The author is an analyst at NH Investment & Securities. He can be reached at [email protected] — Ed.
Affected by macro factors, demand for IT devices is slowing down. In particular, demand for smartphones is sluggish. Improvements in memory supply and demand are expected to be delayed until early 2023. Supply limitations resulting from increasing difficulties in transitioning semiconductor processes and insufficient supply of equipment are positive for SEC.
Macro impacts undermine demand for IT products
We are maintaining a buy rating on Samsung Electronics (SEC) but lowering our TP from W87,000 to W78,000. our risk-free rate assumption in line with the increase in interest rates. Demand for computing devices, including smartphones, is slowing due to macroeconomic factors such as rising global interest rates, war in Europe and lockdowns in China.
Improvements in memory semiconductor supply and demand, which were previously expected to begin in 2H22, are now expected to be delayed until early 2023. In May, smartphone sales in China fell to 20, 6 million units for a fifth consecutive month of decline. Reacting to sluggish sales, major smartphone makers are cutting parts purchases to reduce inventory. SEC’s 2Q22 smartphone sales volume is expected to slip to 68 million units (-9% qq).
Weak increase in memory semiconductor supply is positive
We expect the SEC to record 2Q22 selling of W74.9tn (-4% qq) and OP of W14.1tn (flat qq). By division, 2Q22 OP is projected at: DS (semicon) W10.0tn (+18% qq), SDC (display) W0.8tn (-22% qq), MX/NW (combined) W2.5tn (-35% qq) qq) and VD/HA W0.7tn (-15% qq), with the impact of weak smartphone sales reflected in MX division earnings.
In terms of positive momentum, we note both continued tight supply conditions and currently low SEC valuations. The challenges of developing DRAM on nodes of 14nm or less are increasing and yield control is proving difficult. Affected by a tight supply of equipment, investments in new capacities are not going smoothly. As a result, DRAM supply growth is likely to be limited to +17% in 2022 and +18% in 2023. Due to the recent share price decline, SEC shares are trading at a P/ E 2022E of 8.0x and a P/B of 1.2x. We note that the 10-year low for the company’s P/B sits at 1.0x.