COVID-19 Impact to Be Felt in Earnest in 2Q20
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
1Q20 review: Limited impact of pandemic, favorable forex rates
Samsung Electro-Mechanics reported sales of KRW2.2tr (+8% YoY) and operating profit of KRW164.6bn (-32% YoY) for 1Q20. Despite the COVID-19 pandemic, operating profit slightly exceeded the market consensus of KRW153.7bn, thanks to: 1) launch of a new smartphone by the strategic client; 2) solid MLCC ASP; and 3) favorable forex rates.
Some Chinese smartphone makers carried out parts inventory adjustments in 1Q20. However, we believe parts demand from the strategic client remained solid and that several clients stocked up on parts on concerns over supply disruptions. MLCC shipments and ASP likely increased 6% and 2%, respectively, in 1Q20.
2Q20 outlook: COVID-19 impact to be felt in earnest
Samsung Electro-Mechanics is expected to post operating profit of KRW99.7bn for 2Q20, including KRW88.1bn from the component solution business, KRW6.8bn from module solution, and KRW4.8bn from substrate solution. The module and substrate solution divisions should see sales decline due to weaker-than-expected demand on sluggish smartphone sales. The demand outlook is uncertain for MLCC, but overall market supply should decrease on production disruptions at plants in the Philippines and Japan. For the 2Q20 MLCC market outlook, we assume a 1% drop in shipments, flattish ASP, lower capacity utilization rates, and decline in inventory levels.
Retain BUY and raise target price by 4% to KRW135,000
We raise our target price for Samsung Electro-Mechanics to KRW135,000 based on 2020F BPS and a target PBR of 1.85x (PBR high of 2019 recorded amid widespread concern over recovery in MLCC market conditions). If IT stocks rebound in 2H20, smartphone parts makers should show the sharpest gains following the steep correction of 2Q20. Meanwhile, delays in MLCC investments should lead to a decline in capex spend for 2020. Despite inevitable impact from the COVID-19 pandemic, we maintain a positive mid/long-term demand outlook for MLCC given the uptrend in demand for 5G- and automotive-use MLCCs. We recommend shifting focus to the bright outlook for 2021.