SamsungElectronics MikeWood 2014 Ac15b1f791 17fe11547c

SAMSUNG Electronics
A contrarians perspective on a top 10 global

brand with above average growth potential
and a wide margin of safety.
By: Michael Wood
www.evansic.com
Source: Samsung Investor Day Presentation 2013
Contest Qualification
1. Samsung Electronics (005930 KS Equity)
Price: KRW 1,367,000
Shares: 150,777,000
FX rate: 0.0009 USD/KRW
Market Cap USD: $185 Billion

2. Samsung Electronics GDR (SMSN LI Equity)
Price: USD 672.50
Equiv. GDRs: 276,431,000
Market Cap: USD 185.9 Billion

Prices as of 06/13/14
Prices as of 06/13/14
How to buy Samsung Electronics
All values from here on out are reported in USD
All prices and market caps are as of 06/13/14
This report contains forward-looking numbers
that could differ from actual results
Samsung Electronics is not a suitable investment
for all investors and individual circumstances
should be taken into consideration
This report is intended to provide the investor
with research relating to Samsung Electronics and
is not a solicitation to buy the stock
Disclosure
Cheap price
Management: honest & skillful capital
allocators
Dominant and strengthening competitive
advantage (low-cost & high-quality
manufacturing)
Globally recognized brand that is well taken care
of (broad and strong associations)
Excellent balance sheet protection

Proven Investment Process
Market Cap = $ US 186 Billion
Non-operating assets (net) = $ US 60.4 Billion
Enterprise Value = $ US 125.6 Billion

Q1-2014 Book value = $ US 145.5 Billion
2014E Net Income = $ US 24.0 Billion
2014E Free-cash-flow = $ US 24.0 Billion

EV/FCF2014 = 5.2x (prices as of 06/13/14)
Samsung Quick Stats
1. Samsungs businesses are not well understood, as the
market is assuming Samsung is only a smartphone company
2. Samsung Semiconductor is worth the enterprise value itself
(the market price implicitly assumes mobile is worth -$33B)
3. Samsung trades at more than a 50% discount to peers and
intrinsic value
4. Samsung is manufacturing 13 products with global #1
market share that have very defensible market positions
5. Several catalysts are in motion to unlock the trapped value,
including IPOing non-core businesses, corporate
restructuring and massive share buybacks ($60B net cash)
6. Management has an astounding track record of successfully
creating shareholder value
Thesis
1. Success of Samsung hinges on the success of the
Galaxy S franchise
2. There is no growth left in the smartphone
industry (the market is fully saturated)
3. Lenovo will drive Samsungs mobile operating
margins to 3% (while Apple will continue to
operate in a vacuum)
4. Samsung is a copy-cat and is only successful
because they infringe on others patents
5. Samsung is not shareholder friendly and will
never return capital to shareholders
This presentation seeks to rectify the myths that cloud
the investors mindset on Samsung Electronics
Dispelling the Myths
Apples Portfolio:

iPhone 53%
iPad 19%
Mac 13%
iPod 3%
iTunes 9%
Accessories 3%
Samsungs Portfolio:

DRAM 5%
NAND 4%
Logic Chipset 5%
Mobile Display 5%
Large Panel Display 6%
Tablets 4%
Low-end Smartphones 14%
Premium Smartphones 28%
Feature phones 3%
Networking Equipment 2%
Laptop/PC 4%
TV/Screen 13%
Home Appliances 6%
Samsung has a diverse product offering that can withstand the failure of
any single product. Even if iPhone wipes out Galaxy S, Apple will still need
to buy Samsungs DRAM and NAND memory chips (in larger quantities).
Myth 1 Debunked: Sales by Product (2013)
1. Non-core Assets (net) are worth $US 60.4 Billion
2. Samsung Semiconductor is worth $US 125 Billion
3. Samsung Display is worth $US 29.7 Billion
4. Samsung Home Appliance is worth $ US 11.2 Billion
5. Samsung IT & Mobile is worth $ US 208 Billion

