Samsung bears win after stock swings on ‘shock’ profit miss

By BLOOMBERG

SEOUL • Samsung Electronics Co Ltd ended the day weaker, giving into bears worried about the outlook for the first half (1H) following yesterday’s disappointing fourth-quarter (4Q) earnings estimates.

The shares swung between a gain of as much as 1.2% and a loss of 2.1% before finishing the day 1.7% lower.

The stock rose as analysts said the bleak 4Q results on slumping chip demand were largely factored in, but fell back on pessimism over what comes next.

The South Korean company reported preliminary operating income dropped to 10.8 trillion won (RM39.76 billion) for the period through December, missing the average analyst estimate compiled by Bloomberg by 22%.

Samsung shares lost 24% last year, capping its worst performance since 2000, with the stock taking a beating as chip prices slid and demand for new smartphones slowed. The world’s largest smartphone maker by shipments has been increasingly dependent on chips for profit growth, riding on a spike in global data traffic while yielding to stiffer competition for phones.

Semiconductors accounted for more than three quarters of Samsung’s total profit, compared to the 1Q of 2013 when its phone business represented almost three quarters of profit.

Here’s what analysts said:

HI Investment & Securities Co Ltd (Song Myung-sup): “It’s a shock. It’s not just Apple Inc, but also smartphone, server and PC manufacturers that are not buying.”

CGS CIMB (Lee Dohoon): “We are concerned that memory inventory levels could be elevated even further” in the 1Q of this year, making it “inevitable” for the company to see weaker results in the 1H, according to a note published on Jan 8. We look for further memory capital expenditure (capex) cuts, slower memory price declines and better signs of order recovery from data centre customers to catalyse the stock” in the 1H.

“We are still of the view that structural demand growth for artificial intelligence, cloud, 5G and big data should continue, and that the memory supply-demand imbalance should be reduced along with memory makers’ capex cuts and order restocking cycle” by the 2H. Cuts price target by 9.4% to 48,000 won, maintains ‘Buy’ rating.

KB Securities Co Ltd (Jeff Kim): “There’s a good chance the trend of deteriorating conditions for chip supply- and-demand will continue into the 1H coupled with seasonal weakness,” according to a note on Jan 8.

“With uncertainty over chip earnings growing for the 1H, there’s a possibility for the company to see quarterly operating profit dropping below the 10 trillion won threshold.”

Sluggish stock performance will be “inevitable” as instability in earnings will persist for a while. Earnings expected to improve in the 2H when demand for dynamic random-access memory (DRAM) starts to recover, and on sales of flexible displays used in smartphones.

Citigroup Inc (Peter Lee): Samsung’s “memory strategy for 2019, including DRAM and NAND capex plans will be the most important thing to look out for in terms of ascertaining the possibility of earnings improvement” in the 2H, according to a note yesterday.

“We see Samsung as a long-term beneficiary of the oncoming 5G era, driven by its 5G equipment and smartphone in 2020.” Despite concerns of the chip down-cycle, “we believe Samsung will sustain product and technology leadership” in 3D NAND.

BNK Securities Co Ltd (Park Sung-soon): “The results were a bit worse than expected, but it’s not as if we were expecting good results in the first place. There was a bout of estimate downgrades by brokerages in December and the stock price had slumped.

“The most important thing from here is for the pace of decline in chip prices to slow, which I expect will happen in the 2Q.”