Apple Inc. (NASDAQ:AAPL) and Samsung are now competing in a two horse race. Analysts at CIMB research are out with an initiation report recommending Samsung as a strong buy. The analysts at CIMB state that “starting 2012, the smartphone industry has become more of a ‘2-horse’ race between Samsung and Apple Inc. (NASDAQ:AAPL), as their combined value-based market share soared to 68% from 55% in 2011 with SEC gaining market share at the expense of HTC, Blackberry, Nokia and Motorola.” CIMB has some interesting points on this race between Apple Inc. (NASDAQ:AAPL) and Samsung which we detail below:
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CIMB expects Samsung Electronics Co. Ltd. (LON:BC94) (KSE:005930)’s flagship models to enjoy snowball effects, taking further market share at the high end of the market. High-end smartphone (>US$300) portion is estimated at 40-45% this year, with shipment growth (30-40%) outpacing the high-end smartphone market’s growth of around mid-single digits yoy. Their checks indicate that S4’s initial orders may exceed S3’s by at least 20-30%, and volume could far exceed checks, given that Apple Inc. (NASDAQ:AAPL)’s product refresh (dubbed as Apple iPhone 5S by the press) may not happen until late 2Q13 or early 3Q13, according to some press reports.
They expect Samsung’s mid-end smartphone (US$200-300) portion to almost double to 20% of its shipment volume this year with the successful launch of a spec-down version of high-end models such as Galaxy S3 Mini (out in early 4Q12) and Galaxy Grand (late 4Q12), for which sales appear already strong. Additionally, the mid-range phones should help the company fulfil consumers’ appetite for high-end ‘look and feel’ in Europe, Asia and the US with a smaller subsidy burden for telecom operators. The segment should also support Samsung’s competitiveness against the potential launch of a spec-down version of the iPhone unless Apple makes a drastic price move from its current US$600+ ASPs. Given cost savings from components, they believe margins for mid-range phones should be at least similar to Samsung’s overall handset margins.
Samsung’s’s AP business (60% of System LSI revenue) has benefited a lot from the company’s handset division and Apple Inc. (NASDAQ:AAPL), which have been the two most successful smartphone makers globally in recent years. However, as Apple is now trying to diversify its AP manufacturing partners (likely to include TSMC from next year) and capex for process migration is increasingly burdensome (capex per wafer capacity almost doubling for 20nm vs. 32nm), CIMB believes that Samsung wants to diversify its customer base. One of the main reasons for its vague capex guidance this year is that semiconductor capex can vary substantially depending on new customer wins for 14/20nm processes.
CIMB estimates that Apple could have taken up 40-45% (50-60k wafers per month) of SEC’s 12-inch System LSI capacity. They think Apple is not likely to pull out SEC completely at least in the next few years, as US$bn-12bn of capex (equivalent to almost 90% of the company’s entire System LSI sales in 2012) is probably needed for the 20nm HKMG (High-K metal gate) process for a new foundry vendor and much more for the 14/16nm FinFET (3D structure-based) process. Rather,they expect Apple Inc. (NASDAQ:AAPL) may continue to use Samsung but with less volume in the future, using the company’s 28nm (just linear extension of current 32nm), potentially 20nm and 14nm wafers as well. In the meantime, they predit demand growth for smartphones to take up whatever capacity is left over from Apple Inc. (NASDAQ:AAPL)’s potential order shift away from SEC; as:
1) SEC’s smartphone volume growth is expected to remain strong (44% in FY13 and 29% in FY14); and 2)Samsung’s AP share within its captive market is expected to grow further within high- to mid-end smartphones with improving performances/costs going forward.
CIMB notes that catalysts for Samsung range from its extended smartphone leadership, diversification of System LSI products and customers, expansion of OLED display applications to a friendlier shareholder-returns policy.