Samsung Electronics (SEO:005930)

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Samsung Electronics is a South Korean technology conglomerate that manufactures consumer electronics, specifically digital media, telecommunication networks, semiconductors, and LCDs. Samsung's Digital Media and Communications division is involved in the manufacture of digital media and communication products, such as televisions (TVs), monitors, printers, air conditioners, refrigerators and washers, as well as cell phones, network systems and computers. Its Device Solution division provides semiconductors and liquid crystal display (LCD) products, consisting of memory chips, hard disc drives (HDDs), system large scale integrated circuit (LSI) products and thin film transistor (TFT) LCD products. Samsung's net sales in 2009 totaled 139.0 trillion Korean Won (KRW), with an operating profit of 11.6 trillion KRW.

Samsung has been faced with greater demand and competition as consumers are increasingly resorting to cell phones, PDAs, smartphones, and portable media players to access audio, video clips, and data all at once. In response, Samsung's Mobile Innovator released the mobile widget software developer kit for its TouchWiz user interface in 2009, which allows developers to create widgets for different Samsung phones.^[1] Consumers' expectations and cyclicality in DRAM (memory semiconductors) profitability indicate potential for expansion and new developments.

On April 1, 2010, Samsung completed its merger with Samsung Digital Imaging Co., Ltd., a manufacturer of digital cameras.

Company Overview

Business and Financial Metrics

Second Quarter 2010 Results (ended June 30, 2010)^[2]

Samsung Electronics announced revenues of 37.89 trillion Korean won on a consolidated basis for the second quarter ended June 30, 2010, a 17 percent increase year-on-year. For the quarter, the company posted net income of 4.28 trillion won. Consolidated operating profit for the quarter was a record 5.01 trillion won, an 88 percent increase year-on-year. The figure tops the previous high of 4.41 trillion won in the first quarter of 2010.

The company’s increased profitability in the second quarter was driven by significant improvements in its components businesses. The Semiconductor Business recorded an operating profit of 2.94 trillion won on sales of 9.53 trillion won, while the LCD Business generated an operating profit of 880 billion won on 7.76 trillion won in sales. Samsung’s set businesses – spanning digital media, IT solutions and telecommunications – also performed well despite increased price competition and uncertain global consumer sentiment.

Strong seasonal demand for core components will drive Samsung’s performance in the third quarter, although increased market supply is also forecast. Samsung forecasts that continued price competition in its set businesses will put downward pressure on profit margins in the third quarter.

Samsung also announced that total capital expenditures for the first half of 2010 reached 9.2 trillion won, representing 51 percent of the total of 18.2 trillion won in capital expenditures planned for 2010.

Business Segments

Digital Media and Communications (61.4% of 2009 net sales)^[3]

The Digital Media and Communications division (DMC) is composed of Digital Media and Telecommunications reporting segments, and mainly manufactures and sells handsets, networking systems and other consumer electronics (TVs, monitors, printers, computers and home appliances).

This business line includes digital flat-panel TVs and monitors, audio and video equipment, cameras and camcorders, computers and peripherals, printers and multifunction devices, and home appliances. Samsung's TV and monitor business segments make up the largest portion of Samsung's net sales.^[4] Samsung utilized patented technologies to increase TV sales, such as the digital natural image engine technology (DNIe) in 2004.^[5] This technology was applied to regular Samsung TV and digital products that allows consumers have optimal on-screen image quality.^[6]

• Telecommunication Networks: The telecommunication networks division includes mobile phones and telecommunications equipment. The product portfolio also consists of MP3 players and turnkey telecommunications network solutions, as well as 4G technologies such as Mobile WIMAX and LTE. In 2008, Samsung delivered Mobile WIMAX network equipment to major operators in the US, Japan, Russia, and other markets.^[7] The company also delivered nearly 200 million phones during the year.^[8] Samsung has focused specifically on consumer marketing for their mobile phones. Samsung's Anycall line has been highly successful since 1994, and the TouchWiz UI reflects the adaptability of Samsung's mobile phones to any operating system.^[9]

Device Solution (33% of 2009 net sales)^[3]

The DS division is composed of Semiconductor and LCD reporting segments, and manufactures and sells memory, system LSI, TFT LCD and HDD.

