Demand for High-end Products Remaining Solid
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
3Q21OP to exceed market consensus
Samsung Electro-Mechanics is expected to post operating profit of KRW432.4bn (+41% YoY) for 3Q21, exceeding the consensus estimate of KRW389.7bn. Demand for high-end products is remaining solid as seasonal demand in 2H21 adds to the continuing boom in the MLCC market. Parts makers are seeing a recovery in demand from 3Q21, thanks to: 1) increase in smartphone production at strategic clients; and 2) launch of flagship smartphones at a North American client. Contrary to concerns raised at the start of the year, USD/KRW rate trends are also remaining favorable.
Three reasons to believe MLCC concerns are overblown
Recent news that Taiwan-based Yageo has cut prices for resistors have been seen by some as a sign that the passive parts industry is entering a down-cycle. However, we point out that the prices of resistors and inductors produced by Korean parts makers have recorded a different trend than that of Taiwanese peers from end-2020 through 1H21.
Second, Murata Manufacturing, a Japan-based competitor with MLCC market share of 40%, halted operation of its main MLCC production line in Fukui on August 25 due to COVID-19 impact. The resulting production disruption in Japan should help to keep supply tight in the MLCC market. Although the extent of actual impact remains to be seen, we believe the news will largely help to ease concerns over a possible downturn in passive parts prices.
Third, we focus on the relatively high sales share of MLCCs for mobile devices vs. PCs and servers reported by Samsung Electro-Mechanics. By application, the company's MLCC sales share is estimated at 35% for mobile devices, 35% for other IT devices, 10% for automotive electronics, 5-10% for servers, and 10% for others.
Retain BUY for a target price of KRW240,000
Our target price of KRW240,000 is based on 2021F BPS and a target PBR of 2.77x (PBR average seen during the market boom in 2010).
Samsung Electro-Mechanics expanded its MLCC market share from 22% in 2019 to 23% in 2020 and 25% in 1H21, confirming its competitive edge in the market. The company should benefit from recovering demand for mobile-use parts, which account for over 60% of its sales. The company's shares have sharply underperformed IT peers as well as other sectors since the start of the year. Given the upbeat outlook for future earnings, we see no reason for the gap between earnings trends and share price performance.