Why Is Samsung Electronics Considered More Attractive Than TSMC?

[Asia Economy Reporter Minji Lee] Samsung Electronics is experiencing a record high rally fueled by net buying from foreigners, and opinions have emerged that its undervaluation appeal will grow even more in the future.

According to the financial investment industry on the 8th, foreign investors purchased about 5.27 million shares of Samsung Electronics stock during December. This contrasts with institutions selling 5.3 million shares in the market. Expanding the period from November to the present, foreigners alone bought 28.99 million shares, while individuals and institutions net sold 19.17 million and 8.45 million shares, respectively. As the weak dollar trend continues, foreigners have been accumulating stocks in Asian countries, and with a positive outlook for the IT industry next year, the scale of foreign buying has increased.

The market expects the foreign buying trend to continue in the long term. The buying pressure on Samsung Electronics is expected to grow even stronger than it is now. Furthermore, it is analyzed that Samsung Electronics has greater upside potential compared to Taiwan’s TSMC, the world’s largest foundry company, which is a key consideration for foreigners. In terms of upside potential, Samsung Electronics is far superior to TSMC because it is much cheaper. The 12-month forward price-to-earnings ratio (PER) is 13.7 times for Samsung Electronics and 23.8 times for TSMC. This is just over half of TSMC’s PER. The lower the PER, the lower the stock price compared to earnings per share, indicating greater potential for price appreciation.

Seungwoo Lee, a researcher at Eugene Investment & Securities, said, “Among semiconductor companies this year, from a supply-demand perspective, there has been a strong concentration in fabless (design and development in semiconductor manufacturing) and foundry (dedicated semiconductor manufacturing) sectors, causing related companies’ stock prices to rise significantly,” and added, “When foreigners reduce their dollar assets and enter emerging markets, they will look for the least appreciated stocks rather than overvalued ones.”

It is not just about cheap valuation. Samsung Electronics appears to have both solid fundamentals and dividend appeal. Next year, Samsung Electronics is expected to improve profits due to increased demand for server replacements and inventory accumulation. Although a short-term issue, benefits are also expected from rising DRAM prices due to Micron’s suspension of operations at its Taiwan DRAM plant. Yooak Park, a researcher at Kiwoom Securities, forecasted, “The DRAM industry will enter a supply shortage in the first half of next year and continue a two-year long boom until 2022,” and added, “In the case of NAND, the market boom is expected to begin from the second half of the year.”

Expectations that Samsung Electronics will issue a special dividend in the first quarter of next year are also stimulating stock price gains. Samsung Electronics’ shareholder return plan, which pays 50% of free cash flow (FCF) as dividends, is lower than TSMC’s (70% FCF), but assuming a special dividend is made, its appeal is not expected to diminish significantly. Jaeseon Lee, a researcher at Hana Financial Investment, said, “Although Taiwan’s shareholder-friendly policies are rated better than Korea’s, since TSMC has experienced a short-term sharp rise, there will not be a significant difference in dividend payout ratios.”

This content was produced with the assistance of AI translation services.