Samsung Electronics: Solid earnings; Volatility to facilitate
The author is a KB Securities analyst. He can be contacted at [email protected] – Ed.
Maintain BUY, target price of KRW105,000
We maintain BUY on SEC and our 12m TP of KRW105,000 based on the following:
(1) Earnings capacity is expected to remain robust during the semiconductor downturn cycle as amplitude decreases and cycle periods shorten, supported by lower inventory levels and limited supply growth.
(2) Non-memory (System LSI) and DP are expected to see their profits increase on price increases and adoption of new technologies (ie, 3nm GAA, OLED).
Memory stocks at end customers excl. PC memory (eight to 10 weeks) is believed to be within the typical range for server and mobile memory (seven to eight weeks). In contrast, stocks at memory vendors are estimated to be only one week (vs. typically three to four weeks). As a result, the downward volatility of memory prices appears to be significantly lower than it was in 2H18.
3Q21 forecast: OP of 16.1 tn KRW (+ 30% year-on-year)
For 3Q21, we forecast a turnover of KRW73.0tn (+ 14.6% QoQ, + 9.0% YoY) and a PO of KRW16.1tn (+ 28.2% QoQ, + 30.4% YoY; 22.1% OPM). The PO is expected to exceed the market consensus of KRW 15.8 billion and reach its highest level since 3Q18 (KRW 17.5 billion). We expect the OP to increase in QoQ from KRW3.5tn to 3Q21, with semiconductors alone contributing KRW3.1tn of the increase. By division, we estimate OP of KRW10.0tn for Semiconductor, KRW3.7tn for IM, KRW1.5tn for DP and KRW0.8tn for CE. For 4Q21, we expect OP to slow QoQ to KRW15.0tn (-6.7% QoQ, + 66.1% YoY; 20.3% OPM) due to a deceleration in the rise in memory prices and a seasonal slowdown in demand.
Focus on reducing earnings volatility
Recently, SEC stocks have performed poorly amid concerns that the firm’s bargaining power will erode as buyers stock up on memory stocks and the semiconductor cycle peaks. Unlike previous downward cycles which resulted in increased price volatility for B2C products (i.e. PCs, laptops, mobile devices), this time around we would expect significantly lower volatility given the elements. following: (1) Stocks at memory suppliers are low in a context of limited supply capacity. (2) The launch of Intel’s new CPU, Sapphire Rapids, in 2Q22 is expected to act as a catalyst for a new round of server replacement, leading to increased demand for B2B products (servers). Accordingly, we recommend that you focus on the evolution of the memory shutdown cycle.