Samsung’s Other Businesses Help Offset Plateauing Smartphone Momentum

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (PINK:SSNLF) recently announced its Q2 earnings, posting a record quarter of operating profit but raising concerns that its smartphone momentum may be slowing down. The company saw its Q2 operating profits grow by almost 50% over the same period last year while revenues rose 20% y-o-y to 57.5 trillion Won ($51.5 billion). However, a low single-digit sequential growth in profits for Samsung’s mobile division, which accounts for almost two-thirds of the group income, dented market expectations in a quarter that saw the company launch its flagship Galaxy S4 globally. In fact, S4’s launch may have been partly responsible for the weak earnings performance in mobile as Samsung spent heavily in marketing its flagship product and maintaining its smartphone lead.

The sequential mobile profit decline was, however, more than offset by the stabilizing prices of memory chipsets as well as demand for smartphone screens, which propped up profits in the semiconductor and display divisions by 64% and 46% respectively. Both the supply-side divisions are benefiting from their close relationship with Samsung Mobile, and have become increasingly dependent on smartphone growth as PC sales decline. Our revised $1,350 price estimate for Samsung is about 12% ahead of the current market price.

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Sustaining Smartphone Momentum Will Be Tough

Samsung’s mobile division in recent years has proved invaluable in offsetting the negative business environment that its other segments have been operating in. While the semiconductor division has been reeling under the impact of overcapacity and pricing declines, the economic slowdown in many parts of the world has reduced the demand for PCs and TVs, and hence display panels as well. The growing demand for mobile phones, especially smartphones, and Samsung’s increasing dominance in the same has more than made up for some of the weakness coming from the TV and PC side.

But, with competition increasing at the low-end of the smartphone spectrum and saturation seeping in at the high-end, it will be tough for Samsung to maintain its past growth. Samsung has acknowledged the same, saying that while the smartphone market will grow in the third quarter, it would do so at a slower pace than before. To be sure, the smartphone market is still expected to expand at a faster rate than the overall mobile phone market as smartphones cannibalize feature phone sales. However, most of that growth is going to come from the low-end in the emerging markets where profit margins are low and being rapidly eaten into by rising competition. Samsung will also be wary of the fact that Apple is gradually increasing its smartphone focus in the emerging markets, and could launch a cheaper mid-range version of the iPhone to mitigate its own growth concerns.

This is why the South Korean conglomerate is increasingly looking to extend market share gains at the high-end by aggressively marketing the S4 in developed markets such as the U.S. Its decision to hold the S4’s launch event in the heart of the U.S., at New York, points to this strategy. (see Samsung Has Its Sights Firmly On Apple With Galaxy S4 Launch) S4’s initial sales milestones seem to suggest that it is selling about 70% faster that its earlier model, the S3. The sales growth may however taper off in the coming months as growth in the high-end market slows and competition increases with Apple’s next-generation iPhone launch.


Business Environment Improving On The Supply-side

With smartphone profits peaking, it is a good sign that the overcapacity concerns in the chipset market are decreasing and prices are stabilizing after several years of contraction. As a result, operating profits in the semiconductor division grew almost 70% y-o-y and 64% sequentially. Sales of consumer electronics such as TVs in the developed markets are also improving as the macroeconomic concerns arising from the Euro zone show signs of abating. The LED portion of the market is growing better than the rest, helping Samsung increase shipments of its high-end value-added products. This has helped TV panel ASPs improve, offsetting some of the weakness being seen on the mobile panel end.

Declining demand for PCs is having an impact on the chipset division, causing PC DRAM sales to take a hit. However, the transition to mobile devices is creating a shift in mix and the company could fall short of the demand if it fails to ramp up production adequately. Samsung will therefore look to get its NAND flash fab in China up and running by early next year. The tightness in supply may however cause prices to continue to improve from current levels, limiting the near-term impact on chipset sales. Apart from memory chipsets, Samsung also builds app processors, including its very own Exynos line which is used in both the Galaxy S series and the Note phablets. The growing demand for smartphones and tablets should help keep sales of mobile chipsets high, and Samsung should continue to benefit from this transition so long as it meets its capacity build-up targets.

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