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					Ticker:   SamsungElec
          (KSE: 005930.KS)
Sector:   Information Technology
Industry: Electronic Compo-

                                       Recommendation: BUY
Recommendation: BUY
                                       Samsung Electronics is the competitive electronic company.
                                       Although it grew up coping Sony’s strategy in developing
Pricing                                country South-Korea since 1960s, fast and firm decision making,
Closing Price   ₩ 745,000 (10/23/09)   taking risk with sharp analyzing, and continuous effort to
52-wk High      ₩ 829,000 (09/22/09)   change itself made Samsung overpass Sony and other Japanese
52-wk Low       ₩ 403,000 (10/27/08)   electronics companies in early 2000. Now it became a big guy
                                       in world electronic market.

                                       Although its net income was not good because of competition
Market Data
                                       and financial crisis, it achieved amazing financial performance
Market Cap      ₩ 109,738B
                                       continuously and reached the most top price in recent month.
Total assets    ₩ 75,994B
Trading vol       43,256B
                                       My recommendation of Samsung is ‘BUY’ and the reasons are:
                                       1)      Samsung achieved its leading position through
Valuation                              continuous effort and have lots of No 1 market share in the
EPS             ₩ 46,588               world market
PER             22.94                  2)      Its system such as design, R&D, and convenience appeal
PEG             N/A                    many customers in the world
Div Yield       0.74%                  3)      It achieved its global network and it gives Samsung
                                       benefit in much area such as low cost, design, R&D….
                                       4)      Recently it finished severe competition, called Chicken
Profitability & Effectiveness (ttm)    War, and became winner. Also, D-ram price is strong.
ROA              8.0%
ROE             10.1%
                                       5)      Continuously, it develops high-tech products and its
Profit Margin    N/A                   business divisions got competitive advantage in the market.
Oper Margin      5.7 %                 6)       Although it was hard to get real intrinsic value because
Gross Margin 26.00%                    of some noisy factors such as low net income in 2008,
                                       Samsung’s value is still undervalued considering its future.

Eun Sang (Ian) Yoo

         World leading electronic company in Korea
          - Net profit of Samsung was greater than sum net profit of top 10 Japanese
            electronics companies such as Sony and Hitachi in 20041
          - Top net profit IT company in the world in 2005 over passing MS and Intel2
          - World 19th Brand Rank in 20093

            -   No. 1 in TV market for three years
            -   No. 1 market share in LCD monitor
            -   No. 1 memory and flash ram company
            -   No. 1 most profitable company in TV panel for 7 years
            -   No. 2 in the global laser printer and multifunction printer market
            -   No. 2 cellular phone company4

         Grown as competitive company by fast decision making and aggressive and focused
          investment by ownership management

         Continuous Growing: showed good result in recent 2009 3Q financial performance.

Samsung Electronics Co., Ltd. is a Korea-based company. The company was founded in 1938
and is headquartered in Seoul, South Korea.5 It manufactures a wide range of consumer and
industrial electronic equipment and products.

The Company operates its business through four business divisions: digital media division,
information and communication division, semiconductor division and liquid crystal display
(LCD) division. Its digital media division provides televisions (TVs), videocassette recorders
(VCRs), camcorders, digital versatile disc players, digital audio players, digital set top boxes
(STBs), home theaters, audios and home appliances such as air conditioners, refrigerators,
washing machines, microwave ovens and others. Its information and communication division
provides computers, moving picture experts group audio layer 3 (MP3) players, mobile phones
and others. Its semiconductor division offers memory chips, hard disc drives (HDDs) and others.
Its LCD division offers thin film transistor (TFT) LCD modules and others.6

  Samsung A/R 2008

Korean economy ranks as No.12 in the world but it had hard time in modern history. Korea
experienced Japanese occupation for 36 years and met Korean War in 1950 after independence.
Nothing has left and Korea didn’t have any kind of rich natural resource. Only Human Resource
was in hand.

Government played important role in economic growing. Although it was dictatorship by
military coup, government gained some money after secret dealing with Japan about
compensation of occupation and built highway with that money to stimulate economy like New
Deal inUSA after Korean War. Korea joined Vietnam War and used money from USA for
stimulating economy. Korea exported Nurses and mine worker to German also.

