Samsung Q4 15A – King of volume

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Volume and scale remains essential for Samsung.

• Samsung reported disappointing Q4 15A results where I think that most of the slowness came from components rather than handsets.
• Q4 15A revenues / EBIT were guided to be KRW53.3tn / KRW6.1tn representing margins of 11.5% and YoY growth of 15% for Q4 and 7% for the full year.
• This was below consensus of KRW 53.6tn / KRW 6.6tn and RFM at KRW55.6tn / KRW7.8tn.
• Samsung has given no details at this stage of the performance of the individual divisions but I suspect that that miss has come mostly from the components business.
• There is also likely to have been some weakness in handsets but as Samsung typically winds down inventory in Q4, this is not unexpected.
• However, what is clear is that expectations for the smartphone market in 2016 have been too high and this is now being reflected in lower orders for components going forward.
• RFM has already taken this weakness into account and is forecasting just 3% growth in smartphone shipments in 2016E compared to 14% in 2015A.
• Since the reduction in market share and profitability of the handset business, Device Solutions (components) has been the torch bearer for Samsung and remains its best chance of steady growth.
• The greatest worry from these numbers is the fall in profitability which is now 11.5% compared to 14.3% in Q3 15A.
• Samsung’s ability to make superior margins by selling vast volumes of commodity products is the real strength of this company which is why maintaining sales is so important.
• Hence when sales fall short and margins decline, it is not a good sign.
• The component business tends to ship one quarter ahead of the end demand and it looks like the soft outlook for 2016 has taken its toll.
• However, I suspect that much of its competition in both handsets and semiconductors has fared considerably worse and as a result, I see this as a sign of market conditions rather than a slip at Samsung.
• I still think that Samsung can return to steady earnings growth driven by its component business but the slowing handset market is making life difficult.
• I believe that the market has an overly negative view on Samsung and it see it as the only handset with upside in 2016.
• I think that Apple will fare reasonably well but it now needs to find another product category to reignite growth after its truly mighty iPhone 6 product cycle.
• Samsung is more reasonably priced with a clearer route to growth which is why I prefer it.