Likely to Strengthen Shareholder Return
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Maintain BUY and target price of KRW80,000
We maintain BUY and our TP of KRW80,000 for SEC based on the following: (1) Semiconductors earnings are forecast to improve with limited growth in DRAM supply combined with DRAM/NAND price increases arising from server replacement demand, which has not existed in four years (2) IM and CE should see their cost structures improve on increasing market shares and product mix improvements (3) DP OP is set to rise with business restructuring; focus has shifted to flexible OLEDs from LCDs, which is no longer produced by SEC. For 4Q20, we estimate OP to decline 18.8% QoQ to KRW10.0tn. Given semiconductors’ expected entry into an upcycle, however, we set 2021E earnings at KRW45.5tn (+23.0% YoY). Investment merit should strengthen in the mid to long term.
4Q20 OP estimated at KRW10.0tn (-18.8% QoQ); DP is only bright spot
Excluding DP, all divisions should take a hit from unfavorable seasonality in 4Q20, with company-wide revenue/OP of KRW63.9tn (-4.6% QoQ/+6.7% YoY)/KRW10.0tn (-18.8% QoQ/ +40.1% YoY). The only bright spot is that DP should see earnings improve with (1) the rollout of new iPhone models and (2) Chinese smartphone companies’ growing demand for rigid OLED panels, which should boost the OLED factory utilization rate above 95% in 4Q20. Hence, we estimate 4Q20 DP OP to skyrocket 244.4% QoQ to KRW1.6tn. In terms of divisional OP, we estimate Semiconductors at KRW4.4tn, IM at KRW2.9tn, DP at KRW1.6tn, CE at KRW0.9tn and Harman at KRW0.2tn.
Better shareholder returns to be announced in January 2021
We think SEC is most likely to strengthen its shareholder return at end-January 2021 based on the following assumptions: (1) With respect to inheritance tax payments, the most viable option for Vice Chairman Lee Jae-yong to take is to increase dividends. (2) There is a high possibility that shareholder returns will be increased. On Oct 31, 2017, SEC announced that the shareholder return program for 2018-2020 would be improved. It also stated that the remainder of FCF after dividends are paid would be used for additional returns. Meanwhile, the late Samsung Group Chairman Lee Kun-hee’s stakes in Samsung affiliates (4.2% in SEC, 20.8% in Samsung Life and 2.9% in Samsung C&T) will be passed down to family members according to the Korean Inheritance Law, so the size of inheritance and payment method for the inheritance tax (annual installment payment expected) should affect how the necessary funds to pay will be raised.