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Profitability concerns likely to be temporary

Increased demand visibility and limited valuation burden

We raise our target price for Samsung Electronics (SEC) to W320,000 (from W300,000). Our target price, derived using a sum-of-the-parts (SOTP) methodology, corresponds to a 12-month forward P/B of 3.1x and P/E of 7.9x, which remain low relative to both SEC’s historical valuation range and global peers. Accordingly, valuation pressure still appears limited.

We currently value the foundry business at only W73tr; in light of projected operating losses and a thin EBITDA base, the unit’s contribution to SEC’s value is likely to remain limited in the short term. However, given recent developments (e.g., 4nm LPU orders from Nvidia, 2nm AI chip orders from Tesla, and progress in HBM4 base dies), we believe that the division''s longer-term value remains largely unreflected in the current share price.

For 2Q26, we look for revenue of W155tr (+16% QoQ) and operating profit of W75tr (+30% QoQ). We forecast DRAM and NAND ASP growth at +23% and +30%, respectively, and bit growth at +7% and +3%, respectively. We expect the DS division to deliver operating profit of W72.5tr, accounting for the vast majority of company-wide profit. Meanwhile, for the DX division, we forecast OP margin to narrow 5.3%p YoY to 2.3% due to higher component costs.

Following earnings releases from North American big tech companies last week, the aggregate 2026 capex estimate from global hyperscalers has been revised up to US$806bn (+73% YoY), with further expansion likely in 2027. Major tech firms are now disclosing concrete metrics demonstrating rapid growth in AI-related businesses. Given their sizable order backlogs, a sharp downward reversal in capex appears unlikely.

On its recent earnings call, SEC disclosed that it had entered into long-term supply agreements with certain customers. While additional details were not provided, we believe this reflects a broader industry trend. For reference, SanDisk has disclosed long-term supply agreements extending up to five years, a minimum order backlog of US$42bn, and financial guarantees (e.g., advance payments) totaling US$11bn.

Regarding the bonus-related provisioning issue, management stated that negotiations are still ongoing and that no related costs have yet been reflected. While labor negotiations are inherently uncertain, we partially reflected potential profitability declines by lowering our DS OP margin forecasts for 2026?27 by roughly 3.5%p. That said, we do not view this as a structural risk significant enough to alter our investment thesis.

On the contrary, we believe that continued strength in demand is likely to drive additional memory price increases in 2027 (+14% each for DRAM and NAND); as such, we raise our 2027 operating profit forecast by 5.2% to W445tr.