BS/ Samsung Key Points
*** Samsung is scheduled to report 3Q earnings after the close on 10/11 (3am ET) and will host a conference call the
morning of 10/12 (10/11, 8pm ET). We are looking for revenues of W15.40T (+9.1% QoQ), operating profit of
W1.88T, and net profit of W1.98T. Recent consensus is at W15.36T (+8.9% QoQ), and W1.81T and W1.90T for
operating and net profit respectively.
*** DRAM pricing in 3Q has tracked better than expectations entering the quarter. Our checks however indicate that
despite low inventory at manufacturers, inventory in the supply chain has increased in recent months, and we also
expect supply to slightly exceed demand in 4Q. Although we believe further meaningful upside in DRAM pricing is
unlikely for the remainder of this year, Samsung should nonetheless see solid revenue and earnings growth in 4Q, due
to its strong bit growth in the 30%+ range for 4Q, and our forecast of its DRAM ASP increasing 3-4% QoQ.
*** NAND contract prices have clearly been on an upward trend recently, up in the double digit percentage range over
September and October. We continue to expect the NAND market to be undersupplied in 4Q, driven by seasonality,
low OEM inventory levels, and a rapid rise in demand from the handset market. Samsung should not only see a
strong 4Q in NAND from a top-line perspective, given the solid NAND demand and pricing environment, but also
from a gross margin standpoint, given its ramp of MLC-based NAND.
*** TFT-LCD prices for monitors and notebooks recovered from the trough in July, while TV panel prices have
stabilized. We expect the pricing environment to continue to improve in 4Q, which we expect should lead to a
recovery in Samsung’s operating margin from the low single digits in 2Q and 3Q to the high single digits in 4Q. In
handsets, we estimate 3Q shipments increased 14% QoQ to 30M units, and ASP and operating margin increased
slightly. For 4Q, we are forecasting flat shipments though we think there is possibility of slight upside.
*** We are maintaining our Outperform rating and year-end price target of W745,000. We believe catalysts for the stock
include continued strength in NAND flash pricing in the near-term, a continued recovery in TFT-LCD prices, and
solid earnings growth in 4Q for which we believe consensus is low. We continue to recommend accumulating the
shares as these catalysts materialize.
Forecasting 3Q net profit of W1.98T. Samsung is scheduled to report 3Q06 earnings on Monday 10/11 at 4pm Korea
time (3am ET) and will host a conference call on Tuesday 10/12 at 9am Korea time (Monday 10/11, 8pm ET). We are
looking for revenues of W15.40 trillion (+9.1% QoQ), operating profit of W1.88 trillion (versus W1.42 trillion in 2Q),
and net profit of W1.98 trillion (versus W1.51 trillion in 2Q). Our estimates are marginally lower from our prior estimates
(see our detailed update on 9/1) of W15.52 trillion for revenues (+10.0% QoQ), operating profit of W1.93 trillion, and net
profit of W2.04 trillion. Our 3Q expectations are marginally lower due to the 1-2% appreciation in the Korean won in
September, as well as due to slightly more aggressive pricing by Samsung in handsets. Recent consensus is at W15.36
trillion (+8.9% QoQ) for revenues, and W1.81 trillion and W1.90 trillion for operating and net profit respectively.
DRAM pricing in 3Q better than expectations entering the quarter, though we remain unenthusiastic about 4Q.
As we indicated in our prior update on 9/1, DRAM pricing in 3Q has tracked better than expectations entering the quarter.
Both DDR and DDR2 contract prices increased by 14% over the course of the third quarter. On a sequential quarterly
basis, DDR contract prices increased by 11% QoQ in 3Q, and DDR2 prices declined by 4% QoQ. Although the price
momentum has been positive in the contract market and inventory at the DRAM manufacturers appears to be low, our
checks indicate that inventory in the supply chain, including at distributors and module makers, has increased in recent
months to above-normal levels, and we are likely to see a period of inventory digestion in the near-term. In addition, we
anticipate global DRAM bit supply growth of about 20% QoQ in 4Q, which exceeds our demand growth forecast of 17%
QoQ. As a result we believe further meaningful upside in DRAM pricing is unlikely for the remainder of this year.
Samsung should nonetheless see solid revenue and earnings growth from DRAM in 4Q, given that it expects bit growth in
the mid-30% range, and we forecast its DRAM ASP to increase sequentially by 3-4% QoQ. For 3Q, we estimate
Samsung’s DRAM ASP was flat QoQ, and bit shipments increased 16% QoQ.
