Earnings Expected to Reach Three-year High
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Target price held at KRW105,000; Chip prices should begin climbing
We reiterate BUY and our 12m TP of KRW105,000 on SEC. We expect brisk set sales (consumer electronics such as smartphones and TVs) to push up 1Q21 OP to KRW9.0tn (vs. market consensus of KRW8.5tn), with earnings beginning a clear uptrend as chip prices start to climb in 2Q21. Chip supply should be tight this year given chipmakers’ conservative capex plans coupled with growth in demand as the global economy recovers. From 2Q21, the rise in DRAM prices should accelerate amid a supply shortage while NAND prices should reverse upwards (previously expected in 3Q21).
1Q21 preview: OP at KRW9.0tn; IM/CE earnings to begin structural growth
We forecast 1Q21 OP at KRW9.0tn (+40% YoY), which is higher than the market consensus of KRW8.5tn. The strong performance should be backed by IM (OP of KRW4.1tn; +58% YoY) and CE (OP of KRW1.0tn; +100% YoY), with:
(1) IM earnings fueled by the addition of Galaxy S21 and growing sales of Galaxy A; and
(2) CE earnings boosted by the growing revenue proportion of premium models.
We see TVs, home electronics and PC sales benefiting from both replacement demand and structural growth starting in 2021. We forecast Semiconductor OP at KRW3.2tn, DP OP at KRW0.6tn, IM OP at KRW4.1tn, CE OP at KRW1.0tn, and Harman OP at KRW0.1tn.
Earnings expected to reach three-year high
After a shortfall in 1Q21 caused by increases in memory chip capacity and a halt to the Austin line’s operations (non-memory chips), earnings should begin to improve at a fast clip from 2Q21 with an expected increase of 10% or more in DRAM contract prices and a 3-5% rise in NAND prices. Supply should tighten from 2Q21 because of (1) server increases at North American data centers (i.e., Amazon, Google), (2) growing PC/TV demand and (3) the release of new 5G smartphones. Given this, we expect SEC’s 2021 OP to come in at KRW49.5tn (+38% YoY), which would mark the best performance since 2018.