memory prices could be positive for MU. And WDC. We maintain our $110 PT for MU.
KC Rajkumar