IT Parts/electronics: Galaxy Sets out for Counterattack in 2022 – BusinessKorea

The authors are analysts of Shinhan Investment Corp. They can be reached at [email protected] and [email protected], respectively. — Ed.
 
Samsung smartphone shipments at bottom levels in 2020-2021
Even under the influence of the COVID-19 pandemic, IT hardware demand remained solid over the past year and a half, with more people working from home and pent-up demand unleashed. Samsung Electronics was the only smartphone company to see a drop in sales. Semiconductor supply disruptions caused by a surge in COVID-19 cases in Southeast Asia cannot fully explain the company’s poor performance, given that Apple and second-tier Chinese companies recorded sales growth.
Samsung’s smartphone shipments are seen to have decreased about 10% to 270mn in 2021 from pre-pandemic levels of 300mn units in 2019. However, profitability has improved sharply with operating margin from the IT and mobile communications (IM) division estimated to hit a new high since 2014 at 13% in 2021, up from the previous record of 11.5% in 2020 and 8.6% in 2019. We believe the company has focused on profitability instead of shipment growth (market share gains) during the past two years. Its smartphone market share fell 2%p as a result, while that of Apple, Xiaomi, Oppo, and Vivo went up 2-5%p.
Samsung smartphone output to increase 25% YoY in 2022
Samsung is likely to change course from its current smartphone sales strategy and ramp up output.
① The company is considering expanding quarterly production of smartphones to around 80mn units in1Q22 and 2Q22 each, vs. mid-60mn levels in 3Q21 and 4Q21.
② It appears to be planning to ramp up production by 25% in 2022 from this year’s 270mn units. A10% YoY increase in the production of tech products is usually enough to drive improvement in market conditions for the components.
③ We project Samsung’s smartphone shipments to rise 12% YoY from 269mn units in 2021 to 302mn in 2022, taking into account the company’s production plans and preparations in the supply chain for the year ahead. Shipments of the iPhones are estimated to grow 12-15% YoY this year amid strong demand. We focus on Samsung’s efforts to boost sales of the Galaxy smartphones in 2022.
Investment strategy: Focus on IT parts suppliers in Samsung value chain
The IT hardware (IT parts and telecom equipment) sector has been the worst performer on KOSDAQ since the index hit a bottom on March 19, 2020 due to the pandemic. Small/mid-cap stocks in IT equipment, materials, and secondary battery sectors have gone up in value, resulting in the upward revision of valuation multiples. IT parts stocks, on the other hand, have been stuck in low gear. They should be able to stage a bigger rebound during turnaround periods.
With few exceptions, earnings of domestic IT parts companies are directly or indirectly affected by Samsung’s smartphone shipment volume. We believe 2020 and 2021 have been the worst years. Earnings should turn upward in 2022 as we seem to be passing the trough.
We focus on IT parts companies that derive a greater share of sales from Samsung. Prospects are positive for non-Samsung vendors that stand to benefit from technological changes. Expectations are also high for manufacturers of optical image stabilization (OIS) components as Samsung will increase the adoption of OIS technology in lower-end smartphone models next year.

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