20160713-三星证券-Perspectives_Weekly__2Q_to_show_profit_gains,_albeit_unsustainable_20页_967kb

Samsung Market Strategy Summary

Core Content

This document outlines Samsung's market strategy for the second quarter (2Q) and the second half (2H) of 2016, with a focus on the performance of the Korean stock market and the global financial landscape. It highlights the expected earnings growth for MSCI Korea, the performance of specific sectors, and the impact of commodity prices on profitability.

Main Points

• 2Q Earnings Growth: The MSCI Korea operating profit (excluding financials) is expected to rise to KRW29t in 2Q, primarily driven by the IT hardware & equipment sector, especially Samsung Electronics and Samsung SDI. This growth is attributed to margin gains from cost-cutting and weak commodity prices.

• Earnings Surprise and Forecast Revisions: There is a strong correlation (0.6) between the one-month change in operating profit forecasts and the earnings surprise ratio since 2013. With a 3.3% increase in operating profit forecasts in the last month of 2Q, MSCI Korea earnings are expected to remain solid.

• Sustainability of Earnings Growth: While 2Q earnings are expected to be strong, the growth is likely to be unsustainable in 2H. The MSCI Korea operating profit is projected to rise to KRW58t in 2H, up 21.3% y-y, mainly due to the base effect from 2H15 losses. On a year-on-year (h-h) basis, the growth is expected to be only 3.2% (KRW1.8t).

• Sector Performance:

  • The steel, shipbuilding/machinery, and energy sectors are trading at attractive P/B multiples (below 1x) and have seen upward revisions to EPS forecasts.
  • The semiconductor, pharmaceutical, retail, and securities sectors have weak earnings forecasts.
  • IT hardware & components (excluding Samsung Electronics) is expected to see gains in 2H due to the base effect from poor 1H results.

• Margin Trends: Operating margins are expected to improve until the end of 3Q but will fall in 4Q due to rebounding commodity prices. Most large-cap firms have already utilized cost-saving measures, limiting further margin gains.

• Global Market Outlook:

  • Japanese firms have seen repeated cuts in earnings forecasts, while Chinese firms have slightly rebounded.
  • The Japanese government has lowered its 2016 GDP forecast to 0.9% from 1.7% and the stock market has rallied due to anticipation of more economic stimulus, though this may not translate into improved corporate earnings.
  • The S&P 500 closed at a record high, supported by strong job data and economic recovery expectations, but investors are cautioned due to weak investment bank performance and negative bond yields globally.

• Fund Flows:

  • Capital inflows to domestic equity funds have improved slightly.
  • GEM funds have seen minor net inflows.
  • Fund outflows from Asia ex-Japan, global, and Asia Pacific funds have decreased week-on-week.

Key Information

• Earnings Drivers: 1H earnings growth was mainly due to margin improvements from cost-cutting and weak commodity prices. 2H growth is expected to slow as cost savings reach their limit and commodity prices rebound.

• Sector Analysis:

  • Strong Sectors: Steel, shipbuilding/machinery, and energy sectors are performing well with attractive valuations.
  • Weak Sectors: Semiconductor, pharmaceutical, retail, and securities sectors show weak earnings forecasts.
  • IT Hardware & Components: Expected to drive 2H growth due to the base effect, but excluding Samsung Electronics, the sector is expected to see only minimal gains.

• Valuation Metrics:

  • P/B multiples and EPS forecast revisions are used to assess sector attractiveness.
  • The P/B Z-scores and EPS forecast changes indicate the relative performance and valuation levels of different sectors.

• Market Outlook:

  • The Kospi is unlikely to continue rising significantly due to limited room for corporate earnings improvement and ongoing Brexit concerns.
  • Global markets show mixed signals, with the US stock market performing well but Japanese and global investment banks facing challenges.

Top Picks

• Top 10 Picks (Large Caps):

  • LG Display
  • Samsung Electronics
  • LG Electronics
  • Naver
  • LG Household & Health Care
  • AmoreG
  • Hyundai Heavy Industries
  • Amorepacific
  • Korea Aerospace Industries
  • BGF Retail

• Bottom 10 Picks (Large Caps):

  • Hyundai Motor
  • S-Oil
  • SK Innovation
  • SK Hynix
  • Samsung Life Insurance
  • Hanmi Pharmaceutical
  • Lotte Shopping
  • Samsung SDI
  • Coway
  • Celltrion

• Mid-sized Caps (KRW1t-5t):

  • NHN Entertainment
  • SK Chemicals
  • SK Networks
  • Hyundai Mipo Dockyard
  • GS E&C
  • Cosmax
  • Korea Investment Holdings
  • LG Innotek
  • LG International
  • SK Materials

Conclusion

Samsung's market strategy highlights that while 2Q earnings for MSCI Korea are expected to be strong, driven by IT hardware and energy sectors, the sustainability of this growth into 2H is questionable. The focus is on the base effect and limited room for further margin improvements. The report also underscores the importance of sector-specific fundamentals and valuation metrics in assessing market performance and future trends.