Total Equity Value $ US 433B

Upside to current price: 134%
Cheap Price: Samsung SOTP Value
Cash and Cash Equivalents: $17.0 billion
ST Financial Instruments: $38.6 billion
ST Available-for-sale FA: $1.9 billion
LT Available-for-sale FA:
a
$7.3 billion
Investment in Associates:
b
$6.1 billion
ST Borrowings: -$6.8 billion
Debentures: -$1.2 billion
LT Borrowings: -$2.5 billion

Non-Operating Assets (Net) $US 60.4 billion

As of Q1 2014
1. Non-core Assets (net) $60.4B
(In millions of US Dollar) Mar-14 Dec-13
Equity securities - Listed $ 3,680 ** $ 3,959
Equity securities - Non-Listed 3,088 704
Debt Securities 558 951
Total $ 7,326 $ 5,615
** Listed Equity Securities:
All values in millions of US Dollars
Number of Shares
Owned
Percentage of
Ownership
Acquisition
Cost
Book Value
March 2014
Samsung Heavy Industries 40,675,641 17.6% $ 195 $ 1,166
Samsung Fine Chemicals 2,164,970 8.4% 41 87
Hotel Shilla 2,004,717 5.1% 13 120
Cheil Worldwide 2,998,725 2.6% 2.6 74
iMarket Korea 647,320 1.8% 0.3 15
SFA 1,822,000 10.2% 34 67
Wonik IPS 7,220,216 9.0% 57 56
ASML 12,595,575 2.8% 653 1,123
CSR - 0.0% - 99
Rambus 4,788,125 4.3% 83 43
Seagate Technology 12,539,490 3.8% 197 669
Wacom 8,398,400 5.0% 56 56
Sharp 35,804,000 3.0% 110 108
Other - 42 49
Total $ 1,484 $ 3,680
1. a. LT Assets Available for Sale
Samsung SDS to be spun-off in Q4-2014

All values in millions of US Dollars
Investee Acquisition Cost
Book Value
March 2014
Net Asset
Value
Samsung Card $ 1,384.69 $ 2,092 $ 2,077
Samsung Electro-Mechanics 323.82 841 840
Samsung SDI 309.02 1,067 1,316
Samsung SDS 136.54 803 783
Samsung Techwin 144.26 363 395
Samsung Corning Advanced Glass 193.41 186 186
Other 766 766
Total $ 6,117 $ 6,362
1. b. Investment in Associates
Samsung Semiconductors is worth 9.5x 2015 operating profit
This equates to a value of $US 125 Billion
Consistent with Micron (@7.8x 2015 OP) and SanDisk (@ 10x
2015 OP)
Samsung Semiconductors is worth the enterprise value of
the entire company by itself!!!!
All values are in $US Billion
Samsung Semiconductor 2009 2010 2011 2012 2013 2014E 2015E
Total Revenue 21.4 32.0 33.3 30.7 33.5 41.6 44.9
DRAM 7.5 14.8 12.1 10.6 12.3 16.3 17.5
NAND 5.2 6.7 8.1 7.4 9.1 11.1 12.4
System LSI 3.5 5.9 9.9 11.7 11.4 13.5 14.2
Operating Profit 1.7 8.6 5.8 3.7 6.4 11.4 13.0
Operating Margin 8% 27% 17% 12% 19% 27% 29%
2. Samsung Semiconductor
Source: Bloomberg, Company filings, AllianceBernstein
#1 global market share in overall memory
#1 global market share in Mobile DRAM (49%)
#1 global market share in PC DRAM (33%)
#1 global market share in NAND (32%)
2. a. Samsung Memory
Source: DRAMeXchange
Samsung trades at half the valuation of sector
Samsung Semiconductor will earn $11.4 billion operating
profit in 2014, on par with Intel and Qualcomm
Samsung Semiconductor by itself deserves $125 billion
valuation, on par with Intel and Qualcomms enterprise values
All values are in millions of US Dollars
Semiconductor Market Cap P/B 5-Year
2014 2015 2016 Q1 2014 ROE
Intel $148,500 $136,577 $53,100 14.8 14.2 12.2 2.6 20.7%
Qualcomm $134,170 $102,117 $27,470 14.6 13.5 10.1 3.5 16.4%
Micron Tech. $33,360 $26,992 $16,300 9.6 8.8 8.5 3.3 12.7%
SK Hynix $32,085 $34,168 $13,238 7.7 6.4 6.8 2.8 10.8%
SanDisk $22,280 $19,560 $6,660 15.3 14.7 13.0 3.4 13.4%
Sector Average 12.4 11.5 10.1 3.1 15%
Samsung Electronics $185,531 $125,110 $232,715 5.2 4.9 4.7 1.4 20.1%
P/E ex. net cash
Gross
Revenue
Enterprise
Value
2. Samsung Semiconductor Peers
Source: Bloomberg, Company filings
Consolidation in the DRAM space to 3 competitors has caused
DRAM prices to soar and margins to expand
Since 2013, Micron is up 410%, SK Hynix +83% and Samsung -10%
DRAM Recovery leaves SMSN behind
Does a company that is consistently taking share in the
semiconductor industry deserve a 50%+ discount to its peers?
Source: Gartner
Semiconductor Industry by Revenue
Samsung Display is worth at least 9x 2014 op.
profit, given that their main competitor LG
Display trades at 13.7x 2014 operating profit
Samsung Display is worth $29.7 billion
Samsung Display 2009 2010 2011 2012 2013 2014E 2015E
Total Revenue 20.7 25.4 26.3 29.0 27.8 29.5 31.1
Large Panel 9.8 21.6 20.4 19.5 14.7 13.6 14.3
Small & Medium Panel - 2.3 2.4 2.3 0.6 0.5 0.5
AMOLED (aka OLED) - 1.5 3.4 7.2 12.6 15.3 16.3
Operating Profit 1.4 1.7 (0.3) 2.8 2.9 3.3 3.6
Operating Margin 7% 7% -1% 10% 10% 11% 12%
3. Samsung Display
Samsung is the dominant player in display with 99% market
share in AMOLED
Samsung has already announced Super AMOLED, securing a
two-stage technology lead on peers
Despite the technological edge, Samsung trades at a steep
discount to its most comparable peer LG Display

