2H21E OP of KRW28tn Marks 44% Rise HoH

The author is an analyst of KB Securities. He can be reached at  jeff.kim@kbfg.com. -- Ed.

 

Stock to gain ground after short-term pullback

— On May 14, Samsung Electronics stock climbed 2% compared to a day ago to KRW80,100 but fell 3.3% over the past three weeks (KRW82,800 on Apr 23 →KRW80,100 on May 14) and 1.1% since Dec 30, 2020 (KRW81,000). This reflects a potential supply glut stemming from rising inventory levels at North American data centers (key to semiconductor supply-demand dynamics) as well as concerns over the semiconductor industry peaking in 2H21. However, we believe concerns over a peak to be premature, as:

(1) we expect inventory growth at the data centers to subside gradually; their inventory levels have normalized to six to eight weeks as of this month, after having reached as high as 10 weeks at the beginning of 2Q21, and

(2) we believe OPM for DRAM remains low compared to the previous peak cycle margin (30% OPM in 1Q21A vs. 60% previous peak margin).

Hence, the stock should gain ground after a short-term pullback given the prospect of substantial earnings improvements in 2H21.   

2H21E OP of KRW28tn marks 44% rise HoH

— We expect Semiconductor to see marked earnings improvement starting in 2Q21 with the new No. 2 fab in Pyeongtaek (P2) adding to full-fledged improvements to cost structure. We believe better production yields for 1z nm (15 nano) DRAM and 128-layer NAND as well as higher memory chip prices (DRAM/NAND: +15%/+2%) should propel earnings higher. The No. 3 fab in Pyeongtaek (P3), which is scheduled to commence operations in 2H22, should add 1a nm (14 nano) DRAM and 5nm logic to its product portfolio as it bolsters productivity. Meanwhile, we estimate 2Q21 Semiconductor OP to surge 83% QoQ to KRW6.2tn and 4Q21 OP to increase 2.3x YoY to KRW8.8tn. We also forecast 2H21E OP (KRW28.0tn) to soar 43.6% HoH (vs. KRW19.5tn in 1H21). For the full year, we see OP reaching KRW47.5tn (+32% YoY), jumping to the highest level since reaching KRW58.9tn in 2018. In particular, Semiconductor should see 2021 OP increasing KRW7.8tn YoY to KRW26.6tn (+41% YoY), accounting for 68% of SEC’s annual OP growth of KRW11.5tn. 

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