The author is a KB Securities analyst. He can be contacted at [email protected] – Ed.
Semiconductor industry to benefit from US policy
We maintain KRW 100,000 BUY and TP on SEC. After the semiconductor agreement between the United States and Japan in 1986, the company became the world’s largest semiconductor maker, following the lead of its Japanese counterparts. At present, the Biden administration’s attempt to discourage semiconductor investment in China is expected to create a similar situation, creating positive momentum not only for the SEC but also for the industry as a whole, scoring the first such opportunity in 35 years:
(1) Semiconductor supply dynamics are expected to become more favorable in 2022-24, as US policy has made it impossible for chipmakers (e.g. Samsung Electronics, SK hynix, Intel) to expand their Chinese facilities and Chinese companies have been thwarted in their attempts to venture into the industry.
(2) The recent adoption of trade protectionism, particularly by the United States, Japan and Europe, has created a need to establish local production facilities. Samsung Electronics is the only company with enough capital to meet this challenge in all markets.
(3) Customers will likely source memory chips to avoid supply shortages in the medium to long term.
Push Revenue Above KRW300tn Through Large Scale Acquisitions
Given the SEC’s current shareholder return policy (2021-23), we see the company using its cash reserves (KRW 100,000,000 net cash) to pursue large-scale acquisitions. Since acquiring Harman for $ 8.0 billion (KRW 9.4 billion) in 2016, it has been cautious in choosing its targets. With overseas subsidiaries holding large cash reserves, the company is expected to improve shareholder value through overseas mergers and acquisitions. SEC should try to increase revenues beyond KRW300tn (KRW200tn brand passed in 2012).
Optimal time to increase weighting with an emphasis on upside potential
Given the last 10 months of price correction, we believe the time has come to increase the weighting of the stock with a focus on upside potential. We expect a rally because:
(1) the global semiconductor industry is expected to benefit from increased chip production and US policy that discourages semiconductor investment in China, which undermines the influence of the Chinese market;
(2) the large liquidity reserves make SEC the only chipmaker capable of effectively responding to trade protectionism (ie by building additional local production facilities); and
(3) The 15.4% drop in the share price this year (83,000 KRW on January 4 → 70,200 KRW on November 18) suggests that the concerns have been fully addressed.