Semicon Supply-demand Conditions to Improve in 2H23
The author is an analyst of NH Investment & Securities. He can be reached at hwdoh@nhqv.com. -- Ed.
SEC’s 4Q22 OP plunged 60% q-q to W4.3tn, due mainly to deteriorating memory supply-demand conditions. We expect the global chip giant to experience sustained OP decline till 1Q23. Supply-demand improvement stemming from supply reduction looks possible from 2H23.
4Q22 earnings weak, affected by memory chip price decline
We reiterate our Buy rating and TP of W72,000 for Samsung Electronics (SEC). In calculating our TP, we apply 2023E~2025F ROE of 12.7% and COE of 8.3%, and we adjust our beta from 1.0 to 0.8 as SEC’s share-price volatility has recently shrunk compared to the market.
The firm announced preliminary 4Q22 sales of W70.0tn (-9% q-q) and OP of W4.3tn (-60% q-q), with OP missing our estimate and consensus. By division, we believe that OP broke down as DS W0.6tn (-88% q-q), SDC W1.8tn (-11% q-q), MX W1.4tn (-58% q-q), CE W0.4tn (+68% q-q), and Harman W0.2tn (-32% q-q). Earnings at the semicon division likely fell on weak IT demand and reduced data center investment. DRAM shipments upped 7% q-q, while ASP fell 28% q-q. NAND shipments jumped 9% q-q, while ASP plunged 30% q-q.
Semicon supply-demand conditions to improve in 2H23, driven by reduced capex and supply
SEC’s earnings are forecast to remain lackluster through 1Q23. With ASP to tumble 27% q-q for both DRAM and NAND, the tech giant’s total sales are projected at W64.1tn (-9% q-q) and OP at W0.8tn (-81% q-q) for the quarter. By division, operating income should break down as DS -W2.5tn (TTL q-q), SDC W1.4tn (-20% q-q), MX W1.5tn (+9% q-q), CE W0.2tn (-45% q-q), and Harman W0.2tn (-23% q-q). The semicon division is expected to report a loss for the first time since the 2008 financial crisis.
Fortunately, industry plans are in place to reduce investment and production in 2023 to overcome the current downcycle. Given the characteristics of memory semiconductors, which are standard, general-purpose, mass-produced products, prices can rise if supply falls below demand, even if demand is sluggish. With the memory division likely to book massive losses in 1Q23, SEC is expected to cut investment this year, despite its surplus cash holdings—we estimate 2023 memory capex at W21.3tn. The effects of reduced supply should concentrate in 2H23, when h-h inventory reduction is anticipated. Against this backdrop, earnings at memory makers should pick up from 2H23. In 2024, when supply shortages are to be in full force, earnings rebound in the industry is highly likely to exceed market expectations.