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Samsung Electronics tips record Q1 profit as chip boom winds down

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Samsung Electronics Co Ltd tipped a surprise record first-quarter profit on Friday but market reaction was muted due to growing concerns that the semiconductor boom that has driven the South Korean tech giant’s earnings is about to end.

Samsung shares fell after the announcement as analysts forecast similar or lower profit in the second quarter, due to slower growth in DRAM chip prices and higher marketing costs for the flagship Galaxy S9 smartphone.

“Even if profits start falling in the second half, Samsung will have a strong balance sheet this year,” said Song Myung-sup, analyst at HI Investment & Securities, predicting looser supply of DRAM chips to start driving down prices.

The global semiconductor leader and Apple Inc smartphone rival forecast January-March profit to leap 57.6 percent from a year earlier to 15.6 trillion won ($14.7 billion), beating an average forecast of 14.5 trillion won from a Thomson Reuters survey of 21 analysts.

Revenue for the quarter was tipped to rise 18.7 percent to 60 trillion won, Samsung said in a regulatory filing. The company did not elaborate on its performance and will disclose detailed earnings in late April.

Samsung shares fell as much as 2.7 percent on Friday before paring losses to fall 0.7 percent as of 0345 GMT (11.45 p.m. ET), compared to a 0.4 percent drop in the wider market.

Analysts said Samsung’s shares were affected by a UBS report forecasting an increase in the supply of DRAM chips used in servers, which dragged down Micron Technology Inc shares more than 6 percent on Thursday.

The prices of NAND chips commonly used in mobile devices began falling late last year and analysts have been closely watching for signs of the peak in the DRAM price boom as well.

Even if DRAM price growth is at its peak, analysts said Samsung remained on track for record annual earnings.

“Although gains in memory chip prices have slowed from the height of the chip boom, lower prices could also increase demand for chips, and Samsung has the cost-cutting ability to keep profits up,” said Greg Roh, analyst at HMC Investment & Securities.

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interest payments on bonds,impact on investors

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Vehicles drive near unfinished residential buildings from the Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China September 16, 2021.

Carlos Garcia Rawlins | Reuters

The first test for Evergrande’s debt crisis comes this week — investors will be watching to see if the embattled Chinese property developer is able to pay out its interest due on a bond, or default on it.

The firm is due to pay interest worth $83 million on Thursday, according to data from S&P Global Ratings.

Evergrande’s 5-year, U.S.-dollar denominated bond, had an initial issue size of around $2 billion, according to market data provider Refinitiv Eikon – although the price has plummeted now.

Yields on this bond have skyrocketed to 560%, from just over 10% earlier this year, according to Refinitiv Eikon. The bond is due to mature in March 2022.

Another interest payment on a 7-year U.S. dollar bond is due next Wednesday.

“What happens on Thursday promises to be a seminal event for markets, one way or the other, bigger perhaps than the FOMC outcome which will have occurred just a few hours before,” Ray Attrill told CNBC, referring to the U.S. central bank’s meetings which are closely watched by investors.

Analysts and market watchers largely expect Evergrande to miss the interest payment on Thursday. However, it will not technically default unless it fails to make that payment within 30 days.

S&P Global Ratings said Monday that a default was “likely.”

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“Fact is, Evergrande is already in technical default having missed bank interest payment,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. He was referring to reports that the Chinese government told major banks that the real estate giant will not be able to pay interest on its loans that were due earlier this week on Monday.

“With risks of missing a bond coupon later this week, the capacity to spook capital markets remains significant; considering Evergrande accounts for ~11% of all Asia high-yield bonds,” Varathan wrote in a note on Tuesday.

Foreign investors, offshore bonds may be hit first

If these initial defaults happen, institutional and other foreign investors will likely be more affected compared to domestic investors in China, analysts said.

It’s possible that onshore, yuan-denominated bonds may take priority over offshore, dollar denominated bonds. Offshore bonds are mostly held by institutional or foreign investors, whereas domestic retail investors in China are more likely to own onshore bonds.

“Clearly, the optics of bond investors getting paid when retail wealth management product holders and home-buyers are a long way off clarity, much less, resolution, do not sit well,” Varathan told CNBC in an email.

The case for treating the obligations owed to retail investors of wealth management products more favorably is therefore “strong given the social stability angles on this,” he said.

Protests by angry homebuyers and investors have broken out in recent week in some cities, and social unrest is a key concern.

Last week, around 100 investors turned up at Evergrande’s headquarters in Shenzhen, demanding repayment of loans on overdue financial products — forming chaotic scenes, according to Reuters.

The priority on domestic investors will therefore have implications on the default risks for offshore dollar-denominated bonds — mostly held by institutional or other foreign investors — versus onshore bonds, mostly held by domestic investors.

“An additional point of interest though is whether the coupon due on offshore bonds will get a less preferential treatment to onshore bond coupons — especially given the asymmetric arrangement whereby offshore default does not trigger cross-default (whereas onshore default triggers cross-default for offshore),” Varathan told CNBC. A cross default occurs when a default triggered in one situation spreads to other obligations, leading to a broader contagion.

“In other words, will Evergrande choose to just default on offshore bonds while honouring onshore commitments?” Varathan asked.

Which funds own Evergrande bonds?

UBS, HSBC and Blackrock have been accumulating Evergrande bonds over the past few months, according to Morningstar Direct data.

