[Click eStock] Samsung Electro-Mechanics, MLCC Concerns Are Overstated... Historic Bottom

[Asia Economy Reporter Lee Seon-ae] Daishin Securities announced on the 30th that it maintains a buy rating and a target price of 250,000 KRW for Samsung Electro-Mechanics. This is based on the assessment that the overall fundamentals, including the competitiveness (technology) and profitability of MLCC (Multilayer Ceramic Capacitors), the growth potential of FC BGA substrates, and the stability of camera modules, have improved and expanded since 2021.

Park Kang-ho, a researcher at Daishin Securities, stated, "Annual operating profit is expected to peak at 1.52 trillion KRW in 2021 (83.4% yoy) and 1.57 trillion KRW in 2022 (3.2% yoy), with Q4 2021 operating profit (consolidated) estimated at 391.9 billion KRW (55% yoy / -14.4% qoq). Considering the off-season, this is a differentiated performance," adding, "It is important that this exceeds the consensus (383.9 billion KRW) and shows an increase compared to the previous year. The 2022 price-to-earnings ratio (PER) of 12 times (historical low) suggests that the stock price has a 47% upside potential relative to the target price."

The investment point is the overall strong performance of the business. First, it is judged that the possibility of MLCC reaching a peak at this point is low. November to January is the off-season for the IT industry (with fewer new product launches and production decreases centered on PCs and TVs), so some decline in utilization rates is inevitable. The MLCC market in 2021 recorded a favorable operating margin due to high utilization rates and product mix effects rather than price increases. The Q4 decline in utilization should be seen as a temporary inventory depletion process rather than the peak of the MLCC industry. High utilization and profitability of MLCC are expected to be maintained in 2022. With the expansion of the PC (notebook) market and the transition to 5G smartphones driving demand for ultra-small, high-capacity products, Japanese companies focus on automotive, while Samsung Electro-Mechanics has a portfolio focused on IT with strengths, making a shift to oversupply unlikely.

In 2022, FC BGA will contribute significantly to profitability due to supply shortages relative to demand, expansion of the SiP (including AiP) market, and continued semiconductor substrate boom. Considering the global notebook market expansion (from 171 million units in 2019 to 255 million units in 2021, a 49.5% growth) and the transition to DDR5 in 2022, supply is expected to fall short of demand. Leading companies in Japan, Ibiden and Shinko, focus more on the server/network market than PCs, so their capacity to increase supply is limited. Additionally, as smartphones transition to 5G, demand for SiP and AiP products is also high, causing a trickle-down effect between the domestic PCB market leaders (Samsung Electro-Mechanics, LG Innotek) and second-tier companies, expanding the premium sales ratio by company.

The growth of camera modules (sales and operating profit) in 2022 is significant. Samsung Electronics will release two premium smartphones in 2022 (Galaxy S22 in the first half and foldable phones (Galaxy Z Fold and Flip) in the second half), with Samsung Electro-Mechanics responsible for the main cameras (rear / folded cameras / high-resolution). The company also handled the main cameras (high-resolution) for the higher-end models of the Galaxy A series (A52/A72) that started in 2021, securing stability in profitability compared to before through expanded overall utilization and a premium-focused mix effect.