 Korea government’s economic strategy was building selected and limited companies, so called
Chaebol (alternatively Jaebol, Jaebeol) such as Samsung, Hyundai, LG and Daewoo big to
achieve fast economic growing after Korean War. It is called growing first and distributing
wealth later strategy. Although it still has distribution problem, focusing strategy was effective.
Samsung was able to grow quickly as top leading company by the protecting of Korean
government. Based on market protection, major companies like Samsung were able to raise
money in Korea market and worked as exporting weapons in Korea. When Korea opened the
market, major companies quickly adopted competition and continuously changed companies
system and management to get more competition.

Despite its fast growth, companies had some problems. For example, they tried to build their
body only relying on high leverage. Companies try to be a big guy and compete with each other
in almost all business area. From the manufacturing to service and financing, major companies
tried to competing each other. When Korea met financial crisis in 1997, some company like
DAWOO was destroyed and many other companies had to change its system and strategy
quickly to survive.

Samsung was one of those. However, it was very good at decision making and selected
investment. Its rapid decision making and focusing made it possible to be a competitive company.
In 1974, Samsung analyze its own business and future growing opportunities and it sought
entering memory market. At those time, Korean and Japanese companies prospected Samsung
would be failed if it entered the market. However, through the analyzing and prospection,
Samsung made a plan and made a success after entering the memory market. It became future
cash cow and back bone to build up present Samsung. Also, it has continuously innovated itself
by filling the threaten awareness to the organization. That movement brought the growth and
efficiency to Samsung and changed the company from the outstanding company of developing
country to world competitive company.

For better performance and synergy effect, previous six division-based system was separated into
a Digital Media & Communications (DMC) business unit and a Device Solution (DS) business
Today, its global presence includes a total of 111 subsidiaries in the form of production
subsidiaries, sales subsidiaries, distribution subsidiaries, research laboratories and eight overseas
business divisions representing North America, Europe, China, Southeast Asia, Southwest Asia,
Central and South America, CIS, the Middle East and Africa.
Two pictures below are showing the organizational structures of Samsung Elect.


                                          <Simple figure>


                                          <Detail figure>

    2008 A/R p.13

Employment and Globalization

Total employee number is 161,700 in 2008 and 48% is consisted by international employee.
Its portion of international employee has been increasing every year and company is getting
globalized more. The figures below are showing portion change of international employee and
world organization of Samsung.

                                 < Global Workforce by Year >

                                      <Global Network>9




Four divisions and its portion are as below:

Division                  Business10
Digital Media             Televisions (TVs), videocassette recorders (VCRs), camcorders, digital versatile
                          disc players, digital audio players, digital set top boxes (STBs), home theaters,
                          Home appliances such as air conditioners, refrigerators, washing machines,
                          microwave ovens and others
Information and           computers, moving picture experts group audio layer 3 (MP3) players, mobile
communication             phones and others
Semiconductor             memory chips, hard disc drives (HDDs) and others
LCD                       thin film transistor (TFT) LCD modules and others

Financial Performance by Divisions

Although 2008 was hard time, Samsung gained good
performance. 2009 3rd Quarter was also increased. I
will cover recent quarter result later in this report.

 As seen the chart below, most of the divisions were
shown incensement of revenue.

Although some operating profit looked decreased in
2008, seeing chart below, we can recognize that
operation profit ration and net profit ratio have been
increased in 2009 again.
                                                                      < Blue bar is revenue, light brown
                                                                      line is operation profit, and dark
                                                                      brown line is net profit.>


One thing to mention is semiconductor. Performance of Semiconductor looks not good. But,
during this period, Samsung was competing with other competitors. Taiwan competitors made a
union to fight against Samsung and they played price war. That was called “Chicken Game” and
it was resulted as Samsung’s complete Win in 2009.11 Although many other competitors had
financial loss much, Samsung gained good financial performance in 2009 and gained market
leading position.

Other business overview and 2008 highlights of Samsung Electronics are described in the chart


Business Segment Highlights in 2008

    I.     DMC (Digital Media & Communications)
Visual Displays, Printer, PC, Mobile, Network, Digital Appliances

    1. Digital Media

        Visual Displays
         - Sustained No.1 position with the differentiated design and functions such as
            internet and contents library
         - 21.9% 2008 Global TV market share
         - Lunched LED TV, replacing the conventional cold-cathode fluorescent lamp
            (CCFL) backlighting with eco-friendly LED backlight, in 2009

               - Sustained No.1 position at LCD monitor market for 10 quarters
               - Introduced Blue-Ray player first in the world and provide most slim player in the
             - continued to innovate in the video space with an ultra-compact full-HD
                 camcorder featuring a built-in 64GB solid-state drive, hybrid still/video cameras,
                 and a compact digital camera with a 24 mm wide-angle lens and 10x optical
            Printer
             - Stepped up as a top brand in the shortest time
                 with convenience and fulfilling customer needs
            PC
             - Samsung’s customized notebook computer got
                 popular in emerging market and achieved world
                 top 10 company in PC market and planned to
                 get 3rd mini note book company in recent future
                 with innovated design, convenience and long
                   last battery.

