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Samsung Electro-Mechanics: Stock Expected to Climb in 1H23

The author is an analyst of KB Securities. He can be reached at cm.lee@kbfg.com. — Ed.   


Initiate coverage with BUY rating, target price of KRW190,000   

We initiate coverage on SEMCO with BUY and TP of KRW190,000. Our DCF-based TP reflects 11.62% WACC and 3.82% TGR; implies 17.1x 12m fwd P/E, 1.74x P/B; and holds 41.8% upside (vs. Nov 25 closing price). 

Focus on automotive MLCCs, package substrates         

Our key investment highlights are (1) SEMCO’s advantageous position amid a growing automotive MLCC market and (2) the resiliency of Package Solution earnings. SEMCO’s MLCCs (72% of 2021 OP) are mainly used in IT devices (e.g., smartphones, PCs, consumer electronics). Demand for automotive MLCCs is burgeoning as automobile companies continue to expand their electronic applications amid a growing EV market. We see automotive MLCC accounting for 25% of overall MLCC sales in 2025 (vs. 9% in 2021). SEMCO’s Package Solutions (18% of 2021 OP) mainly produces semiconductor-use package substrates for IT devices. Mass production of high value-added server-use package substrates should begin in 2H22, giving SEMCO an advantage amid demand growth and product mix improvement. 

Expect stock to gain momentum in 1H23 

We forecast 2023 revenue/OP at KRW9.6tn (-1% YoY)/KRW1.2tn (-5% YoY; 12.9% OPM). We see earnings stagnating until 1H23 on slowing smartphone shipments at client companies (e.g., Samsung Electronics, OVX). That said, earnings should rebound in 2H23, as inventory adjustments at smartphone manufacturers are likely to end in 1H23 and smartphone demand should recover on the reopening of the Chinese economy. Given that (1) SEMCO’s current valuation (12.0x 12m fwd P/E)  is at its lowest level since 2018 (12.2x), the height of the previous industry boom, and (2) SEMCO stock leads earnings performance by six months, we see the stock gaining momentum in 1H23. 


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