3. Samsung Display #1 Position
Samsung Display trades at a 50% discount to
its inferior South Korean competitor LG
Display
Samsung Display deserves a premium to LG
Display (7% assumed)
This is the basis of the $29.7 Billion valuation
Display Market Cap P/B 5-Year
2014 2015 2016 Q1 2014 ROE
LG Display $9,591 $12,712 $27,370 16.1 10.2 9.1 1.0 8.6%
P/E ex. net cash
Gross
Revenue
Enterprise
Value
3. Samsung Display Peers
Source: Bloomberg, Company filings
Samsung Home Appliance is worth 7x 2013
operating profit
Whirlpool trades at 7.8x 2014 operating profit
This is the basis of the $11.2 Billion valuation
Samsung Home Appliance 2009 2010 2011 2012 2013 2014E 2015E
Total Revenue 41.0 48.7 42.3 45.0 45.0 52.7 53.4
Visual Display (TV, Monitors) 26.3 28.9 31.3 30.8 29.0 34.0 33.9
Appliance 7.7 10.0 11.0 11.8 13.7 16.1 17.0
Other 7.0 9.8 - 2.3 2.3 2.6 2.6
4. Samsung Home Appliance
Samsung has been the fastest growing company in
the Home Appliance arena
Samsung is strategically well positioned to take
advantage of the smart-home revolution and the
convergence between technology and home
appliances

Samsung has been making refrigerators since the 1960s
Consistently ranked the highest performance product by
Consumer Reports
Continues to innovate in the space (Partnership with
SodaStream brings carbonated water to the fridge)

Samsung is expecting 5.1% CAGR out to 2017

4. Samsung Home Appliance TV
Samsung has had the best selling TVs for the last 8 years
Samsung has the #1 brand awareness globally for TVs

$11.2 Billion valuation for Samsung Home Appliance
is a discount to Whirlpools valuation
Samsung ought to have a premium valuation due to
the disruptive/innovative products and the outsized
growth

Home Appliance Market Cap P/B 5-Year
2014 2015 2016 Q1 2014 ROE
Whirlpool $10,680 $12,280 $19,410 10.9 9.5 10.1 2.3 13.9%
General Electric $270,050 $434,451 $149,580 16.0 15.8 14.9 2.0 10.4%
Sector Average 13.4 12.7 12.5 2.2 12%
P/E ex. net cash
Gross
Revenue
Enterprise
Value
4. Samsung Home Appliance Peers
Non-core Assets = $60.4 billion

