EUR 850.00 For Business Accounts Only

Morningstar | Memory Recovery is Mostly Embedded to the Share Price; Retain Samsung’s FVE of KRW 51,000

Samsung Electronics’ earnings guidance was fairly in line with our forecasts, excluding the one-time factor. The company announced its operating income for the June quarter will be approximately KRW 6.5 trillion, a 56% drop from the previous year, but still above our forecast of KRW 6 trillion. However, while the company did not disclose the breakdown, it suggested there were some one-off gains in the display business and we therefore assume the semiconductor business continued to be weak in the June quarter as we anticipated. While Samsung’s share price surged more than 20% from its recent bottom, implying an expected recovery in late 2019, we are concerned about the completion of inventory correction and the pick-up in demand may be more delayed than the market’s expectation, owing to the intensifying United States-China trade tensions. However, we do not change our fair value estimate of KRW 51,000 because the potential delay to a recovery does not make a material change to our mid-term earnings forecast. Samsung’s shares seem slightly undervalued now, but we recommend that investors take a larger margin of safety.

While we believe the recovery is mostly embedded to the share price, our impression is the recent news is mixed. We therefore think the upside to its share price is limited. On the positive side: 1) the supply-demand balance of NAND flash seems to have tightened because of the power cut in Toshiba’s Yokkaichi fab; 2) chip manufacturers are suggesting a cut in capital expenditure for 2019 and 2020, which will further tighten the supply-demand gap; and 3) the recent decline in pricing will stimulate demand, especially for NAND. On the negative side, DRAMeXchange expects the DRAM price decline in the September quarter will widen to 10%-15%, which is larger than our assumption of high-single-digit declines, which will continue dragging down Samsung’s profitability.

Tensions between Japan and Korea also seem to be another risk factor. The Japanese government announced it will apply new licensing policies to the export of three semiconductor chemicals to South Korea, and these licences are estimated to take three months to be approved. As South Korean chipmakers, Samsung and SK Hynix, both seem to have less than three months of inventories for these materials, they might need to stop production if they cannot source necessary materials while waiting for approval. In this case, the new licensing procedure may temporarily benefit Micron, the third DRAM player following Samsung and SK Hynix, and may further contribute to the tightening supply-demand balance of DRAM. However, we do not believe the new procedure will affect Samsung’s chip production in the long term.