Samsung's Debt Ratings - No Upgrade Due to Handset Profit Margin Worries

Published on: 17th Jun 2013

Fitch Ratings has affirmed Samsung Electronics' Long-Term Foreign- and Local-Currency debt ratings at 'A+' with Stable Outlook. The agency has also affirmed Samsung Electronics' senior unsecured rating at 'A+'.

The affirmation reflects Fitch's expectation that SEC will continue to perform strongly in the short to medium term, continuing from its record operating result in 2012, driven by market-leading positions in its major businesses. Fitch believes that despite large capital investment of over KRW20trn the company will generate positive free cash flow (FCF) in 2013 and 2014.

Upgrade unlikely

Fitch is not likely to upgrade Samsung Electronics' ratings in the medium term despite strong performance. ­Fitch believes that the company's significant exposure to cyclical businesses and reliance on relatively fickle, fast-moving, investment-intensive markets is inconsistent with a 'AA' category rating. In particular, the company's cash flow generation is exposed to the handset market which has proved to be extremely volatile, even for major producers, over the last five years.

Handset margins to decline

Fitch forecasts Samsung Electronics' mobile handset segmental margin to weaken from 2014 as competition intensifies, especially in the mid-to-low-end segment. As the smartphone market matures, the technological gap between SEC and second-tier makers will narrow, leading to more intense price competition. In addition, should Apple Inc. launch more basic iPhones, Samsung Electronics' market position in emerging markets may erode.

Nevertheless, the company should be able to retain its leading market share, over 30%, in the smartphone segment in the next two years. The mobile handset division will remain the largest cash generator, accounting for about 70% of total EBIT, and will continue to support Samsung Electronics' double-digit revenue growth in 2013.

Stable components operations: Fitch believes that the company's semiconductor business will continue to benefit from more stable chip prices in 2013 due to limited supply growth, as well as from its large exposure to mobile/non-memory segments. Fitch also expects strong performance in mobile panels, mainly organic-light-emitting-diodes (OLED), which should mitigate muted growth in large size panels, due to weak demand for TVs.