The authors are analysts of Shinhan Investment Corp. They can be reached at firstname.lastname@example.org and email@example.com, respectively. – Ed.
3Q21 OP forecast at KRW16tr (+27.5% QoQ)
Samsung Electronics is expected to report operating profit of KRW16tr (+27.5% QoQ) on sales of KRW71.9tr (+13.0% QoQ) for 3Q21, slightly exceeding the consensus estimate (KRW15.7tr). Earnings growth should be driven by: 1) increase in DRAM and NAND prices; 2) upturn in smartphone shipments; 3) higher OLED capacity utilization rates; and 4) forex effect.
By division, operating profit is projected at KRW9.9tr (+42.9% QoQ) from semiconductors, KRW3.8tr (+16.0% QoQ) from IT & mobile communications (IM), KRW1.4tr (+13.0% QoQ) from displays, and KRW0.9tr (-18.8% QoQ) from consumer electronics (CE).
Uncertainties unlikely to increase further
Adding to concerns over a memory market peak after 3Q21, uncertainties in 4Q21 and 1Q22 earnings have increased due to disruptions in the IT supply chain. DRAM and NAND prices are projected to drop by 4% and 2% QoQ in 4Q21, respectively, and by 5% and 4% QoQ in 1Q22. However, memory market conditions should improve from 2Q22. We are mindful of the recent slowdown in the spread of COVID-19 in Vietnam and Malaysia and the slowing pace of decline in DRAM spot price. The shift to a steep down-cycle in memory market conditions is only possible if prolonging supply chain disruptions erase any chance of IT demand growth.
For 2022, we forecast sales at KRW299.5tr (+9.0% YoY) and operating profit at KRW61.6tr (+16.0% YoY).
Valuation call →momentum call
Demand for Samsung’s new foldable smartphone models (Galaxy Z Fold 3 and Z Flip 3) launched in August has far exceeded expectations. Strong foldable demand will likely have limited impact on short-term earnings given the pace of parts procurement, but should act as a positive for the shares. The company is highly likely to repeat its initial success in the smartphone market seen at the start of OLED adoption. Expectations are high for synergy between smartphone and parts (display, chips) businesses. We are also upbeat on recent price hikes for non-memory chips amid supply shortages.
We expect Samsung Electronicshares to recover from excessive corrections in the short term (valuation call), then rally alongside increasing orders from clients (momentum call). Momentum should pick up in 4Q21 with the easing of supply chain disruptions and depletion of inventories at client companies.