Samsung Electronics – 3Q & More
Note: We are only looking at Samsung’s display, TV, and mobile businesses in this note.
Samsung Electronics (005930.KS) reported 3Q sales of 73.98t won ($63.24b US), up 17.4% q/q and up 10.5% y/y and operating profit of 15.82t won ($13.52b US), up 25.9% q/q and up 28.1% y/y. The company generated gross margins of 42.0%, the best since 3Q ’18 and operating margins of 21.4%, also the best since 3Q ’18. On a comparative basis 3Q is typically up 8.9% (5 year avg.) q/q and up 6.1% y/y.
Samsung Electronics (005930.KS) reported 3Q sales of 73.98t won ($63.24b US), up 17.4% q/q and up 10.5% y/y and operating profit of 15.82t won ($13.52b US), up 25.9% q/q and up 28.1% y/y. The company generated gross margins of 42.0%, the best since 3Q ’18 and operating margins of 21.4%, also the best since 3Q ’18. On a comparative basis 3Q is typically up 8.9% (5 year avg.) q/q and up 6.1% y/y.
Samsung Electronics - 5 Year Quick Financials - Source: Company Data
Samsung’s display business, which represented 12.0% of sales, was up 29.0% q/q and up 21.0% y/y, and saw a decline in operating margins from 18.6% in 2Q to 16.8%, as costs increased. TV panel prices declined in the quarter, continuing to generate losses in Samsung Display’s (pvt) large panel display business, but small panel sales were strong as Apple (AAPL) and other customers built inventory toward recent model releases. Samsung did mention strength in foldables but gave little detail on their contribution to total display results. Samsung guided for continued growth in the display business in 4Q, again led by small panel OLED displays offsetting losses in the large panel TV business. There was mention that OLED devices, other than smartphones, would begin to play a bigger part in total OLED sales, although are expectations for real growth in that space are oriented toward 2022 and there was also mention of Samsung’s program to begin production of its new QD/OLED TV product as an offset to its (intentionally) declining TV display business. There was also mention of component costs and shortages, neither of which are specific to Samsung, as points of concern for both 4Q and 2022.
On an overall basis Samsung’s display business, which is greatly tilted toward small panel OLED, is better positioned than most, although that was not the case for much of last year and earlier this year. Samsung Display had been the most aggressive of display producers in reducing its exposure to the large panel TV production space in 2019 and closed or sold much of its large panel production capacity. As large panel prices rose during 2020, SDC held off closing remaining large panel LCD production at the request of Samsung Electronics, its large customer in that market, but SDC’s overall outlook on generic large panel LCD production has likely changed little, especially with the large panel price reductions seen recently. SDC hopes to replace the generic large panel LCD business with its soon-to-be-released/announced quantum dot/OLED displays, which will become an integral part of the company’s large panel display business if successful.
As we have noted in the past, there is significant risk associated with developing a new commercial technology in the display space, but if the product passes muster, it will leverage Samsung’s TV business into a ‘premium’ panel category, something Samsung Display has been missing and will give SDC a display product with which it can use to compete against LG Display’s (LPL) OLED TV panel business. That said, such a product would generate losses for some time, so we expect no profit contribution from that business until 2024. While we expect SDC to be successful with QD/OLED, we put more emphasis on SDC’s push to expand its OLED display business into the notebook and monitor space, which began in earnest this year, and see continued expansion in that business as SDC improves its OLED notebook cost structure over the next year. While OLED notebooks will remain in the ‘premium’ notebook category in 2022, we expect their use in mid-tier notebooks to expand in 2H 2022.
On an overall basis Samsung’s display business, which is greatly tilted toward small panel OLED, is better positioned than most, although that was not the case for much of last year and earlier this year. Samsung Display had been the most aggressive of display producers in reducing its exposure to the large panel TV production space in 2019 and closed or sold much of its large panel production capacity. As large panel prices rose during 2020, SDC held off closing remaining large panel LCD production at the request of Samsung Electronics, its large customer in that market, but SDC’s overall outlook on generic large panel LCD production has likely changed little, especially with the large panel price reductions seen recently. SDC hopes to replace the generic large panel LCD business with its soon-to-be-released/announced quantum dot/OLED displays, which will become an integral part of the company’s large panel display business if successful.
As we have noted in the past, there is significant risk associated with developing a new commercial technology in the display space, but if the product passes muster, it will leverage Samsung’s TV business into a ‘premium’ panel category, something Samsung Display has been missing and will give SDC a display product with which it can use to compete against LG Display’s (LPL) OLED TV panel business. That said, such a product would generate losses for some time, so we expect no profit contribution from that business until 2024. While we expect SDC to be successful with QD/OLED, we put more emphasis on SDC’s push to expand its OLED display business into the notebook and monitor space, which began in earnest this year, and see continued expansion in that business as SDC improves its OLED notebook cost structure over the next year. While OLED notebooks will remain in the ‘premium’ notebook category in 2022, we expect their use in mid-tier notebooks to expand in 2H 2022.
Samsung Electronics - Display Division - Source: SCMR LLC, Company Data
Samsung’s consumer electronics division (~56% is TV), which is ~19.1% of sales, grew sales 5.2% q/q and 0.1% y/y but operating margins for the division as a whole declined from 7.9% in 2Q to 5.4% in 3Q. While the TV division margins are not broken out, costs associated with the TV business (components, panel prices, logistics, etc.) were responsible for much of the margin reduction. However the TV segment itself (10.6% of total company sales) grew 9.1% q/q but declined 5.1% y/y against a strong 3Q last year. Typical 3Q q/q growth (including last year’s +55.2%) is 13.1%, although excluding 2020 would be a more normal 2.6% q/q increase, so it was still a strong quarter in terms of q/q sales averages with Samsung’s QD TV (not QD/OLED) and other premium products leading the way.
