Push for Revenue over KRW300tn via Large-scale Acquisitions
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Semiconductor industry to benefit from U.S. policy
We maintain BUY and TP of KRW100,000 on SEC. After the U.S.-Japan semiconductor agreement in 1986, the company emerged to become the world’s top semiconductor manufacturer, taking the lead from its Japanese counterparts. At present, the Biden administration’s attempt to discourage semiconductor investments in China should create a similar situation, providing positive momentum for not only SEC but also the industry as a whole, marking the first opportunity of its kind in 35 years:
(1) Semiconductor supply dynamics should become more favorable in 2022-24, as U.S. policy has made it impossible for chipmakers (e.g., Samsung Electronics, SK hynix, Intel) to expand their Chinese facilities and Chinese companies have been thwarted in their attempts to venture into the industry.
(2) The recent adoption of trade protectionism, particularly by the U.S., Japan and Europe, has created a need to establish local production facilities—Samsung Electronics is the only company with enough capital to meet this challenge across markets.
(3) Clients will likely stock up on memory chips to circumvent supply shortages in the mid to long run.
Push for revenue over KRW300tn via large-scale acquisitions
Given current SEC shareholder return policy (2021-23), we see the company using its cash reserves (KRW100tn net cash) to pursue large-scale acquisitions. Since it acquired Harman for USD8.0bn (KRW9.4tn) in 2016, it has been cautious in selecting targets. With overseas subsidiaries holding large cash reserves, the company should improve shareholder value via M&A overseas. SEC should try to boost revenue beyond KRW300tn (KRW200tn mark passed in 2012).
Optimal time to increase weighting with focus on upside potential
Considering the past 10 months of price correction, we believe now is an opportune time to increase weighting in the stock with a focus on upside potential. We expect a rally because:
(1) the global semiconductor industry should gain from increases in chip production and U.S. policy that discourages semiconductor investment in China, which undermines Chinese market influence;
(2) the vast cash reserves make SEC the only chip maker capable of effectively responding to trade protectionism (i.e., building additional local production facilities); and
(3) this year’s 15.4% drop in stock price (KRW83,000 on Jan 4→KRW70,200 on Nov 18) suggests that concerns have been fully priced in.