       2. Mobile Communications

            Mobile
             - World market share was No. 2 as 16.7% in 2008
               and increasing
             - Continuous providing differentiated cell phone and premium phone
             - Set the strategy to gain market share more to compete with Nokia and gain
               operating margin together in 2009.12
             - Launching various MP3 also.
             - Planning to achieve premium and regular products to fulfill different market
               segment in emerging market also.

            Network
             - Mobile Wi-Max products to 19 countries and get leading position
             - 2008, introduced mobile Wi-max revolution which increased the speed 4 times

       3. Digital Appliances
             - Get premium brand image with design, technology and convenience
             - Gained top growth rate in the industry although financial crisis in 2008
       4. Design
             - Samsung is focusing on design highly as a strategy. It runs design management
                  center and six global design research centers to provided good design to
       5. R&D
             - Spending 9.5% revenue as R&D to gain competitive position


       II.    DS (Device Solution)
              Memory, System LSI, Storage, LCD

           Memory
            - No. 1 in the world since 1993
            - 30.1% market share in 2008
            - Gained low cost and high technology and is developing innovative products
           System LSI
            - Covering chips such as display and MP3 players
            - Had a strategy to broad its business area over memory area
           HDD
            - Covering Hard disk drive
       2. LCD
            - World top technology and production capacity
            - Cost competence
            - 25.7% world market share and No.1 in the world for seven years.

       III.   Other factors
              - Samsung is focusing eco-friendly product and social contribution.

Technology was driving force of the recent stock price mount in the market and portfolio
community decided to raise its share from 5 to 7 % according to this.

In October report, IFM Economy community announced that economy will recover slowly.

According to Korean news, EToday, Korean electronic industry companies prospection for 4th
quarter would be decreased compared to 3rd QT (Samsung showed increased performance
continuously from 1 to 3rd quarters) because of back stock inventory adjustment. Although it
would not be strong as much as last year, seasonal trend would be appealing this year also.
However, Appliance such as TV and cellular phone’s revenue would be increased by entering
hot end year seasonal sales. Semi-conductor is expected to continue good performance. Korean
semiconductor companies such as Samsung and Hynix won in the fierce survival game called
Chicken Game and D-ram price has been strong. 13

In conclusion, despite of some decreasing of back stock adjustment, Samsung is expected to
continue good performance in TV, cellular phone and semi conductor.


Competition and Future Prospect
        Samsung is expected to overpass Intel in year.

        Reasons that 2010 is positive for Samsung
         - Samsung is expected to get new product cycle. It is already achieved market
            leading strategy and increasing of profits. Its subsidiaries’ values are increasing
         - Its global capacity has been strengthening. In memory part, it is overpassing
            Taiwan and Japanese competitors. It introduced LED TV and get leading position
            again with that. Also, in cellular phone, it is minimizing the gap with No.1 Nokia.
         - Although it had financial crisis, its recovering speed is so fast.

As see the chart above, Samsung is gaining relatively good position in IT and memory

Samsung is obtained obvious position in world D-ram competition.

Samsung’s stock price is top compared to other competitors in LCD and Cellular phone market.

                                          Samsung’s operating profit is expected to growth
                                          more in the future also as the chart left.

Currency is the risk. Korean currency is expected to rise a bit. Samsung’s revenue is making a lot
of portion around 85% from other country. Although it made global network such as
manufacturing and selling, it would get influenced by currency fluctuation.

Another risk is Korean stock market’s boom. Although foreign countries’ research agencies keep
saying that Korea and other Asian market’s recovery speed is so fast. Now, it seems that whole
stock price is getting adjusted for a while. However, it could be good opportunity to buy
Samsung stock in cheaper price.

Financial Statement Analysis in 2008

Samsung did a good job although it was a financial crisis in 2008. Total asset has been increased
around 12% compared to 2007. Debt to equity ratio is around 4:6 and it seems it doesn’t have
much debt but current liability ratio to total debt was around 76%.

