Goldman Sachs Samsung Projections

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    April 11, 2016 South Korea Samsung Electronics 2025: Life after smartphones Equity Research Hardware-as-a-platform scenario, foldable display likely to be key Global technology major at an inflection point Strong execution in hardware, preemptive investments in components, and unique synergy from vertical integration over the past two decades have led to Samsung Electronics (SEC) becoming one of the largest companies in the global TMT market in terms of sales/profit. However, we believe SEC now faces a structural decrease in hardware profits  (esp. smartphones) as well as limited earnings contribution from its new growth drivers. We forecast SEC’s earnings to decline gradually through 2025E with solid contributions from semi (then 72% of EBIT)/OLED being offset by smartphones — pointing to its transformation to a capex-heavy semi company from   a smartphone maker. What could make us constructive on the stock Despite its 14% underperformance vs KOSPI over the past year, we maintain Neutral on SEC on balanced risk-reward and our 12-m P/B-ROE based TP of W1.3mn (1% potential upside). We could turn constructive on SEC if it: (1) reforms its hardware strategy  and generates earnings from mobile services, (2) substantially improves shareholder return  via either significant increase in dividend payout or continuous share buyback with cancellation, (3) untangles the complex ownership structure  through potential group restructuring which could reduce its valuation discount vs global peers. Potential opportunities: Hardware-as-a-platform, foldable display    Hardware-as-a-platform  scenario: We assume SEC could leverage its hardware market share via aggressive pricing while also generating revenue/EBIT of W18tn/W10tn from mobile services by 2025E.    Commercialization of foldable display : This could drive the next hardware product cycle based on a differentiated form factor and better mobility with multiple devices converging into one. We expect SEC to maintain a leading share in AM OLED — in 2025E, we forecast SEC to generate W51tn/W5.1tn revenue/OP in AM OLED, with 80%/90% from flexible displays. Scenario analysis: Bull/bear case variance vs current price +41%/-45% Our scenario analysis using 2025E earnings implies a theoretical valuation for each case using DCF methodology (to capture cash generation capability): Bull case : Strong execution of hardware-as-a-platform (leading to a balanced structure with 41% 2025E EBIT contribution from semi vs. 48% at present), boosting its implied valuation to W1.8mn (+41% variance vs current price). Bear case : Increasing competition in semi/display panel businesses drags down its implied valuation to W0.7mn (-45% variance vs current price). Marcus Shin +82(2)3788-1154 marcus.shin@gs.com Goldman Sachs (Asia) L.L.C., Seoul Branch Giuni Lee +82(2)3788-1177 giuni.lee@gs.com Goldman Sachs (Asia) L.L.C., Seoul Branch SEC (005930.KS): KEY DATA AT A GLANCE Note: Current price as of the market close of April 6, 2016   FOLDABLE DISPLAY CONCEPT Note: This is for illustration purpose only.   Source: Company data, Datastream, Goldman Sachs Global Investment Research. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research Key dataCurrent Price (W)1,285,00012 month price target (W)1,300,000Market cap (W bn / US$ mn)187,342.4 / 162,032.9Foreign ownership (%)49.5 12/1512/16E12/17E12/18E EPS (W)128,228142,590138,943141,079EPS growth (%)(16.7)11.2(2.6)1.5EPS (diluted) (W)128,228142,590138,943141,079EPS (basic pre-ex) (W)128,228142,590138,943141,079P/E (X)10.19.09.29.1P/B (X)1.11.00.90.9EV/EBITDA (X)3.02.52.32.1Dividend yield (%)1.61.92.22.3ROE (%)11.211.210.39.7CROCI (%)18.115.213.512.8  April 11, 2016 Samsung Electronics 2025: Life after smartphones Goldman Sachs Global Investment Research 2 Table of contents Our thesis in six charts 4   PM summary: Global tech giant at an inflection point 5   Valuation: Stock appears fairly valued despite underperformance 11   Shareholder return analysis 19   Key growth drivers over the past two decades 23   SEC’s success driven by seven key catalysts 26   Twin challenges ahead 36   Structural decrease in hardware profits 37   Marginal contribution likely from new growth drivers 42   At a glance: SEC’s leadership 49   Hardware-as-a-platform scenario 53   Structural challenges in hardware to lower long-term earnings 54   Software: A dilemma within? 