Samsung Just the Beginning

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Samsung: Just the Beginning...

SEPTEMBER 2012
Winning the scale wars on all fronts — handsets, TVs, semis, display — and taking no prisoners

Samsung Electronics remains the "Jewel of the Samsung Empire" and its long-term success is well aligned with the owner-founder Lee family — Corporate governance concerns are therefore overdone; we see three engines driving 161% EPS growth in '11-'14: Handsets, Semis & Display The smartphone market is bifurcating into premium and low end, with Samsung strong in both — Samsung's Galaxy S3 and Note are taking share in the premium segment despite Apple's best efforts to derail — this is driving improved mix, higher margins, and a tripling in handset profits As one of the few long-term survivors in semiconductors, Samsung will continue to extend its leadership in memory as process migration becomes more difficult and challenge Intel, TSMC, and Qualcomm as the only integrated device manufacturer in the ARM camp Even taking into account the worst "global thermonuclear" case in litigation tussles with Apple, Samsung is still undervalued; we rate Samsung outperform with a price target of KRW 2.1 million, which implies 57% potential upside from the recent stock price

SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

SAMSUNG: JUST THE BEGINNING...

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Portfolio Manager's Summary
Investors often complain that there are not enough choices in tech-land as Samsung and Apple continue to dominate the growth in electronics devices due to success in smartphones and tablets. Samsung Electronics, even more so with its internally sourced components, is creating havoc for many competitors, from handset and consumer electronics makers to component and semiconductor companies. Samsung has a truly unique position in the IT space as the company has become a "total solution provider" to customers. Samsung is strong in Handsets, Memory, Logic semis, Displays, and TVs. Given its ability to spend over $20 billion capex per year, Samsung can capitalize on new growth opportunities by allocating capital where it sees fit. Very few companies have this luxury in the IT space. Furthermore, with eggs in all baskets, Samsung is the ultimate play on convergence and we believe it will be the long-term winner no matter which operating system or device form factor wins out.

Concerns on corporate governance are overdone. Within the Samsung Group, Samsung Electronics is the crown jewel, generating the bulk of the group's profits. The company is controlled by the Lee family, whose leadership is well aligned to long-term success. The company's management culture is distinct and this is a key driver of seamless execution across divisions. Internal divisions have to compete for business and are not artificially sheltered.

Looking forward, we believe there are three legs to the Samsung EPS growth story, driving 161% EPS growth from 2011 to 2014: Handsets, Semiconductors, and Display. We believe we are still in the first half of this remarkable EPS growth story, with only 17% of total EPS growth over the next three years being realized to date. Smartphone value creation is dominated by the high end (high ASPs and high operating margins), but we see the majority of growth coming from the low end. Samsung is a key winner in this smartphone bifurcation trend as we estimate the company is gaining share in both the premium segment (>$450 OEM price) from Apple and HTC and the low-end segment from Nokia. Semiconductors should contribute significantly in 2013E, as we expect the DRAM market to rebound, pending consolidation between Micron and Elpida; the NAND market continues to improve; and the Logic business to post strong results despite the current conflicts with Apple. We believe AMOLED will continue to drive the Display division's future growth, and this will most likely be sustained for the foreseeable future, eventually becoming a significant driver of profits for Samsung as...
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