Samsung Semiconductor = $117 billion

Samsung Display = $ 29.7 Billion

Samsung Home Appliance = $11.2 Billion
Net Asset Value = $ 218.3 Billion
Market Cap = $ 185 Billion
Implied value Samsung Mobile = -$ 33.3 Billion
Samsung valuation so far
Is the worlds largest manufacturer of cell phones
really worth -$33 Billion?
Are the risks so high that a business generating
$25 Billion operating profit is worth less than
nothing!?
Contrarian View: The fear of a mobile implosion
has created a wide margin of safety for the
contrarian investor, not to mention a potentially
lucrative investment opportunity!
5. Samsung IT & Mobile
Consensus view:
Samsung Mobile generates all of their profit from
Galaxy S franchise
Lenovo will drive Samsungs operating margins to
3%
Apple will be unaffected by this inevitable industry
paradigm shift
Growth in smartphones has stagnated and will
likely remain so for the foreseeable future
5. Samsung IT & Mobile
Samsung IT & Mobile is comprised of:
Premium smartphones
Low-end smartphones
Feature phones
Tablets
Premium PCs and laptops
Networking equipment
Samsung IT & Mobile 2009 2010 2011 2012 2013 2014E 2015E
Total Revenue 30.1 35.0 60.7 93.1 125.2 143.2 149.7
Mobile/Tablet 27.8 32.4 48.1 81.8 112.7 127.5 132.3
PC/Laptop - - 10.7 7.7 8.1 10.1 11.4
Networking Equipment 2.3 2.6 1.9 3.7 4.3 5.6 6.0
5. IT & Mobile What is in the group?
Bifurcated strategy: Focused on the (1) high-
end and (2) low-end
Success in the low-end will continue to drive
manufacturing costs lower and bargaining
power with suppliers higher
Success in the high end will be predicated on
high quality products and a strong brand
image
5. Samsung Smartphone Strategy
Two dominant premium smartphone franchises:
(1) Galaxy Note (2) Galaxy S
With the Galaxy Note, Samsung pioneered the
Phablet space
5. Samsung Premium Smartphones
Launched in Q2-2014
Sold 10 million units 10% faster than Samsung Galaxy S4
This successful launch should help dampen the consensus
view that the smartphone business is about to implode
5. Samsung Galaxy S5 Selling Well
Samsung offers a broad array of low-end phones that
each focus on one different main performance
feature
First phone released with Tizen OS Samsung Z

Samsung Z
Samsung Galaxy Young Samsung Galaxy Grand Samsung Galaxy Active
Samsung Galaxy Ace 3 Samsung Galaxy Star
5. Samsung Low-end Smartphones
Growth in smartphone units Ericsson
16.5% unit growth CAGR over 5 years
Pricing would have to fall by 16.5% annually for the
next 5 years for sales and earnings to remain flat
Myth 2 Debunked: Smartphone Growth
Samsung is the dominant supplier of smartphones,
with 31.2% market share as of Q1-2014
5. Global Smartphone Market Share
When one includes premium smartphones, low-end smart
phones and feature phones, Samsung still stands out as the
dominant supplier for mobile devices to the world:
5. Global Cell Phone Market Share
Samsung has a solid line up of premium tablets
Samsung recently announced the launch of new
tablets with 2K resolution (best on market)

