Morgan Stanley maintains a "hold" rating on Samsung Electronics: Performance has been confirmed to have bottomed out, and HBM4 will drive valuation recovery.

Morgan Stanley pointed out in its latest research report that Samsung Electronics' preliminary financial performance in the second quarter of 2025 (2Q25) is generally in line with expectations. Despite a one-time impact from unsold High Bandwidth Memory (HBM) inventory, overall profits have bottomed out, and risks have been released. Morgan Stanley maintains an "Overweight" rating on Samsung with a target price of 70,000 Korean won, which represents a 13% upside from the current stock price of 61,700 Korean won. One-time inventory write-downs drag down profits, but core performance stabilizes According to Morgan Stanley's estimates, Samsung Electronics set aside about 1.5 trillion Korean won (KRW) as impairment reserves in the second quarter due to unsold HBM products and foundry business inventory issues. This was mainly due to a tightening of exports of advanced AI chips, leading to a decrease in capacity utilization. Nevertheless, excluding one-time items, Samsung's profit performance has been close to market expectations, especially with improvement in the profitability of its memory business. The company stated in a press release that its revised HBM products are undergoing customer evaluation or already prepared for shipment, with expectations for improved performance in the second half of 2025 (2H25). Morgan Stanley believes that Samsung is gradually emerging from the bottom of the profit cycle and has strong potential for future performance recovery. HBM4 presents a growth opportunity, while DRAM performance lags behind Morgan Stanley points out that Samsung has significant upside potential in its HBM4 product line. Although its performance in the DRAM market has been relatively lackluster since the beginning of the year (YTD) with only a 16% increase, with the advancement of HBM4 technology and completion of customer validation, Samsung is expected to regain market share in the high-performance memory sector. Furthermore, Samsung's mobile business (MX) has shown some resilience. Despite a 5% decrease in shipments quarter-on-quarter, revenue still achieved low single-digit growth year-on-year, with quarterly revenue increasing by about 20%. Morgan Stanley expects the operating profit of this business segment to exceed 2.5 trillion Korean won this quarter. Divergence in display and home appliance business, OLED driven by foldable screens In the display business, the OLED business benefits from optimizations in foldable screen product offerings, with Morgan Stanley expecting operating profit to be around 0.8 trillion Korean won. In contrast, the home appliance and TV business has shown slight weakness due to intensified competition from Chinese manufacturers. Financial overview: Profits under pressure but attractive valuation According to Morgan Stanley data, Samsung's second-quarter revenue was 74 trillion Korean won, a 6.5% decrease quarter-on-quarter, slightly below Bloomberg's consensus expectation of 75.5 trillion Korean won. Operating profit was 46 trillion Korean won, down 55.9% year-on-year and 31.2% quarter-on-quarter, also lower than the market expectation of 61 trillion Korean won. From a valuation perspective, Samsung's current price-to-book ratio (P/B) is 1.0 times, with an expected P/B of 0.95 times in 2025, approaching historical peak levels. Morgan Stanley uses the Residual Income Model for valuation, assuming a cost of equity of 11.5% and a long-term growth rate of 3%. Risk alerts and upside potential Morgan Stanley points out that the main risks facing Samsung include: fluctuations in product and memory cycles, competition pressure from Apple and Chinese smartphone manufacturers, and a high concentration of profits in the semiconductor business. The upside potential comes from breakthroughs in new technologies like HBM4, as well as the continued increase in memory demand driven by AI and large-scale data centers. Conclusion: Bottoming out, waiting for rebound Overall, Morgan Stanley believes that Samsung Electronics' profit cycle has bottomed out. With the ramp-up of HBM4 products, solid growth in the mobile business, and structural improvements in the display business, the company is expected to reach a turning point in performance in the second half of 2025. The current valuation is attractive, and the "Overweight" rating is maintained unchanged.