MLCC Market Boom Likely to Continue

The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.

 

3Q20 review: Recovery in IT parts demand

Samsung Electro-Mechanics posted operating profit of KRW302.5bn (+60% YoY) on sales of KRW2.3tr (+3% YoY) for 3Q20. The MLCC business saw a steep increase in demand (shipments up 16% QoQ) amid the recovery in market conditions for IT products and electronic parts. We estimate the MLCC capacity utilization rate to have gone up to 100% from the low 80% range in 2Q. Inventory levels further declined. The module solution division delivered solid earnings thanks to smartphone shipment growth and a new flagship model release by the strategic client. Package substrates continued to show double-digit operating margin with production lines running at full capacity.

Emerging as a leading supplier of 5G communication parts

We forecast 4Q operating profit at KRW261.1bn (+88% YoY). Earnings from MLCCs and package substrates will remain strong due to new model launches at overseas clients. Camera module sales may decline owing to parts inventory adjustments at IT product manufacturers in December.

Samsung Electro-Mechanics is projected to see full-year operating profit of KRW1.1tr (+34% YoY) in 2021. The MLCC market boom will likely continue on the recovery of demand and limited capacity expansion after COVID-19.

The company’s future growth should be driven by 5G communication components. Shipments of 5G smartphones are estimated to increase from 20mn units in 2019 to 270mn in 2020 and 670mn in 2021. Shipments of mmWave smartphones are expected to grow from 2H21. The company is currently developing AiP (antenna in package), SiP (system in package), new printed circuit boards, and MLCC for 5G smartphones. We plan to upgrade our sales estimates for each product when new businesses take shape.

Retain BUY for a target price of KRW180,000

We retain our BUY rating on Samsung Electro-Mechanics for a target price of KRW180,000, based on 2020F BPS of KRW73,866 and a target PBR of 2.4x (average PBR high of 2017 and 2018). The company has worked on expanding operations across all divisions (SLP, PLP, RFPCB, multiple-lens camera module, MLCC, electronic parts) since 2017. In 2021, under the strategy of select and focus, the priority should be placed on either high-margin (MLCC, package substrates) or high-growth businesses (5G smartphone parts). MLCC capacity additions appear to be slower than anticipated. We focus on the company’s strengthening presence in the 5G mobile market.

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