Semiconductor/equipment
The author is an analyst at Shinhan Securities. He can be reached at ym.ko@shinhan.com -- Ed.
1Q23 review: Semiconductors swing to loss, solid earnings from MX
Samsung Electronics posted preliminary operating profit of KRW0.6tr (-86% QoQ) on sales of KRW6.3tr (-11% QoQ) in 1Q23, missing the consensus estimate of KRW1.0tr. The earnings shock was mainly attributed to the weakness in semiconductors (both memory and non-memory), which fell into the negative territory amid sluggish market conditions. The strong performance of the mobile experience (MX) division, boosted by new Galaxy S23 smartphones, helped prop up company-wide earnings.
Meaningful output cuts to improve client sentiment and profits Samsung Electronics announced a change in its supply policy along with 1Q23 preliminary results. On top of the natural decrease in production, the company plans to carry out artificial output cuts for products with sufficient inventories like DDR4. We believe the company’s decision will have positive effects in two ways.
1) Improvement in client sentiment: Samsung Electronics’ announcement to join other chip suppliers in reducing chip production should raise expectations that memory prices will not fall further, as with Micron Technology’s decision for deeper production cuts. With inventories at clients almost back to normal and ASP already at sufficiently low levels, an upturn in prices will hinge on improvement in client sentiment.
2) Profit maximization: The company had been reluctant to reduce production in order to widen the market share gap with rivals. However, if the difference in the extent of output cuts continues for a prolonged period, there is a possibility that its inventory level will rise at an increasingly faster pace. And excess inventory may hamper profit maximization in the next up-cycle as it would have to focus on clearing out more inventory than its rivals. We believe the output cut decision has come at a right time to maximize profits and widen the market share gap at the same time.
Thus we revise up our operating profit forecast for 2Q23 from KRW0.12tr to KRW0.25tr (-59% QoQ) with sales projected to come in at KRW62.9tr (-0% QoQ). Spot prices are expected to decline at a slower pace and stage a rebound within 2Q23 or 3Q23.
Retain BUY with shares seen to have already touched bottom
Samsung Electronics’ output cutback has further strengthened our view that shares are unlikely to hit another bottom in the current memory cycle. The next up-cycle was projected to arrive in 3Q23, but may begin earlier than previously anticipated. We maintain Samsung Electronics as our sector top pick for a target price of KRW82,000, based on a target PBR of 1.6x.