20150819-三星证券-On_the_way_to_Galapagos_syndrome__25页_1mb

Sector Update Summary

Core Content

This report analyzes the current state and future outlook of the Korean tech industry, particularly focusing on Samsung Electronics (SEC) and LG Electronics (LGE), in the context of shifting value from hardware to networks and the rise of Chinese and Apple competitors. The report suggests that Korean firms are at risk of falling into a "Galapagos syndrome" due to their outdated strategies and lack of innovation in the smartphone market.

Main Points

• Value Shift: The tech industry is moving away from hardware to networks and ecosystems. This shift is driven by the limitations of hardware upgrades and the growing influence of companies like Apple and Chinese firms.
• Korean Hardware Firms' Challenges: SEC and LGE have failed to adapt to the new market dynamics, with stagnant strategies and declining share prices. Their focus on hardware differentiation and low-end diversification has not been enough to counter the competition.
• Chinese Firms' Rise: Chinese companies like Xiaomi and Huawei are becoming more competitive, not only in hardware but also in expanding into IoT and other emerging markets. Their global expansion and brand development are significant threats to Korean firms.
• Apple's Strategy: Apple is maintaining its dominance in the high-end segment but is increasingly looking to expand into lower-end markets, especially in emerging economies, to sustain growth.
• Investor Sentiment: Investors are concerned about the lack of strategic changes by Korean firms. SEC and LGE are not expected to see significant improvements in the near term unless they pivot towards new growth areas and form strategic partnerships.

Key Information

Share Price and Strategy

• Korean handset makers (SEC, LGE, Semco, Samsung SDI) have underperformed due to their focus on hardware rather than new business models.
• Samsung Electro-Mechanics (Semco) is rated BUY for its potential business revamp in 2H 2015.
• LG Electronics (LGE) is rated HOLD due to its stagnant strategy and lack of meaningful partnerships or M&A activity.

Market Trends

• Global Handset Market: Sales growth is slowing, with Apple and Chinese firms capturing most of the profits.
• Apple's Dominance: Expected to account for 18% of global smartphone sales in 2015 and 88% of operating profits.
• Chinese Growth: Combined market share of Chinese firms is projected to rise from 44% in 2015 to 48% in 2016.
• Smartphone Sales: SEC and LGE are expected to see declining sales and market share, while Chinese firms like Xiaomi, Huawei, Vivo, and Oppo are growing rapidly.

Strategic Recommendations

• Korean firms must shift from hardware-centric strategies to new growth areas such as biopharmaceuticals and smart cars.
• They should consider forming strategic partnerships and allocating resources to these sectors.
• The report warns that without significant changes, Korean conglomerates may face restructuring similar to Japan in the 1990s.

Handset Business Outlook

• SEC's Handset Business: Expected to see a decline in smartphone sales volume and market share, with operating margins expected to fall from 11% in 2015 to 9% in 2017.
• LGE's Handset Business: Likely to remain stagnant, with a projected decline in operating margin and sales volume.
• Online-to-Offline (O2O) Strategy: Becoming increasingly important, with global O2O sales projected to reach 20% by 2017, up from 10% in 2010.

Industry Outlook

• The global handset market is becoming more competitive and less profitable, with the top five firms holding only 54% of the market share.
• Xiaomi's Strategy: The firm is leading in IoT and has a flexible business model that contrasts with Korean strategies.
• Apple's Expansion: The company is likely to expand into the prepaid segment in emerging markets to sustain growth.

Conclusion

Korean tech firms, particularly SEC and LGE, face significant challenges due to the changing industry landscape. Their failure to adapt to the rise of Chinese competitors and the shift in value from hardware to networks puts them at risk of further decline. The report emphasizes that strategic change is crucial for their survival, and without it, they may not recover. The focus should be on new growth areas, partnerships, and diversification rather than relying on traditional hardware strategies.