The author is an analyst of KB Securities. He can be reached at firstname.lastname@example.org. — Ed.
Raise target price to KRW80,000
We raise our TP for SEC by 6.7% to KRW80,000 (12m fwd BVPS x 1.89x target P/B) to reflect an increase in ROE (9.3%→9.6%) stemming from upward revisions to 2020E/2021E NP (attributable to controlling interests) by 3.8%/5.3%. We think benefits from U.S. trade sanctions against Huawei as well as an increase in market share should drive 3Q20 OP, resulting in an earnings surprise with the highest third-quarter earnings recorded since 3Q18.
3Q20 forecast: OP to reach highest level in two years
We raise our 3Q20E OP forecast to KRW11.1tn (+43% YoY/+36% QoQ; 17.8% OPM) from KRW10.0tn (vs. market consensus of KRW9.0tn) to reflect brisk sales of consumer electronics (e.g., smartphones). Representing the highest earnings level since 3Q18 (KRW17.5tn), our estimate focuses on the outstanding performance of the IM and CE divisions (highest earnings levels since 2Q16): (1) IM/CE shipments should be buoyed by trade restrictions on Huawei. (2) Growing digital demand driven by the contactless economy is increasing online purchases (online revenue proportion: 15% in 2019→40% in 2020). By division, we forecast Semiconductor/IM/CE/DP OP of KRW5.4tn/KRW4.2tn/KRW1.1tn/ KRW0.4tn.
U.S. trade sanctions to benefit SEC in the long term
The U.S. ban on exports of semiconductor equipment/components to Chinese companies (incl. Huawei) will undermine SEC order inflow in the near term. However, it will also provide SEC with opportunities to expand market share and secure new clients. Overall, the benefits will outweigh the losses over the long term. The trade restrictions will: (1) Limit market expansion for Chinese counterparts such as CXMT (DRAM) and YMTC (NAND) (2) Induce Qualcomm/NVIDIA/IBM to increase orders with SEC (non-memory business), intensifying SEC’s rivalry with TSMC (3) Set SEC more directly against Apple and Ericsson during Huawei’s virtual exclusion from the smartphone/5G telecom markets. The U.S. ban (effective from Sep 15) is estimated to have pushed DRAM inventory depletion forward, perhaps enough to cause DRAM prices to bottom out.