63   Introduction of “hardware-as-a-platform” scenario 72   Scenario analysis: Quantifying the potential of “hardware-as-a-platform” strategy 75   Key risk factors for the “hardware-as-a-platform” scenario 89   Foldable display the next big driver 90   Foldable display to emerge as a key differentiator for hardware 91   We expect SEC to maintain solid leadership in flexible display 99   Next decade: Earnings and implied valuations 111   Base case: Three stars scenario 112   Bull case: Five stars scenario 115   Bear case: One star scenario 120   Appendices 125   Disclosure Appendix 144   The prices in the body of this report are as of the market close of April 6, 2016, unless mentioned otherwise.  April 11, 2016 Samsung Electronics 2025: Life after smartphones Goldman Sachs Global Investment Research 3 Source: Datastream, Company data, Interbrand, Strategy Analytics, Digitaltimes, IHS, Gartner, Goldman Sachs Global Investment Research. HISTORICALLY STRONG GROWTHHARDWAREHEAVY AQUANTUMM JUMPTOP R&D SPENDERDREAMS DON’T ALWAYS COME TRUESOFTWARE POTENTIALLACK OF TIME OR LACK OF INTEREST?IS THERE AN APP FOR THAT? A FAST-FOLLOWER INSOFTWARE?READY TO CHECK OUTSHRINKING ONCONVERGENCETHE NUMBERONE Dial Samsung: In Numbers $36bn $170bn The change in SEC’s market cap between 2000 and 2015. This made SEC the second-largest share gainer among its technology peers, bested only by  Apple. (p. 24) 7th42nd SEC’s brand value rank in 2015 as per Interbrand, up from 42 nd place in 2001. This is mostly driven by SEC’s strategic focus on brand value enhancement as well as innovative products. (p. 31) $13bn SEC’s R&D spending in 2015. In light of its strong focus on R&D, SEC has been a top R&D spender among its global peers since 2012. (p. 32) 2 out of 5 The number of SEC’s new businesses showing progress. In 2010, Samsung Group announced five new growth drivers but only two, xEVbattery and biopharmaceuticals, have meaningfully advanced. (p. 43) 40kvs.20k Software engineers employed by SEC vs. R&D staff employed by Google. SEC’s group is sizable enough (in our view) to develop competitive content and an OS. (p. 66)The average time per month that Galaxy S4 users spend on SEC’s own apps. Average consumption time for YouTube and Google Play apps were 147min/m and 52min/m, respectively, in 2014. (p. 68) 9minutes1,000 The number of apps that run on Samsung’s Tizen OS—far fewer than the 1.5mn available to iPhone users and 1.6mn available to  Android users. (p. 70) 3years The lifetime of ChatOn, SEC’s mobile messaging service. Despite substantial efforts, SEC has terminated various mobile apps that failed to gain traction with customers. (p. 66)The percentage of merchants who already have POS software compatible with Samsung Pay, vs. 13% for Apple Pay. This could allow SEC to see faster adoption of its mobile payment service. (p. 79) 80% The decline in combined unit shipments for MP3, DSC and PMP between 2010 and 2015. At the same time, global smartphone shipment increased to 1.4bn in 2015 from 0.3bn in 2010. (p. 95) 95% SEC’s market share for small/mid  AM OLED in 2015. Given its earlier investments in R&D and mass production, SEC continues to maintain leadership in flexible display. (p. 105) 65% The percentage of SEC’s 2015 revenue generated by its hardware business. The company’s component business is also highly dependent on hardware demand. (p. 40) 400mn 150mn  April 11, 2016 Samsung Electronics 2025: Life after smartphones Goldman Sachs Global Investment Research 4 Our thesis in six charts Exhibit 1:   SEC’s EBIT share in global TMT started to decline from 2014 with falling smartphone margins…   Exhibit 2:   …and we expect SEC’s earnings to keep decreasing over the long term on challenges in hardware   Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. Exhibit 3:   Hardware-as-a-platform scenario…   Exhibit 4:   …and flexible display would be key… Note: This foldable display concept is for illustration purpose only Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. Exhibit 5:   …in driving the next phase of growth   Exhibit 6:   SEC’s EBIT mix in 2025E based on 3 scenarios Source: Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. 0%10%20%30%40%50%60%70%80%90%100%SamsungAppleContent   ProviderEntertainment   PlatformElectronic   componentsEMS/OEM/ODMSet   makerSemi   excl.   memory HandsetHandsetDRAMDRAMNANDNANDSystem   LSISystem   LSIAMOLEDAMOLED ‐ 50510152025302015   EBIT 2025E   EBITOthersAppliancesTVMobile   serviceLCDAMOLEDSystem   LSINANDDRAMHandset (Wtn) 050,000100,000150,000200,000250,000EPS   (base   case) EPS   (bull   case) EPS   (bear   case) (W) 48%72%41%110%9%29%18%12%36% ‐ 8%13% ‐ 30%0%5%27%8% ‐ 30% ‐ 10%10%30%50%70%90%110%130%2015 2025E:   Base ‐ case 2025E:   Bull ‐ case 2025E:   Bear ‐ caseSemiconductor Display   Panel Handset Mobile   service CE Others
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