The author is an analyst at KB Securities. He can be reached at [email protected]. — Ed.
Maintain BUY and TP of KRW75,000
We maintain BUY on Samsung Electronics (SEC) and our TP of 75,000 KRW. We remain optimistic that passage of the CHIPS Act by the US Congress would benefit the SEC as localized production facilities should facilitate customer expansion. The CHIPS Act aims to provide $52 billion in grants and incentives for the construction of semiconductor production facilities in an effort to bolster U.S. chip manufacturing capabilities. Congress is expected to pass the bill by the end of July at the earliest. If the bill passes, the SEC is expected to begin construction of a $17 billion foundry in Taylor, Texas in 2H22.
SEC could establish chip production base in the US if subsidies increase
According to July 21 media (The Wall Street Journal), the SEC is expected to invest KRW 250 billion over 20 years to build a total of 11 chip factories across Texas. This figure assumes that the SEC will build plants at all sites listed in the tax benefits application submitted to the Texas state government. An investment of this size over such a long period would indicate that the SEC is considering making the United States its second largest chip production base (after Pyeongtaek). We believe that the SEC will only proceed with these plans if the United States increases the corresponding subsidies.
Downward limit for the stock price to rise gradually
Despite the expected decline in earnings resulting from the 10% quarterly average decline in DRAM/NAND prices in 2H22, the limit on the downside of the SEC stock price should continue to increase towards the end of the year, because: ( 1) with memory chip inventories at chipmakers expected to peak in 1H23, long-term investors should start making investment decisions taking into account that semiconductor stocks are generally ahead of six months on industry terms; and (2) chip shipments from the three DRAM majors are only expected to increase by 15% in 2023 and the limited increase in supply should help reduce volatility in the semiconductor cycle, which would benefit the global chip supply and demand dynamics. Capacity expansion cuts for 2023 should significantly alleviate concerns that the semiconductor cycle will repeat the hard landing of 2019.