Samsung Electronics Co. Ltd. Upgraded To #AA-# On Strong Profitability And Cash Outlook Stable

Stocks and Financial Services Press Releases Friday July 21, 2017 17:15
HONG KONG--21 Jul--S&P Global Ratings

HONG KONG (S&P Global Ratings) July 21, 2017--S&P Global Ratings today said it has raised its long-term corporate credit rating on Samsung Electronics Co. Ltd. (SEC) to 'AA-' from 'A+'. The outlook is stable. At the same time, we affirmed our 'A-1+' short-term corporate credit rating on the Korea-based consumer electronics manufacturer. We also raised our long-term rating on SEC's senior unsecured notes to 'AA-' from 'A+'.

The upgrade reflects our expectation that SEC will maintain robust profitability, generate strong free operating cash flows, and increase its cash holdings over the next one to two years. Our view is based on favorable conditions in the memory chip market and the modestly improving performance in the company's smartphone and display panel businesses. We believe SEC's significant cash holdings provide sufficient buffer for the company to weather business volatility without increasing its debt leverage.

In our view, SEC will be able to better maintain its operating performance during industry downturns due to its strengthened global market position in its major businesses with technological leadership and its diverse business portfolio. This is despite the high inherent volatility of SEC's memory semiconductor, smartphone, and display panel businesses.

SEC is strengthening its competitive position in the memory semiconductor industry with growing market shares on the back of its leading technology in premium products, such as vertical NAND flash chips. Also, we expect conditions in the memory chip market to remain favorable over the next 12 months mainly because of strong demand growth from various connected devices for data storage and processing. However, we see potential oversupply risks in the next two to three years particularly in the NAND flash market. That's because many players, including SEC, Micron Technology Inc., and SK Hynix Inc., are making aggressive investments in this rapidly growing industry. Notwithstanding this, we expect SEC's continued large investments in technology and fabrication facilities and high entry barriers in the memory chip industry to enable the company to sustain its leading position over the next two to three years.

We expect SEC to maintain stable operating performance in its smartphone business over the next 12 months. With increasing product commoditization and saturation in the global smartphone industry, SEC faces intensifying competition from Apple Inc. and Chinese competitors. Also, effective quality management for the premium product gets more challenging due to the rapid technology development, as seen by the recall of galaxy note 7 in 2016. Despite these tough conditions, SEC has defended its market position and brand image over the past few quarters. In our view, the company has been able to do this mainly due to its strong vertical integration with leading technology in key components such as memory chips and display panels. The good performance of SEC's recent flagship smartphone galaxy S8 supports its technological advantage.

We expect SEC to generate strong free cash flow and be debt free on an adjusted basis over the next two years despite its increased capital expenditure and somewhat aggressive shareholder return policy. Under our base-case scenario, we estimate the company's annual capital expenditure to increase to Korean won (KRW) 32 trillion-KRW37 trillion in 2017 and 2018, from about KRW25 trillion in 2016. The increase is attributable to the company's focus on strengthening technological competitiveness particularly in its vertical NAND, system large-scale integration (system LSI), and organic light emitting diodes (OLED) businesses.

SEC's annual dividend payouts and share repurchases are likely to remain high at KRW10 trillion-KRW15 trillion in 2017 and 2018. However, we believe the company's solid operating cash flow will be more than sufficient to cover its capital investments and shareholder returns, resulting in substantially positive discretionary cash flows. Accordingly, we expect SEC to increase its cash holdings to KRW80 trillion-KRW90 trillion over the next 24 months under our base-case scenario, from KRW73 trillion as of March 31, 2017. This, together with its diverse product portfolio and market leadership, will enable SEC to maintain its solid credit metrics even during a period of severe market downturn in its major businesses. Reflecting these strengths, we have revised the company's financial risk profile to minimal from modest.

The stable outlook reflects our expectation that SEC will generate strong cash flows and maintain its robust net cash position with disciplined financial policies over the next one to two years. We expect SEC to maintain good profitability despite intense competition and high industry volatility in its major businesses. The company's economies of scale, technological leadership, strong vertical integration, and good brand power underpin its profitability.

We may downgrade SEC if the company's competitive position or profitability weakens significantly, particularly as a result of a sharper-than-expected deterioration in its smartphone business or an unexpected downturn in the memory chip industry. A downgrade trigger could be the overall operating margin declining to below 10% on a sustained basis. We could also lower the ratings if SEC's financial policies or growth strategies become significantly more aggressive as a result of larger-than-expected acquisitions, dividends, share buybacks, or capital investments.

We see limited upside potential over the next 12 months mainly because of high volatility in SEC's semiconductor, smartphone, and display panel businesses.

We could raise our ratings if the company significantly strengthens its global market position in its major businesses and improves business diversity through growing its new businesses such as auto electronics.

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