Samsung Analysis

Topics: Balance sheet, U.S. Securities and Exchange Commission, Asset Pages: 18 (6230 words) Published: June 12, 2013
August 27, 2012

Samsung Electronics (005930 KS)

Company Update

US jury sides with Apple
WHAT’S THE STORY?

Event: A US jury on Aug 24 handed Apple a sweeping victory over Samsung Electronics (SEC)—in stark contrast to an earlier split ruling by a Korean court. Impact: The verdict implies that the handset industry will now compete more fiercely in design, as well as in technology, eroding the profitability of handset makers and parts suppliers. On the positive side, the battles should help Apple and SEC further consolidate their leadership. The USD1.05b in suggested damages for SEC to pay equate to 5% of our 2012 operating profit projection for the firm. Looking ahead, sales (including those of Galaxy S3) should be burdened by the risk of similar verdicts, but we foresee limited impact on earnings, as such risk will be shared by all smartphone manufacturers. SEC will likely suffer in the short term, but the ruling should push it to revamp its corporate culture, brand, and investment strategy. We therefore remain bullish on SEC, expecting it to weather the storm. MS Hwang Analyst ms.hwang@samsungfn.com 852 3411 3719 Eric Yoo Research Associate e.yoo@samsung.com 822 2020 7807

Action: We maintain BUY on SEC with an unchanged target price, though the shares are likely to pull back in the near term. While a reassessment of future earnings is difficult without details of the ruling and possible embargo, shares are unlikely to fall more than 10-15%, as we estimate that at their current price, the non-semiconductor portion of SEC’s business is valued at one standard deviation below its fair level based on the stock’s 10-year average P/E multiple.

 AT A GLANCE

THE QUICK VIEW

Target price
Current price
Bloomberg code Market cap Shares (float) 52-week high/low Average daily trading value (60-day) One-year performance Samsung Electronics (%) Vs Kospi (%pts)

KRW1,550,000(22%)
KRW1,275,000
005930.KS KRW205t/USD180.8b 147,299,337 (71.1%) KRW1,410,000/KRW725,000 KRW440.62b/ USD388.52m 1M +9.0 +2.0 6M +8.1 +13.0 12M +80.1 +70.7

US jury gives Apple sweeping victory: The USD1.05b in damages handed down to SEC far exceeded expectations. The US jury sided almost entirely with Apple, finding that SEC had willfully infringed Apple's design patents while Apple had violated none of SEC’s. The verdict is in stark contrast to a split ruling by a Korean court (also on Aug 24), which found patent infringements by both Apple and SEC, but dismissed claims by Apple that SEC had copied the design of its iPhone. Upcoming rulings: The finalized US court ruling will be delivered within a month, and an injunction hearing concerning the sale of related products is scheduled for Sep 20—the verdict covers only SEC products prior to the Galaxy S3. A new ruling that will cover the Galaxy S3 is scheduled for Mar 2014. Outside the US, other court rulings will follow—a Japanese court is scheduled to announce a ruling on Aug 31. Profitability to suffer at both manufacturers and parts suppliers: The verdict has significantly expanded the scope of intellectual property rights for IT products, in that it effectively expands handset patents to encompass design rather than just technology. Although this will make it harder for manufacturers to generate profits, such a change will not necessarily be bad for SEC. The firm could theoretically opt for other operating systems, while consumers are unlikely to be significantly swayed by the verdict in their handset choices (given that Windows and RIM are in decline, popularity wise). In contrast, the design patent issue should affect other handset makers that run Google’s Android operating system. With smartphone market growth increasingly driven by emerging-market mid- to low-end segments (handsets selling for USD100-USD200), we foresee little damage to SEC's competitiveness in terms of cost, distribution power, and product portfolio. At end2Q12, the firm’s global market share stood at 32.6%—43%...

