Affected by macro factors, demand for IT devices is slowing. In particular, demand for smartphones is sluggish. Memory supply-demand improvement is likely to be delayed until early-2023. Supply limitations stemming from the rising difficulties in semiconductor process transition and insufficient equipment supply are positive for SEC.
Macro impacts sapping demand for IT products
We maintain a Buy rating on Samsung Electronics (SEC) but lower our TP from W87,000 to W78,000. The downward adjustment in TP reflects both a trimming of our 2022E~2023F earnings estimates and a hike to our risk-free rate assumption in line with interest rate increase. Demand for IT devices including smartphones is slowing due to macro factors such as global interest rate hikes, the war in Europe, and China’s lockdowns.
Memory semiconductor supply-demand improvement, which was previously expected to begin in 2H22, is now likely to be delayed until early-2023. In May, smartphone sales in China fell to 20.6mn units on a fifth consecutive month of decline. Responding to sluggish sales, major smartphone makers are cutting back on parts purchases to reduce inventory. SEC’s 2Q22 smartphone sales volume should slide to 68mn units (-9% q-q).
Weak supply increase for memory semiconductors is positive
We expect SEC to log 2Q22 sales of W74.9tn (-4% q-q) and OP of W14.1tn (flat q-q). By division, 2Q22 OP is projected at: DS (semicon) W10.0tn (+18% q-q), SDC (display) W0.8tn (-22% q-q), MX/NW (handset) W2.5tn (-35% q-q), and VD/HA W0.7tn (-15% q-q), with the impact of sluggish smartphone sales to be reflected in earnings at the MX division.
In terms of positive momentum, we note both the continuing of tight supply conditions and SEC’s currently low valuations. The challenges in developing DRAM at 14nm or smaller nodes are rising, and controlling yield is proving difficult. Affected by tight supply for equipment, new capacity investment is not proceeding smoothly. As a result, DRAM supply growth will likely be limited to +17% in 2022 and +18% in 2023. Due to the recent share price decline, SEC shares are trading at a 2022E P/E of 8.0x and P/B of 1.2x. We note that the past 10-year low for the firm’s P/B sits at 1.0x.
Source: Business Korea by Doh Hyun-woo. The author is an analyst of NH Investment & Securities.