Samsung and HTC – Chalk and cheese

Samsung is about growth. HTC is about survival

• Both Samsung and HTC have reported preliminary results and neither are very encouraging.

Samsung

• Samsung preliminary Q1 14A revenues / EBIT will be KRW51tn-KRW55tn / KRW8.2tn-KRW8.6tn giving mid points of KRW53tn / KRW8.4tn respectively.
• These midpoints are broadly in line with consensus revenues / EBIT of KRW54tn / KRW8.3tn.
• The IT and Mobile Coms. (handset) business has performed in line with expectations with EBIT of around KRW5.9tn (RFM and consensus).
• This implies a strong increase in profitability in handsets after the extra marketing and one off bonuses in Q4 have not re-occurred.
• Despite being in line with estimates, IT and Mobile Coms. EBIT has declined by 6.6% compared to Q1 13 which really underlines the issue that Samsung faces.
• The smartphone market is slowing and the company faces pressure on its profitability as competition gets ever more intense.
• Hence, in order to see growth, the other businesses need to really step up which will be difficult given that Semiconductors are already very profitable and much of the rest of the business is already a commodity.
• Hence, without a stellar success from the Galaxy s5 and Galaxy Note 4 (due later this year), earnings are going to fall this year.
• The company believes that the second half of the year will see a recovery but without meaningful growth in handset market share this looks like a tough nut to crack.
• Hence I am forecasting an 8% fall in EBIT for the full year compared to consensus which is forecasting 3% growth.
• There seems very little upside to be had in the shares this year despite the company’s cheap valuation.

HTC

• HTC reported weak preliminary Q1 14A results but the revenue miss can be attributed to a delay booking revenues due to IFRS.
• Revenues / Net Income were TWD33.1bn / LOSS 1.9bn compared to consensus at TWD35.4bn / LOSS 1.7bn.
• The only good news in these numbers is that March did see revenues increase and none of these figures include any shipments from the company’s new flagship the HTC One M8.
• This is an excellent device but HTC does not have the marketing power to push this device very hard and it is coming at a very high price.
• It would not be the first time a superior product was buried under the weight of a bigger marketing budget for an inferior one.
• There are mixed reports of how well the device is selling but the key will be how fast sales drop off once the initial euphoria fades away.
• Either way it will take a miracle for this product to save HTC as there are many almost-as-good products from stronger brands which have bigger marketing budgets.
• Hence, I do not see the HTC One M8 pulling HTC from its current death spiral and, together with Blackberry, I see HTC as one of the first casualties of the coming shakeout.
• Investors should exit from both of these companies while there are those still willing to believe in a recovery.