Won's surge drags down earnings outlook for Samsung Electronics, SK hynix

Following a global rise in interest rates, a strengthening won has emerged as a new variable for South Korea's stock market. Global investment bank Citi cut its operating profit forecasts and target share prices for both Samsung Electronics and SK hynix, citing the impact of exchange rate movements.

According to the financial investment industry, Citi's report released Tuesday lowered its third-quarter operating profit estimate for SK hynix to 74 trillion won ($56 billion) from 76.7 trillion won. The revised figure falls below the consensus of 78.72 trillion won compiled by financial data provider FnGuide.

Citi also trimmed its full-year operating profit forecast for SK hynix to 254.2 trillion won from 261.1 trillion won, attributing the cuts to the won's decline against the dollar. In line with the earnings revision, the bank lowered its target share price for the company to 3 million won from 3.1 million won.

The earnings outlook for Samsung Electronics was also sharply reduced on exchange rate concerns. Citi cut its third-quarter operating profit estimate for Samsung Electronics by 10 percent, to 104.1 trillion won from 115.5 trillion won, reflecting unfavorable currency effects and provisions for bonuses.

In lowering its Samsung Electronics third-quarter operating profit estimate, Citi factored in roughly 5 trillion won in currency headwinds from the won's appreciation.

Analysts say the rapid strengthening of the won could weigh on near-term earnings forecasts for domestic companies. The won-dollar rate had surged to 1,559 won in May before reversing course and falling below the 1,500 won level. Last month it slipped below 1,400 won. The rate opened at 1,359 won in the Seoul foreign exchange market Thursday.

"In the early stages of a sharp won appreciation, history shows that the first concern is a drop in earnings estimates," said Hwang Su-wook, a researcher at Meritz Securities. "A stronger won is something the market can digest in the short term, and over time it can attract foreign inflows and give the Korean market momentum — but in the early phase, the market will ultimately need to work through a round of earnings estimate revisions."

The semiconductor sector is widely regarded as one of the industries most vulnerable to a stronger won. As the won rises in value, converting dollar-denominated revenue into won reduces both sales and profit.

A slowdown in the pace of earnings growth in the semiconductor sector adds to the pressure. According to Mirae Asset Securities, the sector's quarter-on-quarter earnings growth rate is estimated to fall to 29 percent in the third quarter from 55 percent in the second quarter of this year.

"The semiconductor sector, which has driven the sharp upward earnings trend across the broader market this year, is seeing its earnings momentum slow, weakening its ability to lead the market on the profit side," said Shin Hyeon-yong, a researcher at Yuanta Securities Korea.

Some analysts push back against reading the slowdown in semiconductor earnings growth as a signal that the sector has peaked. They note that earnings at Samsung Electronics and SK hynix are still expected to grow, and that a lower growth rate is a natural consequence of a high base.

According to the FnGuide consensus, Samsung Electronics' annual operating profit is forecast to rise to 554.23 trillion won next year from 393.35 trillion won this year. SK hynix is similarly expected to grow from 266.44 trillion won this year to 397.22 trillion won next year.

"The slowdown in semiconductor earnings growth reflects the burden of a high base," said Yoo Myeong-gan, a researcher at Mirae Asset Securities. "The most important metric for valuation is not the earnings growth rate but the stability and profitability of earnings."

He added that return on equity and operating profit margins for semiconductors would significantly exceed past cycle levels in both 2026 and 2027, and that current valuations — which already price in the sector's cyclical limitations — have fallen to excessively low levels.

Citi also said that despite near-term earnings pressure from exchange rates, the memory chip upcycle itself remains intact.