Memory Market to Continue to Face Large Uncertainties in Demand
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and hyon@shinhan.com, respectively. – Ed.
2Q22 OP forecast at KRW14.9tr (+5.5% QoQ)
Samsung Electronics is expected to post operating profit of KRW14.9tr (+5.5% QoQ) on sales of KRW78.4tr (+0.8% QoQ) for 2Q22. Semiconductors should drive earnings improvement on increasing shipments of memory chips (DRAM +13% QoQ, NAND +9% QoQ) and rising NAND prices (+6% QoQ). Meanwhile, mobile experience (MX) and consumer electronics (CE) divisions will likely report weaker-than-expected earnings for 2Q22, hit by the slowdown in overall demand for smartphones and TVs.
By division, we project operating profit of KRW10.4tr (+22.7% QoQ) from semiconductors, KRW3.3tr (-14.9% QoQ) from MX, KRW0.6tr (-45.3% QoQ) from displays, and KRW0.6tr (-27.6% QoQ) from CE.
Conditions met for an upward market cycle in 2023
Weak short-term expectations for smartphones, TVs, and other tech products are shifting investor focus to semiconductors and the memory market cycle. In the near term, we believe the memory market will continue to face large uncertainties in demand amid extremely constrained supply. As memory maker stocks tend to move ahead of changes in market cycles, we turn our focus to market condition forecasts for 2023.
We believe conditions are met for an upward cycle to start in 2023. The market cycle typically enters an upward phase when a gloomy outlook on demand causes overall supply to grow at a slower pace, but actual demand exceeds lowered expectations. In 2023, we expect memory demand to return to normal levels but supplier response to fall short. For now, however, investors will be waiting to confirm the extent of demand declines brought on by the increase in macro uncertainties across the world.
Shares to bottom out upon down-revision of earnings consensus
We revise down our earnings forecasts for 2H22 in reflection of the slowdown in tech product demand. Past data show that memory maker stocks bottomed out upon sharp downward revision of earnings consensus following share price correction. As it typically helps to remove expectations for demand growth and shift focus to supply constraints, downward adjustment of earnings consensus is seen positive for share prices.
Growing market discounts could weigh on valuations in the near term, but we believe much of it has already been priced in. Memory market conditions are at normal mid-cycle levels, but Samsung Electronics shares are now trading at the lowest end of PBR bands recorded over the past 10 years. We lower our target price for the company with downward revisions made to earnings forecasts and a larger discount applied to target valuations, but fully expect the stock to out-perform the KOSPI with macro uncertainties already priced in and chip supply remaining extremely constrained.