[Click eStock] "Samsung Electro-Mechanics, Poor Performance Inevitable Across All Business Divisions"

[Asia Economy Reporter Lee Jung-yoon] Yuanta Securities maintained a buy rating and a target price of 190,000 KRW for Samsung Electro-Mechanics on the 3rd, stating that short-term earnings decline is inevitable due to ongoing inventory adjustments.

Samsung Electro-Mechanics' estimated sales for the fourth quarter of last year are projected to decrease by 3% year-on-year to 2.1 trillion KRW, and operating profit is expected to drop by 59% to 145.6 billion KRW, likely falling short of market consensus estimates. Operating profit by business division is estimated at 43.2 billion KRW for the Components segment, 98.7 billion KRW for the Package Substrate segment, and 3.6 billion KRW for the Camera Module segment. Even excluding one-time costs, short-term overall earnings decline is deemed unavoidable as inventory adjustments proceed amid delayed recovery in the front-end set market.

Researcher Baek Gil-hyun of Yuanta Securities explained, "Although passive component suppliers proactively began adjusting operating rates from the end of the second quarter last year, inventory levels in the market are expected to be slightly higher in the fourth quarter compared to the previous quarter due to weak set demand." He added, "Global companies, including domestic Samsung Electro-Mechanics and Japanese firms, likely conducted intensive inventory adjustments in the fourth quarter of last year."

He continued, "From a short-term perspective, the performance of multilayer ceramic capacitor (MLCC) suppliers is expected to be weak." However, he noted, "Considering that the internal appropriate inventory levels of global MLCC suppliers have increased compared to the past, inventory is likely to enter a peak-out phase after the first quarter of this year."

He further stated, "This is because operating rates are being rapidly lowered and distribution channel inventories are being depleted." He added, "Customers are expected to gradually resume orders in preparation for new product launches by global set manufacturers and recovery of the set market in the first quarter of this year." In particular, the strength of earnings recovery due to the rebound in IT demand in the Greater China region is expected to be higher compared to other component companies, and suppliers' performance is anticipated to improve starting from the first quarter of this year.

The inventory adjustments and sluggish market conditions for Samsung Electro-Mechanics' key IT components have already been reflected in the stock price, resulting in strong downside rigidity. Considering the base effect from last year's earnings and exposure to the Chinese market, the MLCC sector's earnings rebound in 2023 is expected to be stronger compared to other IT set components. Additionally, the increased proportion of flip-chip ball grid array (FCBGA) in the package substrate business division secures visible stable mid- to long-term growth, which is also positive. Furthermore, the company's strategy to expand its business into the automotive sector is receiving attention.

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