Although sales increased around 23%, net income has been decreased by around 25% in 2008.
But in 2009, net income has shown increased.

Cash flow looks relatively similar. Samsung used less money but seems spent money for

In short, it seems Samsung did a good job in 2008 although it’s bad economic environment.

More detail financial statement is attached in appendix.

Financial Trend Analysis

This chart was from Korean security information service and I translated some of words.14 As
you see, every year, revenue has been increasing but profit ratios are relatively getting down.

However, you can see the ratios are increasing again after passing hard time seeing quarter view.
The major reason of recent year’s net income decreasing seems because of recent Chicken War
in semiconductor market and also increasing market share in cellular phone to compete with no 1

        Total Asset     Total Debt    Debt Ratio
As see year and quarter chart, Samsung’s asset is increasing every year and debt ratio is

In short, although net income seems decreased by some competition, it is increasing again.
Revenue and Asset is increasing every year while its debt is decreasing. Financial trend looks
very good.

Ratio Analysis15


Profitability and margin is relatively higher than industry. The data was based on 2009 January
and Samsung increased its financial performance throughout 2009.

Asset turnover is good but current and quick ratio looks bad. It relies on current debt much.

Total revenue and gross profit is high.

Recent Quarter’s Financial Performance

Although Samsung announced its 3rd result in the pubic media companies, officially it’s publish
of official result was on due around 10/30/2009. I was able to get some news media data of
                                                           According to Hankook news paper on
                                                           Oct 2216, Samsung announced
                                                           unprecedented financial performance
                                                           in 3rd quarter in its all business area.

                                                                 The performance was resulted by
                                                                 incensement of customer’s demanding
                                                                 which need Samsung’s part and a part
                                                                 of currency affection. But it was
                                                                 mainly by the Samsung’s market
                                                                 share and leading position.



For last 10 years, company stock price has been increasing. As we looked around through this
report, it was because of its competitive advantage by changing itself as global leading company.

This is three months charts. After it reached the peak, the most highest price, its stock price has
been decreased a bit to be adjusted and it is again seemed increased by the result of 3rd wonderful
financial results.

DCF Valuation
Although I got intrinsic value based on my calculation, it had many problems later on.
First, in 2008, Samsung’s net profit was unordinarily low because of competition and financial
crisis. But seeing trend and performance showing in 2009 it was resonable to consider differently.

Secone, I found some numbers and Free Cash Flow was a lot differrent. Probably I thought that
my caculation such as capital expenditure was wrong. I attached my detail writing that I first
wrote as appendix. Also, although I thought the number was similar, it was like 10% of what I
thought. I tried to corrected some of problems

So, this time, I tried to use professoional organization’s number to get Free cash flow. 17

                                                          < Billion Won>

This chart is shown Samsung’s free cash flow and its expectation based on professional analyst.
When I calculated first time, 2008 number was around half of the number shown in the chart.

Seeing the chart, I assumed that real free cash flow would be around ₩5,000,000 million.
Actually average between 2007 and 2009 would be around 5.5 billion won but I assumed slightly
higher number than 2007.

Applying 10% discount rate, 9% first growth rate and 3% 2nd growth rate. The reasons that I had
9% of grwth rate is that I thought 9% is kind of average growth rate representing its possibilities
through the experience of first trial and 10% discount rate is also from first trial. Detail
discussion is at the appendix.

I got ₩812,747.31 as an intrinsic value. Current market price is around ₩ 753,000 and it is


Two-Stage Discounted Free Cash Flow Valuation Model ( aka Warren Buffett Way Owners' Earnings Discount Model)
assuming discount rate (k) of                                10.00%

Free Cash Flow ("owner earnings") in 2008:
Net Income                                       $   7,992,981.00
Average Increase in Working Capital (subtract)   $ (4,656,448.00)
Depreciation & Amortization (add)                $ 10,095,191.00
Average Capital Expenditures (subtract)          $ (12,915,837.42)
Free Cash Flow (Owner Earnings)                  $   5,000,000.00 <-- becaue of some problem, I used professonal analysis describing in the report

