Samsung Electro-Mechanics’ printed circuit board has many uses. / Courtesy of Samsung Electro Mechanics’ official blog

By John Park

The consolidated earnings of Samsung Electro-Mechanics (SEMCO) for the first quarter surpassed market expectations by a large margin. Sales came in at 1.75 trillion won ― up 25 percent from a year ago ― and the operating profit was 106.7 billion won ― up 65.7 percent. Despite the quarter’s low-demand seasonality, the sales and operating profit advanced 5.1 percent and 7.8 percent from the previous quarter, respectively, amid the growth of Samsung Electronics’ smartphone shipments.

In the second quarter of 2012, SEMCO’s operating profit is expected to grow 24.6 percent quarter-on-quarter to 132.9 billion won. Full-year sales is forecast to rise 28.7 percent from 2011 to 7.76 trillion won and the operating profit is expected to jump 64.4 percent from 2011 to 540.6 billion won in 2012.

In the meantime, Daishin Securities has upwardly adjusted the forecast for the full year sales and operating profit by 9.4 percent and 13.1 percent, respectively. We revised up the six-month target price for SEMCO to 130,000 won after raising the estimate for the earnings per share in 2012 by 7.1 percent. Our “BUY” rating remains unchanged.

Key investment points for SEMCO are as follows.

The firm’s high growth is on the horizon for 2012, with the full-year operating profit likely to surge 64.4 percent to 540.6 billion won. Samsung Electronics took the largest share in the global smartphone and mobile handset market in the first quarter of 2012, which implies benefits for SEMCO in the second quarter of 2012 and later. With the mobile handset component sales accounting for 56 percent of the total sales in the first quarter, SEMCO, an affiliate of Samsung Electronics, looks likely to post peer-beating profit growth this year.

Furthermore, as a supplier of components for many of Samsung Electronics’ premium smartphones, SEMCO showed particular strength in sales of high-margin products such as 8 million-pixel camera modules and flip chip CSPs and BGAs in the first quarter.
Personal computers and TV components are set to contribute to increasing sales and profit from the second quarter onward. With the upcoming rollout of Intel’s Ultrabook around June and PC shipments growth in the coming quarters, SEMCO’s PC components business is primed for margin gains down the road.

Earnings support will also be provided by Samsung Electronics’ growing light-emitting diode (LED) TV shipments amid rising demands for LED TVs in the run-up to major sports events including the London Olympics and the expansion of the low-end LED TV market. SEMCO’s operating profit margin is forecast at 7 percent in the second quarter ― up 0.9 percentage points from the previous quarter.

Volatility in the firm’s sales is waning as the company’s product mix is bolstered by those that capture top global market shares. SEMCO continues to hold the second largest share in the global market for multilayer ceramic capacitor (MLCC), helped by stable demands from Samsung Electronics that commands the biggest global market share in smartphones and TVs.

Going forward, SEMCO is expected to maintain its leadership in the MLCC market by pursuing the production of smaller MLCCs with larger capacity.

Samsung Electronics is a leader in the global FC CSP as well. The ongoing increase in smartphone shipments at Samsung Electronics and others should sustain demands for the parts going into application processors and baseband chips. In the FC BGA segment, SEMCO should be able to begin supplying for Intel’s upcoming Ivy Bridge as one of the earliest movers, adding support to the sales and profit growth in the second half of 2012.