• Semiconductor: Samsung's semiconductor business ranks number two as a worldwide supplier in terms of revenues, growth, and market share.^[10] It is a top supplier of flash memory, SRAM, displayer driver ICs, and MP3 player system-on-chip devices. Samsung is involved in the development of emerging high-tech market segments such as solid-state drive (SSD) storage and "fusion" hybrid semiconductor solutions.^[7] Samsung and Microsoft (MSFT) were the first companies to develop the hybrid hard drive in 2005.^[11]

• LCD The LCD division includes LCD panels for the TV, monitor, notebook, and digital information display markets.

Others (5.6% of 2009 net sales)^[3]

Others primarily represent corporate headquarters and institute of technology.

Trends and Forces

Samsung's Innovation Leadership Enables the Company to Benefit from Changing Consumer Expectations

In the past, laptops were used widely by consumers for accessing email and the internet from home and other locations. As mobile broadcast and broadband wireless connectivity services such as WiFi and WiMAX become more common, consumers are increasingly resorting to cell phones, PDAs, smart phones, and portable media players to access audio, video clips, and data. According to AT&T, the number of WiFi connections in the first quarter of 2009 was three times that in the first quarter of 2008, with 10.5 million users.^[12] In order to keep up with consumer demand, companies in the consumer electronics industry like Samsung need to rapidly develop differentiated products that support emerging technologies.^[13] Consumers want to stay connected at all times with more convenient electronic devices. Also, Samsung is affected by the evolution of service and convergence: Consumers expect a holistic experience from their electronic devices. Manufacturers of electronic devices must contend with the fact that consumers expect a single device to serve as a solution to many of their electronic media and data needs. Consumers are demanding products that can handle both data and media, rather than using PCs and PDAs for to gain data and TVs and portable media players for media information as in the past. Consequently, data-centric companies like Microsoft (MSFT) and Cisco Systems (CSCO) are entering the consumer electronics industry, thereby increasing competition.^[13] Samsung introduced the Android in December 2009, a smartphone with GPS navigation, email, web surfing capabilities, touchscreen, and specialized applications that can be bought from the Android Market.^[14] Samsung also launched a new smartphone operating system in November 2009 called Bada.^[15] This new platform allows developers to create new applications for Samsung's mobile phones, which will aid in providing differentiated products to customers.^[15]

Cyclical upturn ahead in global DRAM (Memory Semiconductors) profitability

Based on historical cyclicality of demand for DRAM, the DRAM industry is expected to do well over the next couple of years. After the tech/internet/telecom bubble collapsed in 2000, DRAM had 3 years of extremely low profits, followed by a peak-cycle period from 2004 to 2006, then a weaker profit period from 2007 to 2009. As the decade draws to a close, the global DRAM cycle has been improving and moving toward peak DRAM cycle conditions. Due to the controlled growth in global DRAM supply during the early stages of cyclical recovery, profits for competitors in the electronics industry will increase for a longer period of time.^[16] Also, the replacement demand for Windows 7 will most likely boost DRAM demand potential, given the growth in DRAM memory content.^[17] Samsung's semiconductors business segment is poised to benefit by this growth, which has been forecast by Samsung's equity research. In January 2009, Samsung developed the world's first 4GB DDR3 DRAM chip.^[18] This memory capacity is expected to double every 2 years.^[18] Currently, Samsung is the world's largest maker of DRAM, and DRAM revenue increased 42% during the fourth quarter of 2009.^[19] Samsung reported revenues of $2,750 million USD during the fourth quarter of 2009 from DRAM sales, while the closest competitors included Hynix and Elpida, with revenues of $1,871 million USD and $1,680 million USD, respectively.^[19] With such a dramatic market lead, Samsung is expected to profit as a top DRAM maker, despite having lost market share during the last quarter of 2009.^[19]

Competition

Samsung's technical leadership and cost-reduction efforts makes the company a competitive force in the industry. Major competitors to Samsung include:

• Hynix Semiconductor (HXSCL) is among the world's top makers of DRAM and other memory chips. The company plans to diversify into other chip markets. The company is a primary competitor for Samsung in the Asia/Pacific region.^[20]

• Panasonic Corporation (PC) is a top consumer electronics manufacturer. Its Digital AVC Networks unit makes TVs, VCRs, CD and DVD players, PCs, cell phones, and fax machines. In addition, it also sells batteries, electronic motors, displays, home appliances, and factory-automation equipment. Panasonic owns about 540 consolidated companies and also operates Panasonic Corporation of North America.^[21]

• Sony (SNE) manufactures high-revenue consumer electronics products and gaming systems, including digital and video cameras, Walkman stereos, and semiconductors. The company also owns entertainment divisions such as Sony Music Entertainment, Sony Pictures Entertainment and Sony Digital Production, Sony Pictures Home Entertainment, and Sony Pictures Television.^[22]

Other competitors in Samsung Electronic's business segments include:

• Nokia (NOK) is a manufacturer of mobile devices and is involved in the internet and communication industries.