FIRST STAGE                                                                                                                Year:
                                                                2009          2010          2011          2012          2013          2014          2015
Prior Year Free Cash Flow                        $       5,000,000.0 $ 5,450,000.0 $ 5,940,500.0 $ 6,475,145.0 $ 7,057,908.1 $ 7,693,119.8 $ 8,385,500.6
First Stage Growth Rate (add)                                    9%              9%              9%              9%               9%                 9%   9%
Free Cash Flow                                   $       5,450,000.0 $ 5,940,500.0 $ 6,475,145.0 $ 7,057,908.1 $ 7,693,119.8 $ 8,385,500.6 $ 9,140,195.6
Discounted Value per annum                              $5,450,000.0  $5,400,454.5  $5,351,359.5  $5,302,710.8  $5,254,504.3  $5,206,736.1  $5,159,402.1

Sum of present value of owner earnings                 $52,323,653.6

Residual Value
Free Cash Flow in year 10                        $   11,836,818.4
Second Stage Growth Rate (g) (add)                          3.00%
Free Cash Flow in year 11                        $   12,191,922.9
Capitalization rate (k-g)                                   7.00%
Value at end of year 10                          $ 174,170,327.49

Present Value of Residual                             $67,150,200.98
Intrinsic Value of Company                           $119,473,854.54

Shares outstanding assuming dilution                            147 <- million
Intrinsic Value per share                               $812,747.31

                 Final Recommendation: BUY

                 As seen so far, Samsung has achieved leading position in the world electronic and IT industry
                 because of its strategy, focused investment, and continuous change itself. The prospection of
                 Samsung is bright. Lots of other financial investment companies are expecting intrinsic value as
                 one million won and it was around 25% higher than current market price. Although the difficulty
                 of calculation because of recent year’s noise factors, it has bright opportunities. Buy would be
                 reasonable choice.

Samsung Annual Report 08
Samsung Sustain Report 09

2008 Balance Sheet

I/S 2008

Cash Flow in 2008

DCF Valuation (Original mistake)

The intrinsic value of Samsung Elect.
I calculated the discount rate taking the risk free rate, beta, and the market risk premium. I used
an average beta of 1.15, a risk-free rate of 0.03% % corresponding to the 3-month Treasury bill
yeild and a market return of 11%. Using these numbers, the discount rate works out to be:

                                 K= 0.03+1.15*(11-0.03) = 12.6455%

After analyzing company, I thought that company would grow as this chart below
             2009            2010            2011             2012            2013
             14%             12%             12%              10%             10%

          2014            2015            2016            2017             2018

            8%              6%               5%              5%              5%

The reason that I picked the growth rate like this was based on my research. Samsung achieved
great growth in 2009 already and had much possibility to growth for several years as same
pattern. I rather calculate it as conservative rate in next 5 more years.

 Free Cash Flow ("owner earnings") in 2008:
 Net Income                                        $ 7,992,981.00
 Average Increase in Working Capital (subtract)    $ (4,656,448.00)
 Depreciation & Amortization (add)                 $ 10,095,191.00
 Average Capital Expenditures (subtract)           $ (12,915,837.42)
 Free Cash Flow (Owner Earnings)                   $    515,886.58

This was my calculation of 2008. Net income of 2008 was worst because of the financial crisis
and chicken war. So I replaced it as 2007 one to make it reasonable because Samsung finished
Chicken war and getting better net income already in this year.

Capital Expenditure was hard part. It was very hard to find right figure. So, I used 04 to 07 figure
from annual report 07 and changed it based on current one with current A/R 08.

Sensitivity analysis was like below.
Discount Rate                                     Growth Rate of first 10 years
                          8%                9%            10%                11%        12%
           8%        ₩110,196          ₩119,161      ₩128,840           ₩139,284    ₩150,551
           9%         ₩91,316           ₩98,498      ₩106,243           ₩114,592    ₩123,587
          10%         ₩77,928           ₩83,857       ₩90,243            ₩97,118    ₩104,517
          11%         ₩67,964           ₩72,968       ₩78,350            ₩84,139     ₩90,362
          12%         ₩60,274           ₩64,570       ₩69,186            ₩74,144     ₩79,469

The current market price is ₩ 753,000
Intrinsic Value was overvalued as ₩ 61,628.05 with discount rate of 12.64%

However, I thought this was not representing fair value well. First, I used 3 month t-bill from
USA and it is representing very conservative fear about investing. However, Samsung has good
credit ranking in Korea and has a lot of possibilities. So, considering its competitive aspects, I
changed discount rate as 10% and applied again and the intrinsic value was ₩ 84,900.59.


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