[Into the Stocks] "Samsung Electronics, Galaxy Drives Q1... Semiconductors Lead in Q2"

[Asia Economy Reporter Minji Lee] Samsung Electronics recorded record-breaking profits in the first quarter, driven by strong performance in its smartphone division, and the semiconductor division is expected to lead strong results in the second quarter. Despite the surprise earnings, the stock price, which had been sluggish due to concerns about the semiconductor market, is anticipated to gain upward momentum in the second quarter. However, experts advise closely monitoring whether this trend will continue, given the surge in semiconductor demand caused by the COVID-19 pandemic.

◆ Record-high operating profit in Q1 driven by strong Galaxy sales

Samsung Electronics posted an operating profit of 9.3 trillion KRW and sales of 65 trillion KRW in the first quarter, marking increases of 44% and 17% year-on-year, respectively. The operating profit exceeded the securities market forecast of 8.9 trillion KRW, meeting the high expectations just before the earnings announcement.

According to provisional earnings estimates by business segment from the securities market, the semiconductor division was expected to generate between 3.5 trillion and 3.9 trillion KRW, display division 400 billion KRW, mobile communications (IM) 4 trillion to 4.4 trillion KRW, consumer electronics (CE) 900 billion to 1 trillion KRW, and Harman 100 billion to 120 billion KRW. Due to seasonal factors, internal transactions were estimated to have caused a deficit of around 200 billion KRW. Although the semiconductor and display divisions showed somewhat sluggish results in Q1, the IM and CE divisions performed well, boosting overall earnings.

The IM division likely saw an increase in average selling price (ASP) compared to the previous quarter due to product mix improvements following the launch of the Galaxy S21. Smartphone shipments in Q1 are estimated at 73 to 74 million units, with Galaxy S21 sales approaching 10 million units. Tablet shipments are predicted to be 8.4 million units. The CE division is expected to have recorded results similar to those in Q4 of last year, supported by sustained 'stay-at-home' demand and strong sales of large TVs amid the prolonged COVID-19 pandemic.

The semiconductor division was expected to record profits of 4 trillion KRW due to a rebound in DRAM prices but is now forecasted to post a lower profit of 3.5 trillion KRW. This is attributed to losses from the suspension of operations at the Texas Austin plant in the non-memory segment. The display division also likely recorded around 400 billion KRW, lower than the expected 500 billion KRW, due to decreased orders for some small OLED panel models and costs related to scrapping LCD production lines.

◆ Quiet stock price despite surprise earnings... “Semiconductors will lift in Q2”

As of 10 a.m. on the 8th, Samsung Electronics’ stock price stood at 84,900 KRW, down 0.93% from the previous trading day. The stock price, which had risen to 86,000 KRW (April 6) just before the earnings announcement, has been declining despite record-breaking results. This appears to have dampened investor sentiment due to the estimated sluggish performance of the semiconductor division.

However, the securities market predicts an upward trend in the stock price starting from the second quarter, as the semiconductor market is expected to enter a full-fledged ‘supercycle.’ Lee Soon-hak, a researcher at Hanwha Investment & Securities, said, “The stock price is expected to gradually rise due to increasing memory prices,” adding, “Since the full-scale earnings momentum will be possible from the third quarter, a meaningful rebound is expected from mid-second quarter.”

With expectations that the semiconductor division will drive strong earnings in Q2, the overall operating profit forecast is expected to be slightly revised upward compared to the previous quarter. According to financial information provider FnGuide, the operating profit forecast is 9.9024 trillion KRW, with the highest estimate at 11.658 trillion KRW.

The semiconductor division is expected to post profits in the 5 trillion KRW range from the second quarter, as fixed DRAM prices rise sharply due to strong demand from servers and PCs. Park Sung-soon, a researcher at Cape Investment & Securities, explained, “As seen in Micron’s earnings announcement, server demand is recovering not only from cloud data center customers but also from corporate customers who had been sluggish in purchasing,” adding, “With the intensifying DRAM supply shortage, a significant price increase is expected from the second quarter.” The industry forecasts that fixed prices for PC DRAM will rise by 20%, server DRAM by 20%, and mobile DRAM by more than 10%.

The non-memory segment, which was sluggish in Q1, is expected to improve gradually due to yield improvements and the normalization of operations at the Austin plant. Park added, “If Intel re-enters the semiconductor foundry business, it could be a potential concern, but this would require the successful mass production of the 7nm process in 2023,” and “Samsung Electronics’ foundry competitiveness is unlikely to be significantly damaged.”

NAND fixed prices are also expected to be influenced by increased demand from telecom companies and reduced production of 2D NAND (MLC). NAND fixed prices are anticipated to turn upward for the first time in a year since Q2 last year, with an increase of about 5%.

The IM division, which showed strong performance in Q1, is estimated to see operating profit drop by about half to the 2 trillion KRW range. Song Myung-seop, a researcher at Hi Investment & Securities, said, “The early launch of the Galaxy S21 led to reduced shipments, making profit decline inevitable.” Due to semiconductor supply shortages, smartphone production is expected to face difficulties, with Q2 sales forecasted at 65 to 70 million units, lower than the expected 75 million units. The CE division is expected to maintain a favorable sales trend in Q2, supported by demand boosted by the reissuance of COVID-19 relief funds.

While a semiconductor market boom is anticipated, there are concerns. Although strong demand from PC, server, and home appliance sectors is supported by the COVID-19 impact, there is no guarantee that this demand will continue beyond this year. Furthermore, if semiconductor companies significantly increase capital expenditures starting in Q4, the supply growth rate could rise sharply, potentially worsening semiconductor supply and demand. Song said, “We need to confirm whether semiconductor companies will significantly increase capital investments,” adding, “We must continuously monitor both demand and supply factors in the second half of this year.”