The Focus Turning from Non-memory to Memory

The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively. -- Ed.

 

1Q21 operating profit forecast at KRW8.32tr (-8.1% QoQ)

Samsung Electronics is forecast to see sales of KRW59.2tr (-3.9% QoQ) and operating profit of KRW8.32tr (-8.1% QoQ) in 1Q21. Initial costs incurred in the ramp-up of a new fab remain a burden, but semiconductor earnings are expected to improve slightly on the increase in DRAM ASP. The IT & mobile communications (IM) division is projected to report earnings improvement on higher smartphone shipments from the launch of Galaxy S21. Display and consumer electronics (CE) earnings will likely fall QoQ due to weak seasonality.

By division, we forecast operating profit of KRW3.98tr (+3.5% QoQ) from semiconductors, KRW3.12tr (+29.1% QoQ) from IM, KRW0.61tr (-65.3% QoQ) from displays, and KRW0.60tr (-26.7% QoQ) from CE in 1Q21.

2021 operating profit to reach KRW48.4tr (+34.4% YoY)

Samsung Electronics is positioned to enjoy strong earnings gains in 2021, with sales reaching KRW262.2tr (+10.7% YoY) and operating profit KRW48.4tr (+34.4% YoY) for the full year. The parts business, such as memory chips and displays, should drive earnings growth. As for the IM business, our earnings projection will likely be revised up depending on the pace of demand recovery.

In 2021, the company is expected to secure operating profit of KRW28.7tr (+52.7% YoY) from semiconductors, KRW12.3tr (+7.3% YoY) from IM, KRW4.1tr (+83.0% YoY) from displays, and KRW3.3tr (-8.0% YoY) from CE.

Time to focus on the flagship memory business

We believe the key driver behind the share price rally is shifting from improvement in valuations to expectations for earnings growth. During the steep rally at the end of last year and early this year, valuation multiples rose sharply on high expectations for non-memory semiconductors. However, Samsung Electronics is unlikely to see significant earnings contribution from the non-memory business in the near term. Nearly 60% of its profits come from memory semiconductors. The key investment point is that the focus is now turning from non-memory to memory.

Memory market conditions should improve rapidly with the spike in DRAM prices and a market turnaround for NAND. SK Hynix, Micron Technology, and Western Digital have rallied recently on such expectations. We see no reason for Samsung Electronics, the world’s largest memory chipmaker, to be left out. Now is the time to focus on a turnaround in memory semiconductors.

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