“We’ve seen a few funds adding to China Evergrande between July and August 2021, given widening spreads and attractive valuations,” said Patrick Ge, manager research analyst at Morningstar.

Here are the top funds with the highest exposure to Evergrande bonds, according to Morningstar.

  • Fidelity Asian High-Yield Fund
  • UBS (Lux) BS Asian High Yield (USD)
  • HSBC Global Investment Funds – Asia High Yield Bond XC
  • Pimco GIS Asia High Yield Bond Fund
  • Blackrock BGF Asian High Yield Bond Fund
  • Allianz Dynamic Asian High Yield Bond

CNBC’s Brittany Dawe contributed to this report.

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Don’t expect Beijing to provide direct support to Evergrande, says S&P

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Outside the China Evergrande Group Royal Mansion residential development under construction in Beijing, China, on Friday, Sept. 17, 2021.

Gilles Sabrie | Bloomberg via Getty Images

The Chinese government is not likely to step in to give direct support to debt-ridden developer China Evergrande Group, according to S&P Global Ratings.

“We do not expect the government to provide any direct support to Evergrande,” said the S&P credit analysts in a Monday report. “We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy.”

“Evergrande failing alone would unlikely result in such a scenario,” they added.

Even in Evergrande’s home province, the developer is insignificant to Guangdong’s vast local economy — it is not too big to fail.

Fears over a potential contagion from Evergrande into the broader Chinese economy and beyond dragged down the Hang Seng index in Hong Kong by more than 3% on Monday. The sell-off continued across the globe.

Evergrande is the world’s most indebted developer and has racked up about $300 billion in debt. It is due to make a number of interest payments for its bonds starting Thursday. S&P said a “default is likely” on those payments.

“We believe the Chinese banking sector can digest an Evergrande default with no significant disruption, although we will be mindful of potential knock-on effects,” S&P said.

In Tuesday morning trade, shares of Evergrande in Hong Kong fell about 4% — its seventh straight session of declines, though far less than the over 10% decline on Monday.

Evergrande’s chairman tried to reassure markets on Tuesday, and said the firm will fulfill its responsibilities to property buyers, investors, partners and financial institutions, Reuters reported Tuesday citing local media.

‘Not too big to fail’

S&P analysts likened the Evergrande fallout to the case of Chinese bad debt manager Huarong, which sparked a market rout earlier this year when it failed to report earnings on time and its U.S. dollar-denominated bonds plunged.

“We don’t expect government actions to help Evergrande unless systemic stability is at risk,” S&P said. “A government bailout would undermine the campaign to instill greater financial discipline in the property sector.”

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Instead of a bailout, Beijing might facilitate negotiations negotiations and funding to ensure individual investors and homebuyers are “protected as much as possible,” the analysts said.

“The government is willing to help, but also wants events to take their course. Even in Evergrande’s home province, the developer is insignificant to Guangdong’s vast local economy — it is not too big to fail.”

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Wise launches investing feature

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The Wise logo displayed on a smartphone screen.

Pavlo Gonchar | SOPA Images | LightRocket via Getty Images

LONDON — British financial technology firm Wise debuted an investments feature Tuesday that lets users invest in stocks through multiple currencies and spend their holdings.

The new feature, called Assets, allows customers to invest in BlackRock’s iShares World Equity Index Fund, which tracks a basket of 1,557 of the world’s biggest public companies. The fund’s holdings include Apple, Amazon and Alphabet.

Users will also be able to instantly spend up to 97% of the invested money in their accounts with a Wise debit card, or send funds overseas. The idea is that customers can hold their funds in stocks, but also still spend and send the money in real time.

“Holding money in various currencies can be hard to manage efficiently,” said Kristo Käärmann, Wise’s CEO and co-founder.

“Assets is seeking to solve that problem, by providing an opportunity for customers to earn a return on their money with us, in a host of different currencies, all in one place.”

Wise says it is holding back 3% of users’ invested cash as a “buffer” in case of any large market fluctuations, to prevent customers’ balances from dipping into negative territory.

The company is initially launching Assets for personal and business customers in the U.K. but plans to roll out the product in Europe at a later date.

Formerly known as TransferWise, Wise began life as a platform offering cheaper currency exchange. It has since expanded its range of products to include multi-currency accounts linked to a debit card.

Now, Wise is rolling out investment accounts after having secured authorization from U.K. regulators last year.

The company says its customers now hold a total of £4.3 billion ($5.9 billion) in their balances globally.

Retail investor boom

Wise’s investing feature is different to that of other fintech platforms like Robinhood and Revolut, which let users trade a variety of different stocks, often without paying commission fees.

With Assets, Wise users will get exposure to hundreds of stocks and can use their holdings to pay for goods or send money abroad in a number of different currencies.

Wise charges an annualized 0.55% service fee and a 0.15% fund fee on the value of a user’s assets, which is taken monthly in arrears.

The launch of Assets comes after a surge in retail investors participating in the stock market, as consumers searched for alternative ways to earn a return on their savings.

Earlier this year, amateur traders inspired by a Reddit forum flocked to GameStop, the video game retailer, helping to fuel wild swings in its stock price.

It’s the first major product update since Wise went public in London earlier this year. Rather than raising money in an initial public offering, the firm’s employees and investors sold their shares directly to the public.

The debut was viewed as a big win for the U.K., where the government is looking to reform London’s listing regime to make it more attractive for tech companies following Brexit.

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