Earnings Likely to Bottom out in 1Q20
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively, -- Ed.
1Q20 operating profit forecast at KRW6.08tr (-15.1% QoQ)
We expect Samsung Electronics to post sales of KRW53.7tr (-10.3% QoQ) and operating profit of KRW6.08tr (-15.1% QoQ) for 1Q20. While earnings from semiconductors and IT & mobile communications (IM) will likely remain flat QoQ, display (DP) and consumer electronics (CE) should decline on weak seasonality. Operating profit is projected to come in lower than the market consensus (KRW6.61tr) due to slowing demand for smartphones in the wake of the COVID-19 outbreak. Smartphone shipments are estimated to fall 9.7% YoY to 65mn units in 1Q20. Server DRAM demand remains strong.
By division, we forecast operating profit from semiconductors to reach KRW3.41tr (-1.3% QoQ), IM KRW2.62tr (+4.0% QoQ), and CE KRW0.42tr (-48.3% QoQ). DP is likely to turn negative with operating loss of KRW0.36tr.
Quarterly earnings to grow sharply from 1Q20 bottom
As COVID-19 takes a toll, the slowdown in IT hardware demand is inevitable. IM and DP earnings will be hit while the outbreak persists. Semiconductors should enjoy price increases for some time thanks to strong server chip demand. With chipmakers reducing supply in the mid-to-long term, prices may move largely in line with our projection.
Earnings are expected to improve sharply after bottoming out in 1Q20. DRAM and NAND supply shortages should drive up prices from 2Q20.
Recommend using short-term correction as an opportunity to buy
We have recently seen greater share price volatility. Macroeconomic variables are difficult to predict. Demand forecasts will have to be revised down. However, memory chipmakers are capable of adjusting supply and demand by cutting back on their output. Chipmakers continue to maintain a conservative outlook on demand. We thus believe it will take time before they actually start to increase supply. With supply to remain constricted, the outlook is clearly positive for semiconductor market conditions.
We retain our BUY rating on Samsung Electronics for a target price of W73,000 in view of: 1) downturn in DRAM and NAND inventory levels; 2) uptrend in 12-month forward EPS consensus; and 3) earnings turnaround (2020F EPS +44% YoY).