EQUITIES UPDATE: Unrest at the Samsung HQ - an opportunity?


Unrest at the Samsung HQ - an opportunity?

Samsung Electronic is down about 10% year-to-date and 16% from its recent high after posting record quarterly and annual earnings in January. The company has been plagued by worries over its 2Q results, weakness in the global smartphone market and concerns about the South Korea government’s efforts to pursue chaebol reform.

Earlier this month, Samsung reported 2Q preliminary numbers that missed already lowered expectations. The company announced that operating profit is expected to come to 14.8 trillion won ($13.2 billion) for the April-June period, 5% higher than the 14.07 trillion won registered in 2017, but 5% lower from the previous quarter. Sales are forecast at 58 trillion won, down 4.9% from 61 trillion won a year earlier. It will publish official results at the end of the month.

The weakness appears to be stemming from Samsung smartphone division which sold fewer-than-expected Galaxy S9 flagship products which were launched in March. Additionally, expenses related to the launch were higher than expected squeezing margins of the business segment. Despite strong reviews from technical journals, customers seem to be purchasing lower-end phones or the iPhone X.

The next catalyst for the group will be on August 9th when the company will announce the details for Galaxy Note 9. There has been some speculation that it will reach stores in Korea on August 24th and it will be priced similarly to the previous version-around $950.

Apart from company specific issues, the Samsung Group, including Samsung Electronics is being pushed by the government to reform its governance structure. Recently, the head of the Korea Fair Trade Commission (FTC) Kim Sang-jo officially criticized the cross-shareholdings of the chaebol saying that, “Samsung Group's current ownership structure in which Samsung Life Insurance holds a stake in Samsung Electronics is not sustainable.”

Additionally, the Blue House has urged Samsung Life Insurance to sell off its stakes in Samsung Electronics Co. and has forced Samsung SDI Co. to dispose of its stakes in Samsung C&T Corp. Potentially, the cross-stake unwinding of the group could lead to more than 16 trillion won ($19 billion) worth of forced selling of Samsung Electronics.

The next event to watch is the government’s attempt to push through Parliament a bill that would ban insurance firms from having a stake in an affiliate of more than 3% of its assets. The stake of Samsung Insurance is a key component of the family's control over Samsung Electronics, and a smaller shareholding would weaken its influence over the Board. While Samsung C&T could likely buy the insurance arm’s stake, it is uncertain if it is financially prudent and it would need to explain other shareholders the necessity for such an outlay.

The bill to change the nature of these cross-shareholdings has long faced opposition in South Korea's Parliament, but it now has a better chance of approval after President Moon's party had a strong showing in local elections last month. In a Bloomberg interview, Lee Jong-kul, a five-term Legislature and member of Mr. Moon’s party, said Samsung Life needs to be untangled from Samsung Electronics to protect its insured members and make it harder for chaebol families to use financial units to control other businesses. Many companies, including Samsung, have relied on expedient methods to run themselves and taking unfair market competition for granted.”

We believe this weakness in the stock is an opportunity. Ultimately, it is strongly positioned in the strength of the semiconductor cycle with 65% of its revenues generated from that group. Finally, any chaebol reform will ultimately be good for the Korean market, including Samsung.


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