Samsung Electronics
Samsung Electronics Co Ltd (005930.KS)
Rating: Outperform
Price (KRW): 2,361,000
Target Price (KRW): 3,400,000
52-week price range (KRW): 1,885,000 - 2,876,000
Market Cap (KRW T): 303.121
Company Overview
Next week car makers, social media mammoths and chip manufacturers will descend on Barcelona for the Mobile World Congress, an exhibition featuring all the latest developments in technology, and at the top of the agenda: the unveiling of Samsung’s Galaxy S9. Yet smartphones are only a fraction of the Korean giant’s business. Samsung Electronics Co Ltd, led by long-standing chairman Lee Kun Hee, engages in the manufacturing and distribution of an array of electronic products. The tech company’s revenue generating functions can be separated into a trio of segments:
1. Consumer Electronics (CE) produces household appliances including smart color televisions (CTVs), high speed printers, Wi-Fi enabled refrigerators and laundry machines with QuickDrive Technology to name a few. Looking at 4Q17 results, QoQ earnings improved in both the TV and digital appliances space led by ultra large-size/QLE TVs and flexwash respectively especially during the festive season.
2. Information Technology & Mobile Communications (IM) includes computers, network systems, digital cameras, and handhold phones (HHP). 4Q17 results were perceived to be slightly disappointing when compared to CE with smartphone sales decreasing because of little demand for low-end models and higher marketing costs. Network systems’ earnings also remained weak although this was expected due to the cyclical nature of LTE investments being concentrated in Q1 and Q2.
3. Device Solutions (DS) represents Samsung’s semiconductor and display parts business which are distributed domestically and in foreign markets. In the last quarter, Samsung focused on creating differentiated products in the Dynamic Random Access Memories (DRAMs) space, but also faced weak seasonality in other areas.
Investment Thesis and Catalysts
1. Samsung has an ambitious outlook for 2018 especially in its IM business unit as the company looks to pursue earnings growth by increasing the sale of premium products; this will likely be driven by an expansion of flagship products, most notably the Galaxy S9. Ahead of the Mobile World Congress Samsung have already promised to “reimagine” the camera, a signal there be more advanced imaging capabilities to differentiate itself along with reportedly offering Bixby Smart Assistant and 6GB of RAM. The target price of 3,400,000 KRW has been based on better than predicted smartphone shipments as well as higher margins.
2. While Apple’s (APPL: NASDAQ) iPhones and Samsung’s smartphones are rival goods, the launch of the iPhone 8 in September 2017 will continue to yield positive results for Samsung in the foreseeable future. Samsung was already a major supplier of Mobile DRAM (DRAM is used for data or program code in phones) to the iPhone 7. With AAPL's decision to use OLED displays for the iPhone 8, Samsung will also be supplying all of APPL’s initial OLED requirement in 2017/2018. Forecasts show Samsung should be able to more than double its OLED revenue from 15.4tn KRW in 2016 to 34.9tn KRW in 2018 which would contribute positively to the top line of the income statement.
3. Lastly, Samsung are well placed to reap the benefits from an increase in demand for semiconductors as we enter an era of cloud computing, autonomous vehicles and the Internet of Things (a network of vehicles and household appliances controlled by a single device) which are all emerging industries that represent demand for computer chips. The higher density trends and innovation of new datacenters is expected to keep demand for server products (e.g. DRAM & NAND) strong and Samsung is poised to capitalise on this. Samsung dethroned Intel in the second half of 2017 when it came to superconductor revenues and have 61% market share. Their shares are also undervalued, trading at a P/E of 9.1 compared to an industry average of 17.7 and Intel’s P/E at 24.11.
Risks and External Influences
1. Samsung has faced criticism for its murky and opaque governance, an issue heightened when Lee Jae-Yong, Samsung Electronics’ Vice-Chairman went to prison for bribing South Korea’s former President. Despite the company’s strong fundamentals, one concern has been the company’s ‘image especially with family-run conglomerates in Korea, known as chaebol, becoming more associated with corruption, a sign that profits for family members are prioritized over shareholder value. At the moment, Samsung’s performance is still strong thanks to memory chips, but if sales slow, a poor corporate image can become a big contributor to long term problems.
2. Despite market maturity and saturation, Samsung still believe there is room to grow in the premium end and that the premium models will appeal to those looking to upgrade older models. However, analysts believe new phone models in recent years have only offered incremental improvements because of the small room for innovation when it comes to smartphones. Furthermore, any marginal gains in recent years have normally been made in either screens, cameras or processors. In recent years, Samsung have been diversifying more into areas like autonomous driving by acquiring US component supplier Harman International and setting up a $300m fund to invest in automotive start-ups.
References
https://www.reuters.com/finance/stocks/companyProfile/005930.KS
https://www.ft.com/content/01d3d768-17cb-11e8-9376-4a6390addb44
http://images.samsung.com/is/content/samsung/p5/global/ir/docs/2017_4Q_Earnings_Release_Samsung_Electronics.pdf
https://www.ft.com/content/c868ebfa-18ae-11e8-9376-4a6390addb44
https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=csplusresearchcp&document_id=1075351661&serialid=iZpKlhJjF%2BY4kVgzX10gE49oT1E0%2Bd33Ico0tmYsuh4%3D
https://seekingalpha.com/article/4088982-samsung-well-placed-boom-increased-demand-computer-chips
https://www.ft.com/content/ae135ad8-049a-11e8-9650-9c0ad2d7c5b5