Samsung Electro-Mechanics poised to benefit from Huawei’s troubles, rising demand for MLCCs

  • 2020-09-09

South Korea’s Samsung Electro-Mechanics Co. is likely to post better earnings in the coming quarters, benefiting from toughened US restrictions on China’s Huawei Technologies Co. and a rebound in demand for its mainstay product, ceramic capacitors.

Shares of Samsung Electro-Mechanics, the electric parts unit of the Samsung Group, have risen for a seventh straight session to close at 144,000 won on Sept. 9. The stock has climbed 16% since the end of August on active buying from institutional investors who purchased over 147 billion won ($124 million) worth of the components maker this month.

Analysts attribute the company’s stellar share performance to rising global demand for multilayer ceramic capacitors (MLCCs), a cash cow for Samsung Electro-Mechanics.

Samsung Electro-Mechanics plant producing multilayer ceramic capacitors (MLCCs)

 

MLCCs, consisting of a number of individual capacitors stacked together, provide and regulate chips’ power supply and prevent electromagnetic wave interference. They are widely used in smartphones, computers, and car electronics. A car uses from 3,000 to 10,000 MLCCs on average for systems such as powertrain, safety and infotainment. Demand for MLCCs is being pushed higher with greater use of the components in self-driving cars.

Samsung Electro-Mechanics is the world’s second-largest maker of MLCCs, following market leader Murata Manufacturing Co. of Japan.

With the flare-up of the US-China trade war in 2019, demand for MLCCs has significantly dwindled in the global market on a sharp decline in information technology gadget sales, and the situation has been exacerbated with the spread of COVID-19.

SMARTPHONES TO THE RESCUE

The sale of IT products, however, showed signs of a rebound in the second half, led by smartphones, of which MLCCs are a key component. Demand for use in desktop PCs and tablet computers is also rising.

According to Samsung Securities, Samsung Electronics Co. is expected to raise its smartphone shipments by 43% on quarter to 77 million units in the third quarter.

Meanwhile, KB Investment & Securities forecasts that despite the global coronavirus pandemic the global MLCC market will grow from $13.3 billion this year to $16.8 billion by 2024, and the automotive MLCC sector is projected to expand its share from 29% to 35% during the period.

Given the rosy business outlook, it comes as no surprise that Samsung Electro-Mechanics stepped up production of automotive MLCCs by establishing a dedicated production line in Busan in 2018, followed by the construction of a new automotive MLCC factory in Tianjin, China.

“When its Tianjin plant goes into full swing next year, the value-added automotive MLCCs will account for a greater part of Samsung Electro-Mechanics’ sales,” said Kim Ji-san, head of research at Kiwoom Securities.

US BAN ON HUAWEI BOON FOR SAMSUNG

Analysts say the toughened US restrictions on Chinese tech company Huawei Technologies are a boon for Korean IT parts makers in the supply chain.

Huawei is widely expected to see its total smartphone shipments plunge below 100 million units in 2021 due to US government sanctions to China. Market focus has thus shifted to local electric parts makers likely to benefit from Huawei’s troubles.

Samsung Securities analyst Lee Jong-wook said Huawei’s reduced market share on the US sanctions would lead to gains for its rivals such as Xiaomi Inc., Guangdong Oppo Mobile Telecommunications Corp. and Vivo Communication Technology Co., which in turn will boost Samsung Electro-Mechanics’ camera module sales, another key product of the Korean company.

Samsung supplies camera modules to Xiaomi, Oppo and Vivo but not Huawei.

Local brokerages recently raised their forecasts for Samsung Electro-Mechanics’ third-quarter earnings and its target price to reflect its optimistic business prospects.

Mirae Asset Daewoo, NH Investment & Securities, Meritz Securities and Kiwoom Securities now expect the parts maker’s shares to hover between 165,000 won and 190,000 won over the next 6-12 months.

By Jae-Yeon Ko

yeon@hankyung.com

<Edited by In-Soo Nam>