Samsung Electronics (005930 KS) Our take on GS5 strong sell-through at Day 1:: JPMorgan

Samsung Electronics (005930 KS) Our take on GS5 strong sell-through at Day 1		Overweight Price: W1,365,000 11 Apr 2014 Price Target: W1,600,000 PT End Date: 31 Dec 2014

According to Maeil Economic newspaper (based on company reported data), Samsung Electronics (SEC) reported Galaxy S5 (GS5) Day 1 sell-through volume was at a much stronger level vs. Galaxy S4 (GS4). The company expanded the initial launch target to 125 countries for GS5 vis-à-vis 60 countries for GS4. According to our supply chain check, the production schedule reveals ~6M/month running rate and goes up 7 to 8M/month in May at a lower level compared to GS4. Contrary to some noise at the initial stage, however, we believe all production issues are resolved.

· Strong Day 1 consumer acceptance: SEC meaningfully increased the number of initial launch countries with GS5 and witnessed strong Day 1 sell-through volume; UK/Czech/Vietnam posted two times higher vs. previous models. Besides, US sales result for GS5 was 30% stronger vs. GS4 as SEC included all major carriers (Verizon, AT&T, T-mobile, Sprint) and U.S. cellular while there were some time lags among carriers for GS4. Within the domestic market, the company is estimated to ship more than 120K units since March-27 (10K/day), at a much weaker level mainly due to regulatory pressure on operation (Hankyung).

· Too early to draw a conclusion: Strong Day 1 result is clearly encouraging, however, given that there are no significant changes in pricing or specifications along with saturating high-end market conditions, it is difficult to assume the GS5 posting stronger result vs. GS4 throughout full-year, in our view. Street consensus for GS5 shipment in 2Q14 is a wide range from 16 to 21M; we estimate the company to deliver 17M in 2Q followed by 15M in 3Q, full-year base 10% lower vs. GS4 (46 million units in 2013). However, there are uncertainties about 3Q and onward due to the change in competition dynamics as there is a potentially high chance of Apple adopting the larger screen size iPhone. This could likely take away the GS5 replacement demand to some extent as larger screen size is no longer a merit.

· Share price expectation: Since the preliminary earnings result (see our comment published on April-8-2014), the stock has remained flattish as we expected. We continue to believe the stock remains range-bound until the market is convinced with sustainable OPM in the handset business. Given the relatively robust GS5 shipments in 2Q14, however, there would be upside risk to our 2Q14 earnings estimates while 2H14 earnings are heavily dependent on the competition landscape from Apple. Also, its marketing and promotion related expenses are one of the major swing factors for its profitability, which is not hard to estimate until we see actual sell-through data and competition landscape. Of note, the company will disclose full 1Q14 result on April 25, 2014 (Friday morning in KST) with 2Q14 and rest of the year outlook.

Table 1: Samsung Electronics – Galaxy S5 vs. S4 initial launch

	Galaxy S5	Galaxy S4
ASP (KRW) - unlock price	W 868,000	W 899,000
ASP (USD) - unlock price	US$ 599.99	US$599.99
# of countries for initial launch	125	60
Day 1 sell-through volume	30% Y/Y up at US, 2x higher at few countries	Not Available
Days required to sell 10M	Not Available	27 days

Source: Company data, J.P. Morgan.

 

Investment Thesis

Samsung Electronics continues to hold a dominant position in the respective markets (both component and set businesses); however, it faces a growth dilemma due to a lack of killer products and high market expectations. However, as valuation appears to be attractive, we believe the downside risk is limited and expect the share price to remain range-bound.

Valuation

We maintain our mid-cycle valuation based Dec-14 PT of W1.6 million (implying 8.6x FY14E P/E and 8.0x FY15E P/E).

Risks to Rating and Price Target

Key downside risks to our price target are sudden and substantial changes in DRAM and LCD prices, the global economy, and weaker-than-expected end-demand for PC, handset, and TVs.

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