SAMSUNG ELECTRO-MECHANICS(009150) 3Q18 Conference Call

■ 3Q18 Review

Samsung Electro-Mechanics Co., Ltd. made an announcement on the 31st that it recorded 2.36 trillion won in sales and 405 billion won in operating profit in third quarter based on consolidation. Its sales increased by 556.5 billion won (+31%) from the previous quarter and 525.2 billion won (+29%) from the previous year, while operating profit increased by 198.1 billion won (+96%) from the previous quarter and 301.8 billion won (+292%) from the previous year.

Samsung Electro-Mechanics explained that sales of high-end Multi-Layer Ceramic Capacitor (MLCC) increased significantly and that all major components such as modules and substrates were supplied with new models. Although changes in sales are expected in the fourth quarter due to seasonal factors, MLCC is expected to continue its growth as demand for high-end products such as IT, industrial, and electric appliances increases.

■ Performance and Implementation Strategies by Business Sector

① Component Solution Sector: Revenue of 1.26 trillion won in the third quarter increased by 158.2 billion won (+18%) from the previous quarter and 498.8 billion won (+69%) from the same period last year. As supply of MLCCs for IT has increased in small and ultra-high capacities for new models and MLCC sales have increased greatly due to diversification of MLCCs.

It is predicted that sales will continue to grow as demand for MLCC markets in fourth quarter and expected to increase greatly with high-end products for IT and industrial and electronic products. In order to respond to MLCCs that are expected to lack of continuous supply, it is focusing on car-electric tier-1 and it is expected that demands for IT will continue to grow. It is planning to actively respond to demands for differentiated products such as small size and high volume.

② Module Solution Sector: Its sales increased by 273.2 billion won (+45%) quarter-on-quarter and 63.1 billion won (+8%) year-on-year to 885.1 billion won. Sales of high-performance dual-cameras and communication modules increased with the introduction of new flagship models of strategic trading lines, while sales of dual-cameras with OIS (Optic Image Stabilization) function increased significantly. It is planning to actively respond to increasing demands for multi-camera modules such as triple and quads and next-generation communication modules such as 5G.

③ Substrate Solution Sector: Sales of 432.4 billion won in the third quarter increased by 132.9 billion won (+44%) from the previous quarter and 32.8 billion won (+8%) from the same period last year. With the introduction of new models of major trading lines, increased demand for OLED-oriented RFPCB (Rigid Flex Printed Circuit Board) and supply of main boards for next-generation Smartphones, SLP (Substrate Like PCB). It is expected that demands for RFPCBs will continue to grow due to increase in hiring of OLED panels in the future, and it is expected that there will be more applications for high-end packages such as electric fields and network devices.

■ Q&A

Q) Please explain current supply and demand trends of MLCC and future market prospects.
A) There are a lot of rumors and speculation related to the recent supply and demand, but there seems to be too much concern over supply and demand. In 2019, demand is expected to grow in the middle of the mid-digit number of mid/low-end and more than 10 percent of high-end, and industry and electric fields that are employed in large-scale high-reliability products are expected to grow by more than 20 percent. In the case of supply, some companies have announced the extension of CAPA, but the actual available time will be at the end of 2019 or early 2020, at the earliest. Since it takes at least one year to get supply of ultra-precise moving parts of facilities, operating new lines and ramp-up may take longer.

It is also expected that conditions of supply and demand of MLCCs will vary by area. Although demand for IT mid/low end, which is based on Taiwan, is not increasing, it is expected that supply and demand will decrease due to expansion and productivity increase.

Despite growing demand, it is limited that the companies which can newly expand in High-end are only Japan and our company. As the companies also have a conservative CAPA operation plan by enhancing productivity of its existing lines, it expects supply and demand conditions to be tight.

Industrial/electronic applications are expected to experience explosive demand growth and even if the industry increases supply by 10% annually, a 5-10% shortage will continue over the next five years. There is a limit to expanding the supply and demand mitigation of Mid/Low end to MLCC overall supply and demand.

The main supply from Taiwanese companies is oversupply with general-purpose products, but the high-end products and large capacity for industrial/electronic power is still in short supply. Although there are concerns about potential lower selling prices, this is limited to general-purpose products and the trend of higher selling prices for industry and electronics is expected to remain.

We are implementing a strategy to differentiate our management resources based on these high- end products and highly reliable products and will have limited impact on supply and demand reduction in mid/low.

In addition, we have secured stable supply volumes through long-term LTA supply agreements with a high percentage of direct transactions centered on large trading lines. Although there are concerns that U.S.-China trade conflicts will reduce demand in China in 2019, there will be a steady increase in sales of target products with increasing demand for 5G, industry, AI, and AUTO.

Therefore, it is expected that MLCC will continue to grow steadily in 2019.

Q) Let me ask you a question on the board. Please explain about sales of RFPCB in third quarter and strategies and plans for expanding its business in the future.
A) Sales of high-value RFPCBs increased significantly in the third quarter from the previous quarter due to the release of the new flagship model of the overseas trading line.

It is predicted that hiring of OLED panels will increase as high-priced functions are expanded according to premium strategies of flagship phones in the future. We will actively pursue expansion of our business through flexible CAPA preparation and diversification of overseas trading lines.

Q) Please explain the price and sales forecast for the fourth quarter of the year. Concerns over the price drop continue to be raised, and please explain about the company’s forecast for sales and ASP in the fourth quarter.
A) In Q3 MLCC’s performance increased significantly due to favorable supply and demand conditions and improved product mix. Supply is also expected to be tight for IT and industry in the fourth quarter, and sales of electric-field ADAS and powertrains are forecast to increase. It is predicted that trend of price increase will continue in fourth quarter.

