Weak IT Demand Impairs Semco’s Profitability, but Long-Term Growth of Autos and Servers Unchanged

Samsung Electro-Mechanics, or Semco, reported lower-than-expected earnings in the December quarter due to continued weakness in IT set demand. The component division’s sales were 5% below our forecasts due not only to weak smartphone shipments, but also slowing demand for networks and servers. The package solution division’s revenue was 8% below our numbers due to weak PC and smartphone demand. The companywide December quarter operating margin fell to 5.1% from 13.0% in the previous quarter, which we attribute to low multilayer ceramic capacitor, or MLCC, utilization and price declines in package substrates. In addition to the lower-than-expected numbers, we did not see substantial progress on inventory correction, which we think could negatively affect the share price in the very short term. However, we remain optimistic about the company’s long-term growth opportunities in MLCC and package substrates, driven by demand for high-end automotive and server components. We plan to update our earnings forecasts after speaking with the company later this month, but maintain our view that Semco’s shares are undervalued.