OREANDA-NEWS. 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+'.

The affirmation reflects SEC's strong credit profile despite its weakening handset business, as well as Fitch's expectation that the company's financial position will remain intact over the next 12-18 months, backed by its market-leading positions and robust cash generation.

KEY RATING DRIVERS

Uncertainty Remains in Handsets: SEC's smartphone business will still face challenges although we expect its margins to stabilise in near term. Competitive advantages in hardware features will help SEC to sustain its profitability in 2015. The positive impact from the launch of new flagship models (Galaxy S6 and S6 Edge) will be fully reflected from 2Q2015 resulting in modest margin improvement. SEC is also streamlining the number of handset models to reduce overhead costs. SEC's handset margins fell substantially to single digits in 2H2014.

Semiconductor Supports Profitability: Fitch expects solid performance in the semiconductor business will continue to support SEC's overall profitability. Technological leadership in both memory and non-memory sectors will further solidify SEC's position as a global market leader. In addition, the cost reduction that came with the technology improvement will offset any effects of declining prices giving SEC a healthy profit for 2015. The non-memory business is also likely to turn around with increasing captive demand for application processors.

Improvement in Display Margin: The demand growth for panels, driven by customers' desire for larger TVs, should be sufficient to avoid excessive oversupply in the global panel industry, despite an aggressive capacity expansion in China. Improvement in SEC's display margin in 2015 will largely come from a more favourable product mix towards ultra high definition (UHD), Quantum Dot (QD) TV and flexible mobile organic light-emitting diode (OLED) displays.

Slim Consumer Electronics Margin: Weak global macro fundamentals will weigh down SEC's consumer electronics business in the near term. Improvement in TV margins will be limited due to already high LCD panel prices, despite an expected decline in panel prices. In addition, unfavourable currency movements will put further pressure on the home appliance business. We expect that SEC's consumer electronics EBIT margin may weaken slightly in 2015 (2014: 2.4%, 2013: 3.3%).

Strong Financial Flexibility, Liquidity: 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 will be largely in line with previous levels. A further increase in dividend is not likely to lead to an immediate rating action given the company's substantial cash reserve. SEC has a robust liquidity profile with its KRW58.5trn cash and cash equivalents (including short-term investments) fully covering its total debt of KRW11.3trn as of end-2014.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- SEC's revenue to increase by single digit in 2015 and 2016
- EBIT margin to slightly improve in 2015 from 12.1% in 2014 driven by solid semiconductor business and improvement in display margin
- Capex to marginally increase in 2015 and 2016 from 2014's KRW23.4trn
- SEC's cash generating ability remains robust with FCF margin at around 7-8%.

RATING SENSITIVITIES

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 (2014: 0.28x) 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.