EUR 850.00 For Business Accounts Only

Morningstar | Solid Profitability at the Bottom of the Memory Cycle Supports Samsung’s Cost Advantage

Samsung Electronics announced its earnings guidance for the March quarter, which implies 14% decline on revenue and 60% decline on operating income from the previous year. While Samsung does not disclose the breakdown by products, we view that numbers are in line with the market’s expectation as: 1) Samsung had issued a profit warning on March 26, suggesting that price decline on memories and display panels will drag down its profitability; and 2) recent market research suggests that both DRAM and NAND price have dropped more than 20% from the previous quarter.  Samsung’s operating margin dropped to 11.9% from 25.8% on the previous year, but we assume that semiconductors' operating margin is still approximately 30%, despite the sharp drop on memory pricing, supporting our view Samsung can generate profit from DRAM business even at the bottom of the cycle, leveraging its cost advantage on memory production. We will revise our earnings forecasts after the company discloses detailed numbers, but do not plan to make a material change to our fair value estimate of KRW 55,000, as we believe that the long-term growth scenario of memories, which is driven by the diffusion of 5G, is intact.

Samsung’s share has surged more than 25% from the recent bottom, as the market already expects the recovery of memory demand in late 2019. However, we are concerned that the share price will stagnate for a while as the recovery may be slower than the market’s expectation, as we forecast that inventory level may be still heavy at the end of the March quarter.