SEC
The author is an analyst of NH Investment & Securities. He can be reached at hwdoh@nhqv.com -- Ed.
During its 1Q23 earnings release, SEC announced that it intends to cut memory output considerably, which will positively impact supply-demand conditions. We expect earnings to begin to rebound in earnest from 3Q23.
1Q23 review: Earnings dampened by weak memory market conditions
We reiterate a Buy rating on Samsung Electronics (SEC) and a TP of W79,000. The tech giant booked preliminary 1Q23 sales of W63.0tn (-11% q-q) and OP of W0.6tn (-86% q-q). By division, operating income likely broke down as DS (semicon) -W4.3 (TTL q-q), SDC (display) W1.2tn (-33% q-q), MX W3.3tn (+93% q-q), CE W0.1tn (TTP q-q), and Harman W0.3tn (-27% q-q).
Earnings deterioration at the memory business dampened overall results. We believe that DRAM shipments and ASP fell 17% q-q and 31% q-q, respectively, while NAND shipments and ASP likely slid 13% q-q and 30% q-q. IT device demand and data center investment remained tepid, and despite weak market conditions, supply was ample across the industry, weighing on supply-demand conditions. Both DRAM and NAND prices are estimated to be hovering below cash-cost level. Meanwhile, the MX business booked higher-than-expected profit, with Galaxy S23 shipments exceeding 11mn units. Earnings at the display business shrank on slowing smartphone sales at a major client.
Production cuts and demand recovery underway
The tepid earnings trend is set to sustain into 2Q23. Though memory chip prices continue to decline, the extent of q-q drop should improve to -1% for DRAM and -1% for NAND versus current consensus of -10~-15% q-q. We forecast 2Q23 sales of W63.5tn (flat q-q) and OP of W0.8tn (+35% q-q).
Earnings should begin to rebound in earnest from 3Q23. SEC announced that it will cut memory production by a meaningful level, which will positively impact memory supply-demand dynamics. We expect the firm’s 2023E DRAM and NAND shipments to grow by a respective 2% y-y and 5% y-y. Thanks to aggressive inventory adjustments at clients since 2Q22, set inventory peaked out in 1Q23 and turned to decline from 2Q23. Memory inventory is also expected to decline from 2Q23. Of note, some set makers began issuing parts orders from March, in light of smartphone demand recovery, data center investment expansion, and PC sales growth.