Samsung’s Momentum Trailing Off, But Still A “Buy” For Mirae

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Mirae Asset Securities analysts Hyunwoo Doh and Yongjei Jeong rate Samsung as a Buy, as they analyze the Korean tech giant’s earnings momentum. The Bloomberg consensus for Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s 4Q13 operating profit is currently KRW10.355tn. However, concerns have been rising over a further decrease in Samsung’s operating profit estimate, due to the latest forex rate trends and one-off issues. These concerns have resulted in a 4.3% drop in SEC shares over the past four trading days.



Samsung’s Earnings momentum to weaken through 1Q14

We estimate Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s 4Q13 sales at KRW60.1tn (+1.7% QoQ), operating profit at KRW9.3tn (-8.5% QoQ) and net profit at KRW7.6tn (-7.4% QoQ). We lowered our operating profit estimate by 6.2% from the previous KRW9.9tn. Our revised operating profit estimate falls 10% below the Bloomberg consensus of KRW10.36tn.

The downward revision to our operating profit estimate is due mainly to: 1) the adjustment of bonus payment amount, as the company paid more than KRW400bn in special bonuses (100% of base salary) to celebrate the 20th anniversary of Samsung’s “New Management Initiative;” 2) fine-tuning by business division to reflect the adjustments to the Display Panel (DP) division’s capacity utilization ratio estimate and the IT & Mobile Communications (IM) division’s ASP estimate; and 3) a 4% QoQ decline in the average US dollar won exchange rate in 4Q13 (KRW1,062, as of 31 December).

Operating profit estimation by business division

By business division, we estimate operating profit of KRW2.3tn (+6% QoQ) for semiconductors; KRW5.9tn (-12.4% QoQ) for IM; KRW537.2bn (-45% QoQ) for DP; and KRW586.3bn (+67.5% QoQ) for Consumer Electronics (CE). The semiconductor division should see an improvement in earnings, backed by the DRAM market upswing, while the CE division should also post strong earnings growth on seasonally strong demand. However, the IM division should see a decrease in earnings, due to slower high-end smartphone sales and inventory destocking, while the DP division should also post poor earnings, due to ASP drop and lower AMOLED capacity utilization.

An earnings recovery by Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is unlikely to be seen in 1Q14. We estimate Samsung’s 1Q14 operating profit at KRW9.2tn (-1% QoQ), which breaks down to: KRW2.2tn (-4.9% QoQ) in semiconductors; KRW6tn (+2.3% QoQ) in IM; KRW676.8bn (+26% QoQ) in DP; and KRW386.1bn (-34.1% QoQ) in CE. Earnings momentum should remain tepid in 1Q14, due to the IT industry’s seasonally weak demand.

BUY ratings and target price maintained

We maintain our BUY rating and target price of KRW1,800,000 for Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930). Our target price is based on a target P/B of 1.8x, considering our three-year ROE estimate of 19%. Samsung’s quarterly earnings uptrend, which had remained intact until recently, should continue to slow through 1Q14. As such, its share price momentum should weaken until an earnings recovery is seen. However, we believe the share price downside will be limited, given that: 1) the shares currently trade at FY14E P/E of 6.3x, the lowest among global IT firms; and 2) the company has recently announced changes to its shareholder policy (an increase in the dividend yield rate).

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