Rating Action: Moody's upgrades Samsung Electronics to Aa2; outlook stableGlobal Credit Research - 01 Sep 2022Hong Kong, September 01, 2022 -- Moody's Investors Service has upgraded Samsung Electronics Co., Ltd.'s (SEC) senior unsecured debt rating to Aa2 from Aa3.The rating outlook is stable."The upgrade reflects our expectation that SEC will over the foreseeable future maintain solid earnings and strong business and financial profile through business cycles, underpinned by its brand and technological leadership, the secular long-term growth prospects of its key businesses and its exceptionally healthy balance sheet," says Gloria Tsuen, a Moody's Vice President and Senior Credit Officer.RATINGS RATIONALESEC's Aa2 rating reflects the company's strong technological and commercial advantage, which underpins its leading market positions in multiple segments, including memory chips, display panels, mobile and consumer electronics. In particular, its distinct leadership in the memory chip business, which is the key earnings and cash flow driver and benefits from a positive long-term demand growth prospect, provides key rating support.The rating also considers SEC's proven ability to generate positive free cash flow (FCF) through industry cycles, and its exceptionally strong financial buffers, reflected in its large net cash position of KRW108 trillion as of the end of June 2022. These strengths offset the cyclicality and high capital intensity of SEC's businesses, and its moderate profitability.After a strong H1 2022 performance, the global memory chip industry will likely undergo a significant cyclical downturn over the next several quarters as consumer demand for PC and smartphone products softens. This will result in SEC's adjusted operating income declining to KRW45 trillion-KRW50 trillion annually in 2022-23 from KRW52 trillion in 2021. Still, SEC will remain solidly profitable during the period, with an adjusted operating margin of around 16%.SEC will resume profit growth thereafter, because of spending cuts on capacity expansion and continued structural growth in demand for memory, driven by increases in data usage and storage.Moody's also expects SEC to generate sizeable FCF in 2023-24 after small negative FCF in 2021-22, as its expected annual cash flow from operations of KRW70 trillion-KRW72 trillion will be more than enough to cover its Moody's-projected capital spending and dividends of KRW50 trillion-KRW52 trillion and KRW10 trillion a year, respectively. This factor and the company's already-high cash holdings will provide it significant financial flexibility.ESG considerations have a neutral-to-low impact on SEC's rating, reflecting the company's moderately negatively environmental risk and neutral-to-low social and governance risks. In particular, the rating considers SEC's conservative financial strategy, as evidenced by its consistently low leverage and large reported net cash position through business cycles.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe stable rating outlook reflects Moody's expectation that the company will maintain its technological and commercial leadership in its key segments, positive FCF and financial prudence over the next 12-18 months.Moody's could upgrade SEC's rating over time if (1) the company enhances its business stability by strengthening its leadership positions in its key businesses and significantly diversifying its business profile and earnings base; (2) it maintains its profitability and strong financial profile; and (3) Korea's sovereign rating is upgraded.However, Moody's could downgrade SEC's rating if its (1) adjusted operating margin declines below 13%-14%; (2) ability to generate FCF weakens; or (3) strong net cash position deteriorates significantly. A weakening in the company's market share or technology leadership, as well as its adoption of a more aggressive financial or shareholder return policy, could lead to such declines.The principal methodology used in this rating was Semiconductors published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74959. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Headquartered in Suwon, Korea, Samsung Electronics Co., Ltd. is a global leader in the memory semiconductor, mobile handset and flat-panel TV markets. Its device solutions business -- including semiconductors and display panels -- and its mobile and networks business generated 73% and 23% of reported operating profit, respectively, in the first half of 2022. REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. Gloria Tsuen, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong, China (Hong Kong S.A.R.) 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