The author is an analyst of KB Securities. He can be reached at firstname.lastname@example.org. — Ed.
Recently won Qualcomm order to increase foundry revenue by USD5.0bn in 2021
We maintain BUY and our 12m TP of KRW80,000. SEC recently won a Qualcomm deal to manufacture a full batch of Snapdragon 875 chipsets worth KRW1.0tn (5G smartphone AP), coming on the heels of the company’s intake of 5G telecom equipment orders worth KRW8.0tn from Verizon. This is testament to SEC’s competitiveness in the foundry business. The Qualcomm order intake will boost SEC’s foundry revenue by USD5.0bn to USD15bn in 2021. This increase is meaningful in that Qualcomm chose SEC’s 5nm EUV process for the production of its high-end model instead of TSMC’s 7nm (on which Snapdragon 865 was fabricated). 3Q20 OP should be driven by the benefits to come from the U.S. sanctions against Huawei as well as an increase in market share, marking the highest third-quarter earnings recorded since 3Q18. This may result in an earnings surprise.
3Q20 forecast: OP to reach highest level in two years
For 3Q20, we forecast OP at KRW11.1tn (+43% YoY/+36% QoQ; 17.8% OPM), which reflects brisk sales in consumer electronics (e.g., smartphones). Exceeding the market consensus of KRW9.2tn, our estimate marks the highest earnings level since 3Q18 (KRW17.5tn). IM and CE will drive earnings performance, with the divisions set to achieve their highest quarterly earnings since 2Q16: (1) IM/CE shipments should be buoyed by U.S. sanctions against Huawei. (2) Growing digital demand driven by the contactless economy is increasing online purchases (online revenue proportion: 15% in 2019→40% in 2020). By division, we forecast Semiconductor/IM/CE/DP OP of KRW5.4tn/KRW4.2tn/KRW1.1tn/ KRW0.4tn.
Normalization of server DRAM inventory in 4Q20 to begin to ease uncertainty
Taking into account SEC’s 12m P/B-ROE trend, we expect the stock to rebound in September-October 2020. Over the past decade, SEC stock has rebounded on an average of six months before DRAM contract prices increase, which we think will happen in March-April 2021: (1) North American data centers’ server DRAM stock levels are expected to normalize in 4Q20 (2) DRAM stock levels at SEC and other memory chip manufacturers are believed to have normalized to around two weeks (as of September). Hence, we expect clients to increase new server DRAM orders after 4Q20, when their inventory levels should be depleted.