Samsung Electronics (GM:SSNLF, PINK:SSNLF) is a South Korea-based company principally engaged in the manufacture of consumer electronic products. Among the plethora of electronic goods that Samsung produces are big home appliances such as TVs, refrigerators, air conditioners, washing machines, microwave ovens, laptops, printers, etc. It is also the current market leader in the mobile phone market, having moved ahead of Nokia (NOK) and Apple (AAPL) in the smartphone market at the start of 2012. Apart from the above mentioned products, the company also manufactures components such as semiconductors and display panels that are used in its own end-products, as well as sold to outside customers. The vertically integrated business model allows it to secure the supply of components and match the ever growing demand for consumer electronic goods.
Based on the above overview, we have broken down the company's business into four major divisions:
Below, we take a look at the trends that are driving the growth of the various business divisions in detail.
Mobile Phones - Samsung's Crown Jewel
By our estimates, Samsung derives most of its value - almost a third - from its mobile phone business. We see most of the division's value coming from its smartphone business, which is growing by leaps and bounds as cheap Android phones infiltrate the emerging markets. The company has also done well in the high-end smartphone market with recent launches such as Galaxy S III, which has sold 10 million units in under two months since launch. The wide range of smartphones that the company keeps churning out has helped it cater to most customer needs, helping increase its market share from around 14% in 2007 to approximately 20% in 2012. As a result, Samsung has not only leaped ahead of Nokia as the largest handset maker, but also Apple in the smartphone market.
Average handset ASPs for Samsung have increased from around $120 in 2007 to about $140 in 2011. Going forward, we expect the favorable smartphone mix to help ASPs increase in the near term, but we expect that the gradual commoditization of this market with the entry of multiple other serious contenders, such as Nokia/Microsoft and Google/Motorola, and increasing focus on emerging markets will drive down prices in the long run. Increasing competition from not only Nokia and Google/Motorola, but also Asian rivals such as ZTE, HTC, and Sony, could also limit the upside potential for Samsung's market share, going forward.
The second most valuable division for Samsung is the home appliances division, which contributes about a quarter of the company's value. Most of Samsung's home appliance revenues come from the sale of TVs, in which Samsung is the market leader with about a 23% market share. Samsung has been #1 in both TV units and revenues worldwide for more than nine years now.
However, the global TV market is expected to see sluggish growth due to the lower replacement rates. In such a scenario, Samsung's strong investment in developing value-added features such as LED backlit technology, high frame rate LCD TVs and TVs with larger screen sizes, together with a strong control over its supply chain should help it capture more market share in the future.
Despite a leading market position in TVs, Samsung's TV ASPs have been falling due to an industry-wide oversupply of TVs, exacerbated in 2011 by manufacturers overestimating an economic recovery and increasing shipments in the first quarter. As the hoped-for sales failed to materialize, it resulted in price-cuts across the industry, hurting profits across the board for almost every vendor.
Going forward, we believe manufacturers will attempt to control new shipments into the U.S. market so that prices remain steady. The industry, as a whole, therefore expects to be more profitable with less discounting. Differentiation through value-added features such as LED technology in TVs will also help Samsung increase its TV ASPs in the future.
The semiconductor business is typically cyclical in nature characterized by oversupply and undersupply cycles. Currently, the global memory market seems stuck in an oversupply glut with demand picking up at a slower place, amid soft economic conditions. Weak demand for PCs is one of the main reasons why the semiconductor market is presently languishing. However, demand for mobile devices such as smartphones and tablets, as well as servers that support cloud-computing, bolsters the outlook for the future. Manufacturing semiconductors contributes around 22% to Samsung's value, by our estimates.
Samsung's LCD display panel business contributes only about 8% to the company's value, despite having the second-largest market share (~23%) in the market, as of 2011. The company's display business has been the worst affected by the ongoing European debt crisis - which saw demand for TVs decline. As a result, the division was unprofitable for four consecutive quarters, leading to an operating loss of 750 billion won in 2011. Going forward, we see most of the growth coming from the emerging markets where TVs and PCs have comparatively lower penetration. LED backlit models could see the highest growth rate, but most of that may come at the expense of other LCD models such that the overall market may not return to historical growth rates.
On the other hand, smartphones, tablets and other mobile devices are seeing the fastest growth. This is one of the main reasons why Samsung has spun off this division and merged it with Samsung Mobile Display Co Ltd., a joint venture between Samsung Electronics and Samsung SDI Co. that makes both LCD and AMOLED displays. The company is betting that its mobile AMOLED displays will experience enormous growth. Together with its LCD factory capacity and market leadership, Samsung plans to drive up the adoption of AMOLED in mobile devices with the merger.
We estimate a $1050 price for Samsung, which was about 10% lower than the market price yesterday.
Disclosure: No positions.