References: to "Samsung Securities" are references to any company in the Samsung Securities, Co., Ltd. group of companies. Samsung Securities and/or other affiliated companies, its and their directors, officers, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this report or of issuers described herein and may purchase and/or sell, or offer to purchase and/or sell, at any time, such securities or other financial instruments in the open market or otherwise, as either a principal or agent. Any pricing of securities or other financial instrument contained herein is as of the close of market for such day, unless otherwise stated. Opinions and estimates contained herein constitute our judgment as of the date of this report and are subject to change without notice. The information provided in this report is provided "AS IS". Although the information contained herein has been obtained from sources believed to be reliable, no representation or warranty, either expressed or implied, is provided by Samsung Securities in relation to the accuracy, completeness or reliability of such information or that such information was provided for any particular purpose and Samsung Securities expressly disclaims any warranties of merchantability or fitness for a particular purpose. Furthermore, this report is not intended to be a complete statement or summary of the securities, markets or developments referred to herein. Samsung Securities does not undertake that investors will obtain any profits, nor will it share with investors any investment profits. Samsung Securities, its affiliates, or any of its and their affiliates, directors, officers, employees or agents disclaim any and all responsibility or liability whatsoever for any loss (direct or consequential) or damage arising out of the use of all or any part of this report or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. Past performance is not indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Samsung Securities. Any analysis contained herein is based on numerous assumptions. Different assumptions may result in materially different results. Samsung Securities is under no obligation to update or keep current the information contained herein. Samsung Securities relies on information barriers to control the flow of information contained in one or more areas or groups within Samsung Securities into other areas or groups of Samsung Securities. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other financial instruments. Samsung Securities makes no representation that any transaction can or could have been effected at those prices and any prices contained herein may not reflect Samsung Securities ' internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by Samsung Securities or any other source may yield substantially different results. Additional information is available upon request. For reports to be distributed to US: Securities research is prepared, issued and exclusively distributed by Samsung Securities Co., Ltd., an organization licensed with the Financial Supervisory Service of South Korea. This research may be distributed in the United States only to major institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended, and may not be circulated to any other person otherwise. All transactions by U.S. investors involving securities discussed in this report must be effected through Samsung Securities (America) Inc., a broker-dealer registered with the U.S. Securities & Exchange Commission and a member of the Financial Industry Regulatory Authority/SIPC, and not through any non-U.S. affiliate thereof. The analysts listed [on the front of this report] are employees of Samsung Securities Co., Ltd., or a non-U.S. affiliate thereof, and are not registered/qualified as research analysts under applicable U.S. rules and regulations and may not be subject to U.S. restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. For reports to be distributed to UK: This report is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of section 21 of the Financial Services and Markets Act 2000 of the United Kingdom ("FSMA"). To the extent that this report does constitute such an invitation or inducement, it is directed only at (i) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) of the United Kingdom (the "Financial Promotion Order"); (ii) persons who fall within Articles 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order; and (iii) any other persons to whom this report can, for the purposes of section 21 of FSMA, otherwise lawfully be made (all such persons together being referred to as "relevant persons"). Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Persons who are not relevant persons must not act or rely on this report. For reports to be distributed to Korea: This report is for private circulation only, not for sale, and is issued and distributed only to persons permitted under the laws and regulations of Korea. For reports to be distributed to Singapore: This report is provided pursuant to the financial advisory licensing exemption under Regulation 27(1)(e) of the Financial Advisers Regulation of Singapore and accordingly may only be provided to persons in Singapore who are "institutional investors" as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. This report is intended only for the person to whom Samsung Securities has provided this report and such person may not send, forward or transmit in any way this report or any copy of this report to any other person. Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of such analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research report. The analyst(s) principally responsible for the preparation of this research report receives compensation based on determination by research management and senior management (not including investment banking), based on the overall revenues, including investment banking revenues of Samsung Securities Co., Ltd. and its related entities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
Copyright  2010 Samsung Securities Co., Ltd.. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the prior written consent of Samsung Securities America Inc.
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