Kalra / BS Beginning with 2006 estimates, Bear Stearns policy requires deduction of a normalized level of stock-based compensation expense.
Key Points
*** Samsung reported 3Q net profit of KRW2.19tn, above our estimate of KRW1.98tn and consensus of KRW1.90tn. The upside relative to our estimate came from better TFT-LCD and handset operating profit, and higher non-operating income, which we believe was due to better consumer electronics sales and profits, as well as higher profits from the company's LCD joint venture with Sony.
*** Samsung expects significant earnings improvement across all business divisions in 4Q, which is in line with our expectation. We forecast net profit to rise 20% QoQ to KRW2.62tn in 4Q. We are raising our 2007 profit estimate slightly to KRW10.14tn from KRW10.06tn. Our profit estimates for 4Q06 and 2007 were well above consensus coming into earnings, and we expect consensus estimates to move up.
*** Samsung’s commentary on DRAMs, both for the near term and for 2007, was very positive; however, we maintain our guarded view for the near term and believe meaningful upside in DRAM pricing is unlikely through the remainder of this year. Samsung’s 2007 bit supply growth guidance of 90% YoY also appears daunting. In NAND, we expect the positive momentum to continue over the near term. We believe Samsung is being conservative with its 2007 NAND bit growth guidance of 120% YoY, and expect the company to raise its guidance during 2007.
*** Handset results and guidance were better than expected, which we attribute to the strong acceptance of Samsung’s recently launched handset models leading to share gains. The growth in next-generation services is also playing into Samsung’s strength, given its competitiveness in next-generation handsets such as WCDMA and HSDPA phones. Meanwhile, TFT-LCD prices and margins are clearly recovering, and we expect TFT-LCD operating margin to return to the low double-digit range in 2007.
*** We are introducing a year-end 2007 target price of KRW805,000 (vs. our earlier target price of KRW745,000 for year-end 2006) and reiterate our Outperform rating. We expect 4Q to be a strong quarter for Samsung, and 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. We also believe consensus expectations for 2007 are low, and that upward estimate revisions by the street should also serve as a catalyst for the stock.
Details
Net profit better than expected driven by better LCD and handset profits and non-operating income. Samsung reported 3Q revenue of KRW15.22 trillion (up 7.9% QoQ), slightly below our estimate of KRW15.40 trillion (up 9.1% QoQ) and recent consensus of KRW15.36 trillion (up 8.9% QoQ). Operating profit of KRW1.85 trillion was marginally below our estimate of KRW1.88 trillion but marginally above consensus of KRW1.81 trillion. Net income came in at KRW2.19 trillion, above our estimate of KRW1.98 trillion and consensus of KRW1.90 trillion. The higher-than-expected non-operating income we believe came from better consumer electronics sales and profits, as well as higher profits from the company’s LCD JV with Sony. Samsung raised its 2006 capex plan from KRW9.23 trillion (-8% YoY) to KRW10.24 trillion (+2% YoY), with the increase primarily in memory spending, which was raised from KRW5.63 trillion (-11% YoY) to KRW6.66 trillion (+5% YoY).
See table at bottom for divisional breakdown of revenue and operating profit and comparison with our estimates.
Continue to expect strong earnings growth in 4Q. The company indicated that it expects significant earnings improvement across all business divisions in 4Q, which is consistent with our expectation. We forecast overall net profit to increase 20% QoQ to KRW2.62 trillion in 4Q (no material change from our prior estimate of KRW2.63 trillion). Note that our 4Q profit estimate was above consensus of KRW2.22 trillion coming into earnings, which we expect will move up. For 2007, we are raising our net profit estimate slightly to KRW10.14 trillion from KRW10.06 trillion. We expect 2007 consensus net profit to move up, based on the higher capital spending plans for 2006 and strong DRAM bit growth guidance for 2007, and would note that our 2007 profit estimate was already towards the high end of street estimates coming into earnings (consensus was KRW8.82 trillion pre-earnings). We are introducing our 2008 net profit estimate at KRW10.71 trillion.
Very positive DRAM commentary and 2007 outlook, but we maintain our guarded view for the near term.