5. Samsung Tablets
According to IDC Samsung took 5% market share directly from
Apple in 2013
Samsung now has 22.3% market share in tablets
Samsung is the only tablet to gain an real traction against
Apple
5. Samsung Tablets Taking Share from Apple
Apples enterprise value trades at 8.9x 2014
operating profit
Samsungs IT & Mobile business is worth at least 8x
2014 (10% discount to Apple)
Therefore, Samsung IT & Mobile is worth $208B
IT & Mobile Market Cap Net Cash P/B 5-Year
(debt) 2014 2015 2016 Q1 2014 ROE
Apple $550,930 $133,627 $417,303 $181,382 10.6 10.2 10.0 4.6 27.6%
Google $371,340 $53,472 $317,868 $52,280 17.3 14.5 12.3 4.3 18.5%
Lenovo $13,271 -$1,500 $14,771 $33,873 16.9 15.2 10.8 4.7 20.3%
Microsoft $339,710 $81,100 $258,610 $88,380 11.3 10.5 9.9 4.0 36.3%
IT & Mobile Average 14.0 12.6 10.7 4.4 26%
Samsung Electronics $185,531 $60,721 $124,810 $232,715 5.2 4.8 4.7 1.4 20.1%
P/E ex. net cash
Gross
Revenue
Enterprise
Value
5. IT & Mobile Whats it worth?
If the consensus is correct and Lenovo is successful in
driving down Samsungs operating margins to 3%, then
Samsung will still generate $4.3 billion in operating profit
for 2014
Using a 15x multiple this business is worth $64 billion in a
worst case scenario (Lenovo trades at 18x operating profit)
In this scenario Samsung Electronics intrinsic value is $283
Billion
Upside to Samsung Electronics in this scenario is still 52%

The worst case is more than priced into the stock.
Samsung provides a margin of safety for the prudent
investor even in a (highly unlikely) worst case scenario.
Myth 3 Debunked: Lenovo drives margins to 3%
Samsungs brand ranked #8
th
in the world according to Interbands Top 100 Global
Brands
Samsung has a premium product and scale like just like its peers on this list
Samsungs brand power will help protect against Lenovos aggressive pricing
This will mitigate the downside scenario that IT & Mobile is only worth $64B
Except: Brand Matters to Customers!
Samsung pioneered one of the great rebranding efforts of the modern era
#1 brand awareness for Smartphones around the world
#1 brand awareness for TVs around the world
Lenovo is competing against a lower cost operator that is more widely recognized
in the global market place they have a tall order ahead of them to try and knock
down Samsung
Samsung is a premium brand
Samsung advertises more aggressively than Coca-Cola (the most prolific
advertiser)
Samsung advertises 4 times more than Apple
Despite this focus on the customer, the consensus believes that Apple is far more
immune to competitive pressure on its margins
Even if Lenovo or Apple forces Samsung to compete as a low-end player, they will
not need to advertise as aggressively (mitigating the impact on operating margins)
Samsung takes good care of their brand
Samsung is able to advertise more aggressively than Apple because of their
commitment to human capital
Samsung employs over 325,000 people, more than 4 times what Apple employs
To commemorate the chairman's 25
th
anniversary, the employees were paid a $2
billion bonus

Source: Investor Presentation 2013
Samsung takes good care of their people
Since their venture into the cell
phones business in 1992, Samsung
has amassed a mobile patent
portfolio that consists of 16,000
patents
Samsung couldnt possible be a
copy-cat if they have amassed
nearly 50,000 patents since 1989
(second only to IBM)
Despite Apples patent victories in
the US, no major victories have
been awarded off home-turf
The most recent patent ruling
found that Apple also infringed on
Samsungs patents
Myth 4 Debunked: Samsungs Patent Portfolio is Strong
Samsung was founded by Lee
Byung-Chul (top), is currently
chaired by Lee Kun Hee (left), and
will be succeeded by Lee Jae-Yong
(right)
Samsung is a family owned
business with the current chairman
controlling 49.7% of voting control
The Lee family has an impeccable
record for allocating capital to
growing sectors of technology
Each generation has left their
unique mark on the company
Three Stars of Samsung
Source: Bloomberg, Company Filings
Proven Track Record
Excellent Capital Allocation Return on Capx
While most struggled to keep their heads above
water in 2009, Samsung set the goal to reach $400
billion sales by 2020
So far so good:
Management expects more of the same
Born: 1910
Died: 1987 (at age 77)
Founded Samsung in 1969
Started as a rice-trading operation
Transitioned into manufacturing TV
sets, electric fans and refrigerators
Extended the business in the 1950s to
include banking, insurance, real estate
and tungsten exporting
Invested in microprocessor
manufacturing in 1974 by purchasing
Korean Semiconductor Company out
of bankruptcy

Lee Byung-Chuls philosophy for establishing new businesses:
Pounce on them when the market is at rock bottom.
Founder: Lee Byung-Chul
The companys philosophy promotes the idea that
the individual will grow to be a Samsung man by:

