Moody’s Investors Service says that Samsung Electronics Co., Ltd.’s (SEC, Aa3 stable) weak 1Q 2019 results are credit negative but have no immediate impact on the company’s Aa3 senior unsecured rating or stable outlook.
Samsung Electronics Revenue Declined Due To Weakness In Memory Chip Market
Headquartered in Suwon, Samsung Electronics Co., Ltd. is a global leader in the memory semiconductor, mobile handset, and flat panel TV markets. Its device solutions business (including semiconductor and display panel) generated 79% of consolidated operating profit in 2018.
SEC’s revenue and reported operating profit declined 14% and 60% respectively year-on-year in 1Q 2019, driven mainly by weakness in the memory chip market and to a lesser extent display panels. The company’s reported operating margin also fell to 11.9% from 25.8% a year earlier.
“SEC’s weak 1Q performance reflects cyclicality in its business lines, but the company has maintained very strong financial buffers that should help it operate through this downturn,” says Gloria Tsuen, a Moody’s Vice President, and Senior Credit Officer.
“We expect memory chip demand to improve in 2H 2019 as datacenter customers finish destocking, seasonality turns more favorable compared with 1H, and lower memory chip prices encourage more applications and stimulate demand,” adds Tsuen.
SEC’s semiconductor business saw a mid-20% drop in 1Q 2019 in the prices of both DRAM and NAND due to inventory adjustments at datacenter firms, weak seasonality, macroeconomic uncertainties, and increased NAND supply in the market.
At the same time, the display panel business fell into a loss in 1Q 2019 as a result of reduced demand for flexible OLED displays and increased market supplies for large LCD displays. The performance will likely improve in 2H 2019, driven by higher seasonal demand for flexible smartphone OLED panels and as SEC continues to focus on value-added products in LCD such as UHD, 8K and ultra-large TV panels.
Although Moody’s expects SEC’s full-year revenue and reported operating profit to decline by around 10% and 50% respectively from the record levels of 2018, the company’s adjusted debt/EBITDA will remain low at 0.3x, compared with 0.2x at the end of 2018. At the same time, the level of earnings should be comparable to the levels recorded between 2014 and 2016.
The company has also maintained a high net cash position, providing it with strong liquidity and balance sheet flexibility. As of the end of March 2019, it held cash resources totaling KRW102 trillion against total debt of KRW13 trillion.