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June 25 (The following statement was released by the rating agency)
Fitch Ratings has affirmed South Korea-based Samsung Electronics Co., Ltd.'s (SEC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A+' with Stable Outlook. The agency has also affirmed SEC's senior unsecured rating at 'A+'.
KEY RATING DRIVERS
Solid Credit Profile: The affirmation of the ratings reflects SEC's record operating results in 2013 as well as Fitch's expectation that the company's credit profile will remain intact over the next 12-18 months, backed by its market-leading positions in its major businesses and its diversified product profile. Fitch believes that the company will continue to generate positive free cash flow over the medium term as its cash flow from operations remains strong while capex is expected to be in line with previous levels.
Handset Margin to Decline: Fitch expects SEC's handset margins to weaken in 2014 as competition intensifies. Narrowing technology differentiation will lead to heightened price competition. Lower contribution from premium smartphones amid increasingly saturated markets in developed economies, especially in the high-end segment, will result in a structural margin decline. Nevertheless, we expect the company to remain the global smartphone market leader in terms of unit shipments, given its strong brand and broad product range.
DRAM Supports Profitability: Fitch believes the semiconductor business will continue to post solid results. Overall the dynamic random access memory (DRAM) market will remain stable in 2014 given conservative capacity expansion, improved supply-demand conditions as a result of industry consolidation and the diversification into specialty DRAM from commodity. However, prices peaked in early 2014 and we expect further declines as growth slows in the smartphone and tablet markets.
Handset Slowdown Affects Display: The slower handset growth is likely to put pressure on related component businesses, such as small and mid-size organic light-emitting diode (OLED) displays. However, SEC's market leadership in the display segment will remain intact due to its technology leadership, captive demand and cost competitiveness. Solid performance in the high value-added displays, mainly ultrahigh definition (UHD) panels, could provide upside, which would mitigate the slowing growth in the OLED business in the medium term.
Increasing Shareholder Returns Likely: A possible dividend increase or share buyback will not lead to immediate rating action given the company's substantial cash reserve and strong cash generation capability. SEC is likely to raise shareholder returns, which the family of Chairman Lee Kun-hee may use to pay for any costs incurred in the restructuring process to pave the way for Mr Lee's heirs to take over the group. However, management has yet to confirm any succession plans, which gained urgency after Mr Lee suffered a heart attack in May 2014.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Sharp deterioration in the economy or a decline in the company's competitiveness leading to a significant loss in its market share of major business segments, or sharply lower profitability
- Negative FCF resulting in funds flow from operation (FFO)-adjusted leverage above 1x (2013: 0.24x) on a sustained basis. However, Fitch does not foresee such a development over the next 12-18 months.
Positive: Fitch does not foresee a positive rating action over the medium term due to SEC's exposure to cyclical businesses and investment-intensive markets.