3Q22 OP Estimated at KRW11.3tr (-19.9% QoQ)
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and hyon@shinhan.com, respectively. – Ed.
3Q22 operating profit estimated at KRW11.3tr (-19.9% QoQ)
Samsung Electronics is expected to have posted operating profit of KRW11.3tr (-19.9% QoQ) on sales of KRW77.3tr (+0.1% QoQ) for 3Q22, falling short of lowered market expectations (KRW12.1tr). Consensus projections for 2023 may decline even further in view of falling memory chip prices and slowing sales of tech products amid the macroeconomic downturn.
By division, operating profit from semiconductors should have come in at KRW6.0tr (-39.8% QoQ), mobile experience KRW3.0tr (+13.6% QoQ), displays KRW1.9tr (+78.8% QoQ), and consumer electronics KRW0.3tr (-13.8% QoQ).
Unprecedented supply cutbacks expected on a steep decline in tech product demand
Demand for tech products like smartphones, PCs, and TVs is declining at a fast pace due to the rapid macroeconomic deterioration. The decline in chip orders is even faster, which appears to be largely because of the inventory burden at clients. Inventories have built up to record high levels during the three-year-long up-cycle. The extended up-cycle will take a toll.
Faced with weakening demand, memory makers plan to use their oligopolistic position and aggressively scale back supply. Micron Technology announced in the recent earnings call that capex spend will be cut by 50% in FY2023 and capacity utilization by about 5% at the year’s end and early 2023. Kioxia also decided to reduce its NAND output by 30% from October.
Focus on memory production cutbacks rather than demand
In the previous down-cycle, the earnings shock came with order cuts made in 4Q18 after earnings peaked in 3Q18. This led the share price to tumble. Shares tested lows in 4Q18 and recorded the first bottom with a short-term rebound in 1Q19. It was quite fast considering that DRAM contract prices went up in 1Q20 (share price rally started in 3Q19 after the second bottom). We can explain the short-term rebound seen in 1Q19 with capex cutbacks (supply reduction). The situation in 4Q22 will likely be similar to that of 1Q19. We believe supply cutbacks will be reason enough for the chipmaker’s share price to outperform the KOSPI.