• LG Electronics is a global leader in home entertainment products, mobile communications, home appliances, and business solutions.

• Toshiba (TOSBF) is a leading competitor for Samsung in the electronics equipment industry, specifically semiconductors and digital products. Toshiba is also at the top of the Greenpeace Consumer Electronics Ranking along with Samsung.^[23]

• Dell (DELL) is one of America's largest companies and a global manufacturer of personal computers.

• Seagate Technology Holdings (STX) is a primary competitor in the hard drives industry.

• Hewlett-Packard Company (HPQ) is a competitor to Samsung as a leading manufacturer of personal computers, commercial and consumer PCs, workstations, handheld devices, and digital entertainment systems.

• Canon (CAJ) is a competitor in the digital camera and printer segments.

• Motorola (MOT) is a manufacturer of wireless telephone handsets.

• Koninklijke Philips Electronics (PHG) a leading competitor for Samsung in consumer electronics, including mobile phones and entertainment solutions.

Presently, Sony Electronics is Samsung's closest competitor in the consumer electronics industry.^[24] In fiscal year 2008, Sony Electronics reported net sales of 6,613,800 million in yen (approximately $71,608,000,000 USD) and Samsung reported net sales of 121,294 billion in KRW (approximately $105,525,780,000 USD).^[25][22] For both companies, the electronics segment has increased in sales during the 2008 fiscal year. However, Sony has faced greater restructuring charges (an increase of 7 billion yen).^[26]

Trading on Stock Exchanges

The Samsung stocks are not traded on any US Exchange. The company's home market is the Korean Exchange. Samsung global depository receipts (GDRs) are traded on some European Exchanges including London and Frankfurt.

References

1. ↑ Samsung Press Release, 08/26/09
2. ↑ Samsung Investor Relations: "Samsung Electronics Announces Second Quarter 2010 Results" July 30, 2010
3. ↑ ^{3.0 3.1 3.2} Samsung Annual Report 2009, p. 46
4. ↑ Samsung 2008 10-K, Performance by Business, pg. 18
5. ↑ Samsung Growth, Encyclopedia.com
6. ↑ Samsung DNIe Video Processing, Presentation Technology Reviews
7. ↑ ^{7.0 7.1} Samsung 2008 10-K, Business Overview, Page 19
8. ↑
9. ↑ Samsung Telecommunications, PR-inside
10. ↑ Samsung Semiconductor, Inc., 2007 Worldwide Semiconductor Rankings, Pg. 3
11. ↑ Hybrid Semiconductor
12. ↑ MuniWireless, 4/23/09
13. ↑ ^{13.0 13.1} Industry Trends in Consumer Electronics
14. ↑ Samsung's New Android, LinuxInsider, 12/18/09
15. ↑ ^{15.0 15.1} Samsung Launches Open Mobile Platform, 11/10/09
16. ↑ [Samsung Equity Research Spot Report, Lawrence Lee and Sunwoo Kim, 09/02/09, Pg. 4]
17. ↑ [Samsung Equity Research Spot Report, Lawrence Lee and Sunwoo Kim, 09/02/09, Pg. 5]
18. ↑ ^{18.0 18.1} Samsung DRAM Chip, 1/29/09
19. ↑ ^{19.0 19.1 19.2} Samsung Remains Top DRAM Maker Amid Dramatic Market Growth, Xbit Laboratories, 1/29/10
20. ↑ Hynix Semiconductor Inc., Hoovers
21. ↑ Panasonic Corporation, Hoovers
22. ↑ ^{22.0 22.1 22.2 22.3} Sony Corporation, Hoovers
23. ↑
24. ↑ Best Global Brands 2009 Rankings, Interbrand
25. ↑ ^{25.0 25.1 25.2}
26. ↑ Sony FY 2008 20-F, Performance by Product Category, Pg. 51
27. ↑ Sony FY 2008 20-F, Pg. 97
28. ↑ ^{28.0 28.1} LG FY 2008 10-K, Pg.43
29. ↑ Fortune Global, CNNMoney.com
30. ↑ ^{30.0 30.1} Dell Financials
31. ↑ Fortune Global, CCNMoney.com