Clients Likely to Resume Order Placements in 3Q20
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
Sharp rebound expected in 3Q20 after steep nosedive in 2Q20
Samsung Electro-Mechanics is expected to post sluggish earnings for 2Q20, with operating profit to come in at KRW90.9bn (-44% YoY). For the MLCC business, we assumed a 1% decline in shipments and flat ASP levels on a QoQ basis. The camera module division will likely see sales plunge 49% QoQ and operating earnings turn to a loss, due to parts inventory adjustments at domestic clients.
Following the sharp decline in 2Q20, earnings should record an equally steep upturn in 3Q20. Domestic IT parts suppliers as a whole will likely see orders surge as clients that cut back in 2Q20 resume order placements in 3Q20. In 3Q20, Samsung Electro-Mechanics is highly expected to enjoy: 1) strong QoQ growth (far above 50% levels) in camera module sales; and 2) earnings improvement at the substrate solution division thanks to new model launches at overseas clients. Company-wide operating profit should reach KRW200.2bn (+6% YoY).
MLCC prices to remain solid through early-3Q20 on supply disruptions
MLCC prices have remained solid despite the COVID-19 pandemic, with: 1) IT product manufacturers stocking up on general-purpose components (package substrates, PI film, passive parts, etc.) amid concerns over supply disruptions; and 2) production/output disruptions seen at MLCC plants in China, Japan, Malaysia, and the Philippines. We expect MLCC inventory levels at Samsung Electro-Mechanics to fall from 45 days in 1Q20 to 40 days or less in 2Q20. Tight market supply should help to keep MLCC prices at solid levels through early-3Q20.
Retain BUY and raise target price by 15% to KRW155,000
We raise our target price for Samsung Electro-Mechanics to KRW155,000, based on 2020F BPS and a target PBR of 2.1x (PBR average of 10 peers). While difficult to predict the timing and speed of recovery in global IT demand, we nevertheless expect to see sharp growth in domestic demand for IT parts in 3Q20. Market conditions for MLCC should remain relatively solid in the near term on tight supply. With earnings consensus down-adjusted in reflection of expectations for sluggish earnings in the IT supply chain, we now turn our focus to companies that are likely to see a stronger rebound in 3Q20 vs. peers. We recommend Samsung Electro-Mechanics as our top pick among large-cap electronics stocks in view of forecasts for relatively solid market conditions and stronger earnings than peers over the next two quarters.