Demand improvement expected in 2H23

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The author is an analyst of NH Investment & Securities. He can be reached at hwdoh@nhqv.com — Ed.

We expect SEC’s earnings to remain sluggish through 2Q23, amid slowing memory market conditions. Industry conditions should improve from 3Q23, however, led by supply reductions and increased demand for smartphones and data centers.

1Q23 earnings slow due to weak memory market conditions

We maintain our Buy rating on Samsung Electronics (SEC) and raise our TP from W72,000 to W79,000, as we revise up our 2024~2025 earnings estimates on an expected memory industry upcycle from 2024. Our TP reflects a 2023~2025 ROE of 12.7% and COE of 8.2%.

We forecast 1Q23 sales of W65.60tn (-7% q-q), OP of W0.44tn (-90% q-q), and NP of W0.8tn (-97% q-q). By division, operating income should break down as DS (semicon) -W4.29tn (TTL q-q), SDC (display) W1.22tn (-33% q-q), MX W3.19tn (+88% q-q), CE W0.04tn (TTP q-q), and Harman W0.27tn (-27% q-q).

The decline in profits in 1Q23 is due to the deteriorating performance of the memory division. DRAM shipments and ASP are expected to slide 17% q-q and 31% q-q, respectively, while NAND shipments and ASP will likely decline 13% q-q and 30% q-q due to sluggish demand for IT devices and a continued drop in data center investment. Despite the industry slowdown, SEC’s investment and production cuts have been relatively small compared to those of its competitors. As a result, in spite of its large capacity and process competitiveness, its profit slowdown has stood out. The foundry division is also likely to turn to a loss. Profits at the MX division appear brisk given the industry conditions, with Galaxy S23 shipments reaching 11mn units.

Expect improvement in smartphone and data center demand

SEC’s earnings will likely remain sluggish through 2Q23, as memory prices continue to fall. However, the rate of decline should slow significantly, with DRAM prices sliding 1% q-q and NAND 2% q-q. We forecast 2Q23 sales of W64.04tn (-2% q-q) and OP of W0.66tn (+49% q-q).

A full-fledged earnings rebound is possible from 3Q23. Due to aggressive inventory adjustments at clients from 2Q22, set inventory peaked in 1Q23 and turned to decline. Memory inventory should also shrink from 2Q23. Some set makers began ordering parts from March, based on expectations for improving smartphone demand, rising data center investment, and PC sales growth.

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