Samsung’s commentary on DRAMs was very positive overall. Its DRAM bit growth was stronger than expected in 3Q, at 21% QoQ versus our expectation of 16% QoQ growth. During the quarter, the company fulfilled only about 70% of its customer orders and its inventory declined to less than one week. It expects DRAM demand to remain strong in 4Q due to increasing PC memory content from Vista-ready PCs. For 2007, Samsung expects pricing to remain healthy, despite its bit growth guidance of ~90% YoY and its industry bit supply growth expectation of ~65% YoY, as it expects demand to also grow by ~65% YoY next year, driven by an acceleration in PC memory content growth from 33% YoY to 47% YoY, and demand growth from game consoles and 3G handsets. Despite Samsung’s positive commentary, we maintain our view that meaningful upside in DRAM pricing is unlikely over the near term, given: 1) our recent checks indicate that inventory in the DRAM supply chain, including at module makers and distributors, had built up in recent months to above-normal levels, and inventory digestion should continue in the near-term, 2) strong bit supply growth in 4Q, and 3)our expectation of a pause in DRAM demand following the seasonal peak in PC builds in late October/early November. In addition, Samsung’s 2007 bit supply growth guidance appears daunting.
NAND momentum continues in the near term; Samsung’s 2007 bit growth guidance appears conservative. On the NAND side, Samsung's 3Q bit growth of 35% QoQ and 4Q bit growth guidance of 45% QoQ were in line with our expectations. NAND margins are expected to increase in 4Q, as it ramps up its 60nm/8Gb production and MLC production – its percentage of MLC production increased to 40% of its total NAND production in 3Q, above its earlier indication of 30%, and the percentage is expected to increase to 75% in 4Q, above its prior indication of 50%-60%. The company's commentary on the NAND market overall was positive and consistent with our view. Supply and demand stabilized in 3Q, driven by a demand recovery in high-density cards and the launch of new MP3 players. Demand is expected to remain robust in 4Q, with slower price declines expected. For 2007, the company guided for NAND bit growth of 120% YoY, and expects industry bit growth to be 140% YoY. We believe the company is being conservative with its guidance and that it is likely to raise its expectation next year – we are modeling for Samsung’s NAND bit growth to be 145% YoY in 2007.
TFT-LCD prices and margins recovering; we expect margins to return to double-digits next year. TFT-LCD shipments were stronger than expected in 3Q, with unit shipments up 14% QoQ versus our estimate of 12% QoQ growth. Operating margin was a positive surprise, at 5% versus our estimate of 2%. The company continues to demonstrate solid execution with its shift to larger-sized panels across monitor, notebook, and TV panels, which we believe was the main reason for the margin upside. The company’s commentary on the LCD market outlook was upbeat and consistent with our view. Prices for notebook and monitor panels have been recovering since the trough in July, and have stabilized for TV panels. For 4Q, the company guided for ASP to increase by 10% QoQ for notebook and monitor panels, and to decline slightly for TV panels, while units are expected to increase 8% QoQ. 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. We also expect Samsung’s TFT-LCD operating margin to increase to high single-digits in 4Q, and to return to the low double- digit range in 2007.
Handset shipments better than expected in 3Q and 4Q; benefiting from strong product line-up and expansion of next-generation services. Handset shipments increased 17% QoQ to 30.7 million units, above our expectation of 30.0 million units (14% QoQ growth). Following two consecutive quarters of eclines, export ASP increased 5% QoQ from US$167 to US$175, while domestic ASP declined 8% QoQ to KRW343,000 from KRW374,000, leading to overall handset ASP being up about 2% QoQ. The company expects both units and ASP to increase sequentially in 4Q, which is above our expectations. We believe the better-than-expected results and guidance are due to strong acceptance of Samsung’s recently launched models, which are allowing it to gain share. The growth in next-generation services is also playing into Samsung’s strength, given its competitive strength in next-generation handsets such as WCDMA and HSDPA phones.
Stock should outperform over the short term. We are introducing a year-end 2007 target price of W805,000 (versus our previous target price of KRW745,000 for year-end 2006) and reiterate our Outperform rating on the company. We expect 4Q to be a strong quarter for Samsung, and believe catalysts for the stock include continued strength in NAND flash pricing over the near term, a continued recovery in TFT-LCD prices, and solid earnings growth in 4Q. We also believe consensus expectations for 2007 are low, and that upward estimate revisions by the street should also serve as a catalyst for the stock.
some graphs:
geocities.com
geocities.com
(i think hdd fall in the tiny "other" category - its not in any of their primary divisions) |
