The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. — Ed.
Maintain BUY, target price of KRW80,000
We maintain BUY and TP of KRW80,000 on SEC. We still hold a positive view given that:
(1) although key clients are focusing on depleting inventories amid low-demand seasonality, inventories should fall to healthy levels in 2Q23;
(2) the decline in chip prices should slow in 2Q23 (4Q22 -30%→1Q23E -20%→2Q23E -10%) as prices near cash cost levels; and
(3) the fall in earnings consensus should end near the 1Q23 earnings release (April). We see chip supply-demand dynamics improving as signs pointing to an end to the downcycle (e.g., drop in inventories, slowing price declines) begin to surface in 2Q23.
Borrowing of KRW20tn was inevitable
On Feb 14, SEC announced that it will borrow KRW20tn from subsidiary Samsung Display (4.6% annual interest; KRW920bn interest income for Samsung Display; full redemption upon maturity in 2025/early redemption at discretion) to fund operations; at end-2022, SEC had KRW115tn in cash reserves (KRW104tn net cash) The move was inevitable given that its cash cow DS division is expected to suffer a loss for the first time in 14 years and overseas subsidiaries account for the majority of SEC cash reserves. Also, most of the KRW53tn capex planned for this year is committed to domestic operations.
2023 forecast: OP at KRW13tn; 2Q23 to mark trough
Considering the expected DS loss, we forecast 2023 OP at KRW13tn (-70% YoY), with 2Q23 OP at KRW0.6tn (vs. 4Q22A KRW4.3tn, 1Q23E KRW1.1tn). Indirect output cutbacks should lower SEC DRAM output by 9%, leading to a 4% decline in global DRAM supply, which should help supply-demand dynamics in 2H23. That said, we see DS OP rebounding from 3Q23. Given that semiconductor stocks lead industry conditions by six months, we see limited downside for SEC stock regardless of the company’s poor performance.
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