1. Acquiring the capability and the courage for
empowerment
2. Growing an internationally oriented mind
3. Making use of team spirit and solidarity
4. Reminding the employee of the sovereignty of his
existence as the leader, making history for his time
5. Thinking in terms of effectiveness, not to be
inhibited by past practices and attitudes
6. Cultivating the pioneering attitude
Ahead of their time: Samsungs 1980 Sahoon
Age: 72
Chairman since: 1987
Son of Lee Byung-Chul
Most notable accomplishment is the
64MB DRAM memory chip, transforming
the formerly bankrupt company into the
worldwide memory leader
Chairman Lee wanted to build a brand,
not just a product
Today, Samsung has 13 products with #1
global market share all under the
Samsung brand
Diagnosed with lung cancer in 2000
Suffered a severe stroke in 2014

Current Chairman: Lee Kun-Hee
The fabric of the circular holding structure is unraveling
2013: Govt bans cross holding structures, provides tax break for
unwinding of circular holding structures
2014: Chairman Lee tragically suffers a severe stroke
2014: Samsung announced IPO of Samsung SDS, Samsung Everland

Catalyst: Corporate Restructuring
President Park Geun Hyes government introduced in 2013
legislation banning family-run chaebol businesses from
creating new cross shareholdings, which were blamed by the
Intarnational Monetary fund for contributing to the nations
1997-1999 financial crisis

The government is also offering tax breaks to encourage the
chaebol to unwind existing structures to form more
transparent holding companies

Could Jay Lee use this tax break as an opportunity to transfer
his fathers assets in exchange for a conversion of Samsung
Electronics into a holding company structure?
Catalyst: Govt Bans Cross Shareholdings
Age: 42
Son of Lee Kun-Hee
Graduated from Seoul National
University
Graduated from Keio University (Japan)
PhD from Hardvard University
Fluent in Korean, Japanese and English
Brokered the licensing deal with Android
that enabled Samsungs Mobile division
to grow from $35 billion to $135 billion
in 5 years
Main point of contact for key suppliers
and partners (Google, Apple, Sony, HP)

Catalyst: New Chairman Jay Y Lee
Announced May 8, 2014
Expected to IPO in Q4 2014
Established in 1985 as a data system and
technology consulting company
Provides IT and Networking consulting,
customized application integration, IT
infrastructure outsourcing

Catalyst: Samsung SDS IPO
Announced on May 15, 2014
Expected to happen Q1-2015
Everland is a holding company with influential ownership in
Samsung Life (the largest shareholder of Samsung Electronics)
This IPO marks the
unraveling of Samsungs
circular holding structure
Proceeds are expected
to cover estate taxes
for Jay Lee and family
Catalyst: Samsung Everland IPO
Lee Kun Hee began
succession planning
for Jay Lee
Preserving capital became the priority in 2008
as the Lee family planned for succession.

Lee Kun Hee suffers
severe stroke
Myth 5 Debunked: History of Share Buybacks
Chairman Lee Kun-Hee currently has 49.7%
voting control of Samsung Electronics
Presumed tax bill is $US 6 billion
IPO of SDS and Everland are expected to yield
$3 billion for the family
Jay Lee will need to repurchase up to $US 20
billion worth of shares within Samsung
Electronics to retain his fathers current voting
control

Catalyst: Inevitable Share Buyback
Management recognizes valuation disparity
Samsung is firing on all cylinders
Samsung Semiconductor is worth enterprise value
Market is ascribing no value to IT & Mobile, Display and
Home Appliances
#8 Global Brand Value in the world
#1 Brand awareness in Smartphones and TVs
13 Products with #1 market share
Improving corporate governance
Realigned interests with Lee family
Massive share buybacks on the horizon
Limited downside given $60.4 billion Non-core Assets

Conclusion

14 Rev: $232B 14 Rev: $11.9B

14 FCF: $24B 14 FCF: $3.1B

EV: $129B EV: $159B
Samsungs enterprise value is $30 billion
cheaper than Facebook yet 8x more profitable!!
Valuation Extremes

Whats in your portfolio?
By: Michael Wood
www.evansic.com

SamsungElectronics MikeWood 2014 Ac15b1f791 17fe11547c

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