August 27, 2012
Samsung Electronics (005930 KS)
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 email@example.com 852 3411 3719 Eric Yoo Research Associate firstname.lastname@example.org 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
Bloomberg code Market cap Shares (float) 52-week high/low Average daily trading value (60-day) One-year performance Samsung Electronics (%) Vs Kospi (%pts)
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%...
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