Samsung Q3 17 – Spring clean.

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Now is the best time to clean house.

• Samsung’s chip business has driven yet another mighty set of results making it the perfect time to deal with all of governance issues that continue to plague the company.
• Q3 17 revenues and EBIT are expected to be KRW62.0tn / KRW14.5tn slightly ahead of estimates at KRW61.8tn / KRW13.4tn.
• While these results are not very far ahead of expectations, Samsung has generated 2.8x more EBIT than Intel is expected to have generated in the same period.
• This will put Samsung’s chip business comfortably in the global No. 1 slot where it looks it is going to stay for some time.
• Handsets have also had a good quarter driven by its well-received flagship products but the real star of the show remains semiconductors.
• Typically, an environment of limited supply and strong demand is ruined by over enthusiastic capacity additions but I see the semiconductor industry being a little bit more cautious these days.
• I think this is due to the prohibitive cost of building a cutting edge fab and the fact that worries regarding Moore’s Law grinding to halt are now firmly on the investment horizon.
• The big question mark remains China which has said that it wants to create its own semiconductor industry (not including Taiwan) and aggressive roll-outs there could cause yet another demand / supply imbalance.
• Either way this will take some time meaning that Samsung’s chip business is likely to continue generating vast profits for at least 12-24 months.
• Against this backdrop, the outlook for the shares remains pretty steady which makes it the perfect time to deal with the corporate governance issues that have been plaguing the company.
• This appears to have begun in earnest with the resignation of co-Vice Chairman Oh-hyun Kwon who has also been serving as CEO.
• With Jay Y Lee also likely to out of the picture for a few years, the way is open for new blood to take the helm of Samsung and clean-up these long-standing issues.
• This is becoming increasingly important as the long-term discount in Samsung’s valuation has evaporated over the last 18 months.
• This means that the murky way that the company is owned, controlled and managed needs to be changed into something much more transparent.
• Failure to do this effectively is likely to result in a big correction in the valuation as soon as the current business momentum hits a bump in the road.
• I am hopeful that today’s resignation is just the first step in this direction and that much more is to follow in the next 12 months.
• While the company is firing on all cylinders, tolerance to the skeletons as they leave the closet will be at its highest.
• Samsung’s timing looks to be excellent.