SEC May Establish Chip Production Base in U.S. If Subsidies Increase
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Maintain BUY and TP of KRW75,000
We maintain BUY on Samsung Electronics (SEC) and our TP of KRW75,000. We remain optimistic as passage of the CHIPS Act by the U.S. Congress would benefit SEC as localized production facilities should facilitate client base expansion. The CHIPS Act aims to provide USD52bn in subsidies and incentives for building semiconductor production facilities in an effort to bolster U.S. chip manufacturing capabilities. Congress is expected to pass the bill by end-July at the earliest. If the bill passes, SEC is likely to begin construction of a USD17bn foundry in Taylor, Texas, in 2H22.
SEC may establish chip production base in U.S. if subsidies increase
According to Jul 21 media reports (The Wall Street Journal), SEC is expected to invest KRW250tn over 20 years to build a total of 11 chip production plants across Texas. This figure assumes that SEC will build plants on all sites listed in the tax benefit application submitted to the Texas state government, however. An investment of this size across such an extended period would indicate that SEC is considering making the U.S. its second chip production base (after Pyeongtaek). We believe SEC will only follow through with these plans if the U.S. increases related subsidies.
Downside limit for share price to gradually rise
Despite the anticipated earnings retreat stemming from the quarterly average 10% drop in DRAM/NAND prices in 2H22, the downside limit for SEC’s share price should continue trending up towards the year-end, as: (1) with memory chip inventories at chipmakers expected to peak in 1H23, long-term investors are likely to start making investment decisions taking into account that semiconductor stocks typically lead industry conditions by six months; and (2) chip shipments at the three DRAM majors are expected to increase by only 15% in 2023 and the limited increase in supply should help reduce the volatility of the semiconductor cycle, which would benefit overall chip supply-demand dynamics. Capacity expansion cutbacks for 2023 should substantially alleviate concerns of the semiconductor cycle repeating the hard landing that occurred in 2019.