4Q guidance for the TV segment is for growth q/q but down again on a y/y basis as lessening COVID-19 restrictions move consumers away from a sequestered lifestyle. Guidance for 2022 in the TV segment was less optimistic, with more emphasis on logistical issues slowing TV market growth. While logistics are certainly an issue, we question whether that is the source of reduced demand, but we do agree with the lower demand outlook for TV sets. That said, if TV panel prices continue to decline in 2022, while it will hurt LCD panel producers, it would be beneficial for Samsung’s TV business, giving them room for the discounting needed to compete against Chinese competitors.
Samsung, as are almost all other TV set brands, is hoping that ‘premium’ TV products will offset lower overall set demand, and while the premium market will certainly be the growth driver for the TV set business in 2022, we expect Samsung’s broad range of premium TV products will take considerable shelf space in 2022. With quantum dot enhanced LCD TV, Mini-LED TV, Ultra-large TVs, and potentially QD/OLED TV offerings, Samsung will certainly give consumers ample choices in the premium category, but competition from Chinese brands such as TCL (000100.CH) and Hisense (600060.CH) in key markets will still be an issue in 2022.
Samsung will have less of a cost burden to carry than those Chinese brands that have their own TV panel production as large panel prices decline, and will be able to cherry pick the market for the best supply deal, which was the intent back in 2019, but the margin leverage usually gained by TV set manufacturers when panel prices decline could be offset by continued component shortages and logistics costs. If we had to be somewhere in the TV space in a year when demand is reduced, it would be with either Samsung (more premium product and little large panel LCD production drag) or LG Electronics (066570.KS), given the growth of their OLED TV business in 2022, although LG Display (LPL) still has enough large panel LCD production to see some negative influence from that part of their business next year.
4Q guidance for the TV segment is for growth q/q but down again on a y/y basis as lessening COVID-19 restrictions move consumers away from a sequestered lifestyle. Guidance for 2022 in the TV segment was less optimistic, with more emphasis on logistical issues slowing TV market growth. While logistics are certainly an issue, we question whether that is the source of reduced demand, but we do agree with the lower demand outlook for TV sets. That said, if TV panel prices continue to decline in 2022, while it will hurt LCD panel producers, it would be beneficial for Samsung’s TV business, giving them room for the discounting needed to compete against Chinese competitors.
Samsung, as are almost all other TV set brands, is hoping that ‘premium’ TV products will offset lower overall set demand, and while the premium market will certainly be the growth driver for the TV set business in 2022, we expect Samsung’s broad range of premium TV products will take considerable shelf space in 2022. With quantum dot enhanced LCD TV, Mini-LED TV, Ultra-large TVs, and potentially QD/OLED TV offerings, Samsung will certainly give consumers ample choices in the premium category, but competition from Chinese brands such as TCL (000100.CH) and Hisense (600060.CH) in key markets will still be an issue in 2022.
Samsung will have less of a cost burden to carry than those Chinese brands that have their own TV panel production as large panel prices decline, and will be able to cherry pick the market for the best supply deal, which was the intent back in 2019, but the margin leverage usually gained by TV set manufacturers when panel prices decline could be offset by continued component shortages and logistics costs. If we had to be somewhere in the TV space in a year when demand is reduced, it would be with either Samsung (more premium product and little large panel LCD production drag) or LG Electronics (066570.KS), given the growth of their OLED TV business in 2022, although LG Display (LPL) still has enough large panel LCD production to see some negative influence from that part of their business next year.
Samsung Electronics - Sales - TV Division - Source: SCMR LLC, Company Data
Samsung IT/Mobile division (38.4% of sales) saw sales up 27.6% q/q, against a weak 2Q, but down 6.8% y/y against last year’s strong 3Q. The mobile segment itself (37.0% of total sales) grew sales 27.6% q/q but declined 8.3% y/y. IT/Mobile operating margins declined from 14.3% last quarter to 11.8% in 3Q. Overall, Samsung’s smartphone shipments grew in the quarter with the introduction of new foldable smartphones and an expanded mid-tier lineup, but increased marketing costs (foldables) squeezed margins a bit. Guidance for 4Q is for increased smartphone demand with a caveat toward component issues. 2022 guidance was still optimistic, with a focus on growing the foldables line, making it a significant part of its ‘flagship’ Galaxy offerings, which have been weak over the last two product cycles. Samsung has begun to offer a ‘bespoke’ service for its foldables, customizing devices to customer specifications, which the company hopes will increase consume focus on foldable overall, but the service is too new to gain any insight in whether it will serve to generate additional sales without lower margins.
Samsung Electronics - Sales - Mobile Division - Source: SCMR LLC, Company Data
Across the board, the segments we look at, Samsung did as well or better than most, and given their size, volumes, and internal capacity, they were able to sidestep at least some of the component and logistical issues facing most in the CE space. The company still seems optimistic about 4Q but a bit less so for 2022, although we expect they are better positioned overall if 2022 looks more like pre-COVID years. That said, Samsung’s success in 2022, in the markets we cover, will depend on their ability to differentiate their CE products. Without that differentiation they will face the same diminishing returns that a slower CE growth environment places on participants. They have a better shot than most but we expect 2022 will be a more difficult year.
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