NAND flash: channel checks indicate momentum should continue in the near-term. We are forecasting
NAND bit
growth of 35% QoQ and ASP decline of 19% QoQ in 3Q for Samsung. NAND pricing has clearly been on an upward
trend recently, with contract prices up in the double digits in aggregate in September and October. Contract pricing for
4Gb NAND has increased by 18% in September and October, while 8Gb NAND prices have increased by 13% over the
same period. According to our recent channel checks, OEMs have built their flash inventory a lot more cautiously this
year, due to pricing fears given the weak pricing environment in 1H06. As a result, inventory at customers remains low,
and NAND demand strength is expected to continue through November. We continue to believe that the NAND market
will be undersupplied in 4Q, driven not only by seasonality, but also by strong growth in demand from handsets, where
our checks indicate that the use of NAND flash is rising rapidly. Samsung should benefit not only from the demand
momentum and stable pricing in the near-term, but should also benefit from its transition from SLC to MLC,
which should benefit margins. For 4Q, we are forecasting bit growth of 44% and ASP decline of 10% QoQ.
TFT-LCD prices recovering; expect positive momentum to continue. The TFT-LCD market is clearly recovering.
For monitor panels, which represent 47% of Samsung’s large-sized LCD panel shipments, prices bottomed in July and
have been trending up through the third quarter: 17-inch monitor panel prices have moved up by 20% from the trough,
while 19-inch monitor panel prices have increased by 7% from the July trough. Notebook panel prices have also been on
a slight upward trend since bottoming in July. Meanwhile, the price declines in TV panels in the first half of 3Q were
greater than expected; however, TV panel prices have been relatively stable over the past month. We expect prices for
monitor and notebook panels to continue to improve in the near-term given the seasonal improvement in demand and
inventory reduction. Although we have yet to see TV panel prices move upward, we would note that the TV panel market
is a highly elastic market, and we expect Samsung’s unit growth to remain strong in upcoming quarters. Given the
improving pricing environment, we expect Samsung’s operating margin to recover from the low single digits (3% and 2%
in 2Q and 3Q to high single digit percentage range in 4Q (our estimate is 7%), as we estimate ASP should increase in the
mid single digits sequentially in 4Q.
Handsets: maintaining unit expectations, but pricing may have been more aggressive than expected. On the handset
side, we are maintaining our unit growth forecast of 29.9M units for 3Q, which represents a sequential increase of 14%
QoQ. Our checks indicate that demand from the domestic Korean market was strong during the quarter, due to an
increase in handset subsidies from operators. In addition, Samsung has seen a solid recovery in its sales to Europe
following its product launches in late 2Q and early 3Q, although we think the strength has also been to some extent due to
aggressive pricing by Samsung. As a result we have tweaked down our ASP assumption from +2% QoQ to +1% QoQ (in
KRW terms), and our operating margin assumption from 10.5% to 10.2%. We are also maintaining our 4Q estimate of
30.0M units (flat QoQ). Note that it is usual for Samsung to lose share in 4Q because of its usual year-end inventory
control efforts. Overall, we believe that with its aggressive new model launches, the company is returning to share gain
mode, and believe that its competitive position should strengthen as the 3G market grows.
Stock should outperform in the near-term. We are maintaining our Outperform rating and year-end price target of
W745,000. Our methodology for arriving at the target price is a sum of the parts analysis where we have applied
extremely conservative multiples to each division’s earnings.
We believe catalysts for the stock include continued
strength in NAND flash pricing in the near-term, a continued recovery in TFT-LCD prices, and solid earnings growth in
4Q for which we believe consensus is low. Though we have lowered our 4Q EPS estimate from W19,258 to W17,627,
based on lower ASPs and therefore margins for handsets, lower telecom equipment revenues, as well as slightly lower
LCD margins, our net profit estimate for 4Q at W2.63 trillion remains well above consensus net profit of W2.22 trillion.
We continue to recommend accumulating the shares as these catalysts materialize.
Valuation Method for Target Price: Sum of the parts; target P/E applied to each division's 2007 earnings estimates.
Investment Risks: Weakness in demand for PCs, handsets, and consumer electronics; new entrants into the NAND flash
market; weakness in DRAM, flash and TFT-LCD pricing; weakness in financial subsidiaries' earnings; significant
appreciation of the Korean won. |
