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[ANALYST REPORT] Samsung Electronics: 2Q16 preview

June 16, 2016 - 16:08 By Korea Herald
We now expect Samsung Electronics (SEC) to post operating profit of KRW7.65tn (+15% QoQ) for 2Q16, driven mainly by strong sales of Galaxy S7 smartphones. 

SEC has recently been establishing clear leadership over rivals in technological advancement, backed by bold, preemptive investments. 

We thus maintain our BUY rating for SEC and raise our target price to KRW1,650,000.



2Q16 preview

For 2Q16, we expect SEC to report sales of KRW50.03tn (+0.5% QoQ), operating profit of KRW7.65tn (+15% QoQ), and net profit of KRW6.25tn (+19% QoQ). Operating profit should exceed the Bloomberg consensus of KRW6.68tn. 

By division, we estimate operating profit from the Semiconductor business at KRW2.44tn (-7% QoQ); Display at KRW0.04tn (TB QoQ); IT & Mobile Communications (IM) at KRW4.44tn (+14% QoQ); and Consumer Electronics (CE) at KRW0.76tn (+49% QoQ).

Sluggish market conditions have led to a continued downturn in DRAM prices. DRAM margins also likely declined in the process. NAND earnings, on the other hand, have been relatively solid, thanks to an increase in the portion of higher-priced 48-layer 3D NAND. 

Meanwhile, we believe the IM division was the main force behind 2Q16’s earnings growth, with the Galaxy S7 smartphone receiving positive reviews from the market and recording strong sales. 

Strict management of marketing costs and COGS led to notable improvement in margins.

3Q16 outlook

For 3Q16, we estimate sales at KRW50.23tn (+0.4% QoQ) and operating profit at KRW7.3tn (-5% QoQ). By division, we estimate operating profit from the Semiconductor business at KRW2.42tn (-1% QoQ); Display at KRW0.44tn (+881% QoQ); IM at KRW3.87tn (-13% QoQ); and CE at KRW0.63tn (-18% QoQ). 

DRAM prices have recently begun to decline at a slower pace and should help to improve earnings at the Semiconductor division.

The Display division should benefit from seasonal demand and the removal of yield issues that had weighed on recent earnings. The IM division may see a slight dip in earnings, with competition to intensify from the upcoming release of Apple‘s iPhone 7.

BUY maintained, target price raised to KRW1,650,000

We maintain our BUY rating for SEC and raise our target price to KRW1,650,000 from KRW1,550,000. 

Our revised target price reflects adjustments made to earnings forecasts, with the three-year (2016-2018) ROE estimate raised to 12% from the previous 11%.

SEC has recently established clear leadership in technological advancement, with rivals having yet to ramp up to 20nm on DRAM, but SEC already nearing the shift to 18nm.

The company is also the only chipmaker that can mass-produce 3D NAND at this point. In mid/smallsized OLED panels, which most smartphone makers will likely adopt from 2018, Samsung Display maintains a dominant market share.

In all, we find that SEC’s bold, preemptive investments are now starting to bear fruit.

Moreover, the company continues to maintain strict cost control at its smartphone business. Amid sluggish IT market conditions, we thus expect SEC to maintain its solid leadership over peers.


Source: Mirae Asset Securities http://securities.miraeasset.co.kr/eng/jsp/main.jsp