Fourth quarter sales are expected to continue to grow year-on-year as tier 1 sales increase by actively responding to IT high-end products and industrial demand and strengthening whole-use lineup.

Q) Let me ask you about the trend of demand for Chinese camera modules. There is a lot of talk about slowing sales of smartphones in China, and what about the demand for camera modules on the Chinese market? I wonder how to respond to slowing demand in the future.
A) Sales of high-end and dual-cameras increased in the third quarter due to expansion of sales of high-end and dual-cameras. It is predicted that hiring more multi-cameras based on flagship will increase in the future and that demands for high functions such as high magnification Zoom and OIS will increase. It will utilize business opportunities for improvement of specifications and strengthen technology development with major companies through differentiated technology and design in activities to expand supply to major flagship companies. Through this process, we will continue to increase sales.

Q) I’d like to ask you questions about the component business. Demand for electric applications is increasing, so please explain about product mix and future business prospects, including demand forecasts.
A) Sales increased during the third quarter as supply of MLCCs for electric fields to global tier-1 increased. The demand for electric appliances has been greatly increased due to the increase in hiring and selling ADASs. It is predicted that demand for electronic devices will continue to increase as self-driving and electric vehicles become regularized. From a product perspective, we will secure lineup based on high temperature, high pressure, and high reliability and have differentiated competitive edge. By securing a new plant base announced recently, we will actively respond to demands from markets and expand supply to large trading lines.

Q) Let me ask you a question on the camera module. As number of multi-cameras increases up to three to four, please explain about Samsung Electro-Mechanics’ competitive advantage, strategies, and whether it will be possible to increase profitability significantly due to expansion of multi-camera sales.
A) In order to differentiate Smartphones, hiring multi-cameras with high resolution and optical Zoom is expanding. Due to the expansion of technology inflection points, demands for supply are increasing for our companies that have lenses, actuators, and automation technologies that are key components of camera modules. It is responding proactively to demands for continued differentiation of major trading lines by developing major components such as high magnification, the Actuator for optical Zoom, and high resolution lenses. It is expected that profitability will be improved further as it strengthens competitive edge in high-end and new differentiated products in multi-camera markets.

Q) Let me ask you a question on the board. It is likely that RFPCB increased in the third quarter as a foreign trading line and SLP employment as a local strategic customer increased. How did the third quarter profitability change? Samsung Electronics actively talked about the release of 5G phones or foldable phones in its third quarter conference call, so how can the low-margin HDI quickly turn into SLP? Will the profitability of the board change in 2019 if the number of floors increases?
A) Sales of high-value products increased significantly compared to the second quarter due to the release of the flagship new model of the main trading line, and the operating rate changed to surplus.

Circurit board’s supply of SLP board and RFPCB for OLED for main board was expanded at its base in Kunsan and Vietnam. Package substrate also increased as for the demand for new flagship models and boards for PCs. In case of high value-added products, the expansion of the sole supply contributed to the improvement of profitability.

As for SLP, there has been no change in models for first half of 2019 and second half of 2019 is still under discussion. However, the expansion of the SLP in China is becoming visible. Based on yield, quality, and technical skills, we will expand sales of high-value products on major trading lines and actively respond to variety of products such as electronic filed and network, and technological inflection points to secure business competitiveness.

Q) The MLCC’s plan to build a factory in China has been announced. What is the size of investment in China? How much more production capacity and how does the portion of the electric filed change compared to what it is today? Please explain how you plan to lead the factory in Busan and China strategically.
A) As announced on September 20, it will invest 570 billion won to build a new plant in Tianjin, China in order to respond to the mid- to long-term increase in demand for electric appliances. It will expand by stages.

In case of MLCC base for electric facilities, Busan, which is currently mass-producing new products, plans to use it as a base for development of new products and mass production of high-end products, and China’s new factory, which is set to be completed in 2019, is planning to operate as a major production base for local customers and electric appliances.

Q) Mass production of Fan-out PLP has started in Q3 and I am curious about current status of mass production and strategies for expanding future business.
A) It is currently supplying PLP to AP that was hired for Galaxy Watches that were released in August. AP and Power Management Semiconductor were packaged as one, and memory with different ball pitch was stacked on top without separate parts. Compared to its competitors in Taiwan, it has increased its technical level by 2nd. This reduced thickness and volume by 20% or more.

Improved electrical performance of smart devices, which reduces power consumption and improves battery capacity. The yield also reached the target rate in three months, and the volume of goods is also rising above expectations. Starting with mass-production of the first product and second product mass-production in September, we will expand the entry of additional orders and other products for differentiating products and actively utilize PLP as demand for miniaturization of electronic devices and high performance grows in 5G, AI and self-driving markets.

Q) What is the market forecast for Q4 and 2019? We also ask for a forecast of Samsung Electro-Mechanics’ performance in the company.
A) Although seasonal effects are expected at the end of this year, it is predicted that sales growth for component businesses will continue. The market for MLCC, which we are focusing on, is expected to be positive in 2019, although there are concerns that demand in China will decrease due to the U.S.-China trade war.

It is expected that high performance of electronic devices will increase hiring of MLCCs with small and high capacity. Electric power plants and industrial applications, which are expected to increase annual demand by more than 20% over the next five years, are the markets that we are focusing on and are expected to see a significant increase in 2019. It is expected that South Korea’s business will remain stable despite easing supply and demand of low-capacity products. We will focus on responses to new businesses such as 5G and AI and on major existing businesses. We will also focus on profitability of MLCC and substrate so that it can grow compared to 2018.

 

Naver Papago was in charge of the translation.