Won-dollar rate has fallen from above 1,500 to the mid-1,300s in two months, squeezing exporters' earnings as dollar revenues shrink in won terms; overseas investment banks have cut third-quarter forecasts for Samsung Electronics and SK hynix by up to 10 percentage points
The won-dollar exchange rate has plunged from above 1,500 won to the mid-1,340s in just two months, setting off alarm bells for South Korea's export-dependent companies. Industry analysts warn that every 100-won move in the exchange rate can swing operating profit by trillions of won, casting a shadow over second-half earnings.
According to the financial investment industry, the exchange rate — which surged well past 1,500 won per dollar in early July — tumbled to the 1,330s intraday earlier this month before rebounding to around 1,380, swinging sharply in both directions.
The rapid drop to the mid-1,300s has put exporters on high alert. For semiconductors, automobiles and display panels — industries that sell products in dollars but pay a large share of costs in won — a weaker dollar translates directly into lower earnings.
"Sensitivity varies by company depending on overseas production ratios and currency-hedging levels, but for some companies a 100-won drop in the exchange rate can reduce operating profit by more than 1 trillion won ($724 million)," an industry official said.
The semiconductor sector is the most exposed. Samsung Electronics and SK hynix receive most of their chip revenues in dollars while paying labor and other major costs in won. When the exchange rate falls, selling the same volume of chips at the same dollar price yields less revenue and profit once converted into won.
Global investment bank Citigroup recently cut its third-quarter operating profit forecasts for Samsung Electronics and SK hynix by 10 percentage points and 3 percentage points, respectively, to reflect the stronger won.
Samsung Electronics' third-quarter operating profit estimate was lowered from 115.5 trillion won to 104.1 trillion won — a reduction of 11.4 trillion won — while SK hynix's forecast was trimmed from 76.7 trillion won to 74 trillion won, a cut of 2.7 trillion won. Combined, the two companies' third-quarter forecasts fell 14.1 trillion won from previous estimates.
The cuts to full-year forecasts are even larger. Samsung Electronics' annual operating profit estimate was reduced 7.1 percent, from about 394.8 trillion won to 366.7 trillion won, while SK hynix's was lowered 2.64 percent, from 261.1 trillion won to 254.2 trillion won. The combined reduction in annual operating profit forecasts for the two companies amounts to about 35 trillion won.
Nomura Securities also recently estimated that a 10 percent appreciation in the won could reduce domestic memory chipmakers' operating profit by about 12 percent in the short term, citing the fact that roughly 20 percent of their costs are denominated in won.
Nomura also cut its third-quarter operating profit forecast for SK hynix from 86 trillion won to 77 trillion won — a reduction of 9 trillion won — reflecting the stronger won, while projecting Samsung Electronics' third-quarter operating profit at 107 trillion won. The bank said the earnings drag would likely be offset by rising average selling prices for memory chips.
SK hynix's own internal analysis points to similarly significant exposure. According to the company's semi-annual report, assuming foreign-currency assets and liabilities remain unchanged from end-June levels, a 10 percent drop in the won-dollar rate would reduce pre-tax profit by about 4.75 trillion won.
Automakers face a comparable challenge. According to Daol Investment & Securities, a 100-won annual average decline in the won-dollar rate would reduce Hyundai Motor's annual operating profit by about 1.9 trillion won and Kia's by about 1.4 trillion won. Combined, a 100-won drop would move the two companies' operating profit by about 3.3 trillion won. Each company's operating profit margin would also fall by roughly 1 percentage point.
The display sector is taking a direct hit as well. LG Display is particularly vulnerable given its high export cost base, which means a stronger won weighs heavily on its results.
Daishin Securities on Thursday cut its third-quarter operating profit forecast for LG Display by about 25 percent, from 436 billion won to 325.3 billion won. The brokerage cited the average won-dollar rate as of Tuesday falling 4.6 percent from the second quarter and 12.7 percent from end-June as pressuring profitability. Slowing demand for IT devices — driven by rising semiconductor and key raw material prices — added to the headwinds.
Full-year estimates were also marked down. Daishin Securities cut its annual operating profit forecast for LG Display by 24.5 percent, from 888 billion won to 671 billion won, and trimmed next year's forecast by 10.7 percent, from 1.18 trillion won to 1.06 trillion won. The simultaneous drag from a weaker exchange rate and "chipflation" is compressing margins on two fronts.
To be sure, a stronger won is not an unmitigated negative for exporters. When the exchange rate falls, the won-denominated cost of raw materials, components and production equipment purchased in dollars also declines.
For major exporters in semiconductors, automobiles and displays, however, dollar-denominated revenues typically far exceed foreign-currency costs, meaning the hit to sales and operating profit outweighs any savings on the cost side.
Within the industry, concern is growing that the fourth quarter could prove more difficult than the third. The Bank of Korea's monetary policy stance suggests the won could strengthen further from current levels. Bank of Korea Governor Shin Hyun-song, at a press briefing following the central bank's benchmark interest rate hike last month, said that early action on monetary policy "leaves room for the won to appreciate further."
Corporate Korea is also watching the speed of the exchange rate moves. The sharp swings of hundreds of won in a short period have shaken the exchange rate assumptions companies built into their business plans. Samsung Electronics and SK hynix are closely monitoring exchange rate developments and reviewing their domestic and overseas investment and spending plans as they reassess their business plans for this year and next.
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