Samsung – Steady succession

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JK Shin can leave with his head held high.

• Samsung has reshuffled management at its handset business in a move that I think has nothing to do with performance and everything to do with an orderly transfer of power.
• When one looks at Samsung’s financials on an annualised basis it is easy to assume that JK Shin has been replaced due to the fact that 2015 will be the second year where company earnings have declined.
• However, when looks at the business on a quarterly basis things look very different as the last two quarters have seen a steady recovery based on quick and decisive action.
• Furthermore, Q4 15E is likely to see a continuation of the recovery that was experienced in Q3 15A and the outlook for 2016E is also one of steady growth.
• It was in Q2 14A and Q3 15A where earnings were hammered due to declines in handset market share and margins.
• If JK Shin was to be replaced due to bad performance, it would have happened then and keeping him on has actually turned out to be a good move.
• Every other handset company that has faced a similar situation to this has on gone to rack up huge losses and to lose almost all of their business.
• However, to JK Shin’s credit, Samsung acted quickly to cut the fat out of its operation and focused on what it knew it could do well: commodity products in huge volumes.
• In Q3 15A, Samsung recorded a steady market share gain after several quarters of losses and has managed to hold margins steady at 9-11% for the last three quarters.
• This is far better than any of its Android brethren are doing and I think that this position is sustainable as long as Samsung can out-ship its nearest rival by at least 2 to 1.
• It is a rescued and stabilised handset business that JK Shin hands over to his successor Dong Jin Koh giving him time to decide what strategy to pursue for the future.
• Consequently, I think that talk about JK Shin being removed for poor performance is very far from the reality.
• The mantle of expectations has now passed from handsets to semiconductors where the outlook is for steady growth at excellent profitability.
• Consequently, I can still see upside in Samsung’s share price despite still applying a 20% discount for its murky corporate governance.
• Even this is beginning to change with cash being returned to shareholders (see here) and some real signs of the intention to become a mature, world class company.