2Q22 OP Forecast at KRW14.4tr (+1.9% QoQ)
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 KRW14.4tr (+1.9% QoQ)
We now expect Samsung Electronics to post operating profit of KRW14.4tr (+1.9% QoQ) on sales of KRW76.4tr (-1.8% QoQ) for 2Q22, coming in short of market expectations of KRW15.2tr and our previous forecast of KRW14.9tr.
Mobile experience (MX) and consumer electronics (CE) divisions will likely report weaker-than-expected earnings for 2Q22, with overall demand for smartphones and TVs weighed down by growing macro uncertainties. Unfavorable forex rates are also expected to have larger negative impact on operating profit from tech products (MX and CE divisions) than components such as semiconductors and displays. Meanwhile, semiconductors should generate relatively stronger earnings on increasing shipments (DRAM +11% QoQ, NAND +9% QoQ) and rising NAND prices (+6% QoQ).
By division, we project operating profit of KRW10.3tr (+21.9% QoQ) from semiconductors, KRW2.6tr (-30.8% QoQ) from MX, KRW0.7tr (-32.2% QoQ) from displays, and KRW0.6tr (-22.5% QoQ) from CE.
Downward adjustment of market expectations on overall demand
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 the worst supply constraints in history.
We still believe current memory market conditions point toward the start of an upward cycle in 2023, with demand expected to return to normal levels but supply likely to remain extremely constrained. For now, however, investors will be waiting to confirm the extent of demand declines brought on by the increase in macro uncertainties. Given the recent slowdown in server chip orders and higher-than-normal inventory levels at client companies amid prolonged chip shortages, we expect to see downward adjustment of market expectations for server chip demand going forward and a subsequent shift in investor focus to supply constraints.
Shares to bottom out upon down-revision of earnings consensus
We lower our target price for Samsung Electronics to KRW78,000 with earnings forecasts revised down in reflection of slowing demand for tech products. During periods of market correction, memory maker stocks tend to bottom out upon sharp downward revision of earnings consensus. Downward adjustment of market consensus on earnings is seen positive for share price trends as it typically helps to remove expectations for demand growth and shift focus to supply constraints. With macro uncertainties already priced in and chip supply remaining extremely constrained, we expect Samsung Electronics shares to outperform the KOSPI as market expectations for server chip demand undergo downward adjustment.