Lower 2Q14 outlook on strong won and weak smartphone shipments
We lower our 2Q14 earnings estimates to sales of W55.2tn (previously W56.6tn,
down 2.4%), OP of W8.8tn (W9.3tn, down 5.2%) and NP of W7.4tn (W7.8tn, down
5.3%). We cut our outlook to reflect the rapid KRW appreciation and smartphone
shipment decline. As such, 2014 EPS should fall 3.4% to W193,796. However, we
maintain our TP at W1,800,000 derived via SotP valuation (9.3x 2014 PE, 1.7x PB).
Strong KRW to erode OP
In 2Q14, the KRW is appreciating rapidly. And, we believe the strong KRW will
continue, on: 1) external conditions, including a falling US interest rate and easing
concerns over emerging markets, and 2) the ongoing current account trade surplus.
As such, we lowered our 2Q14 average KRW/USD estimate by 0.8% from W1,041
to W1,033. Assuming Samsung Electronics’ average quarterly OP FX exposure at
a long position of W25tn, OP could erode more than W800bn as the KRW/USD
has declined 3.4% from W1,069 since 1Q14.
Entry/mid-range smartphone shipments to fall
We cut our 2Q14 smartphone shipment forecast to 81mn units (previously 85mn
units). We already anticipated shipments would fall from 1Q14 (89mn units) on
inventory corrections ahead of new entry/mid-range model launches. But with
competition in these markets growing in China, additional downside appears likely.
However, the high-end weighting should grow on Galaxy S5 sales (18mn units),
lifting ASP to USD300 (up 14% QoQ), minimizing a decline in smartphone sales
and OP. For tablets, we expect shipments to fall to 10mn units (13mn units in
1Q13). As such, IM OP should decrease to W5.8tn (previous estimate W6.2tn).
And, smartphone OP and OPM should erode further in 2H14 on a growing
weighting of entry/mid-range models and more competition.
Upside from changing governance and better shareholder return
policies to be limited
Shares have rallied 5.6% over the past four trading days, on: 1) expectations for
changes in corporate governance, and 2) improvements in shareholder return
policies. However, we believe further upside will be limited, as: 1) there will be no
material changes in governance, and 2) there are no share buybacks scheduled
for 2Q14. Of note, we expect buybacks to begin in 2H14.
*Source: Korea Investment & Securities Co.