Samsung in Thailand The Wireless Expansion Luis Hidalgo

Samsung in Thailand The Wireless Expansion Luis Hidalgo Matt Kostiak Kunihiko Mikuriya Anthony Park Chun Tao

Roadmap u Samsung Electronics Overview u Thailand Country Overview u Wireless Phone Market in Thailand u Company u NPV Valuation u Conclusion u. Q &A

Samsung Overview u Subsidiary of Samsung Group u Products: Home Electronics, semiconductors, telecom

Competitive Position I

Competitive Position II

Reforms with Samsung u Just-In-Time Inventory System u Saved overhead costs of $270 mn. u Reduced debt by 11 trillion Won

Reforms with Samsung u u u Just-In-Time Inventory System Saved overhead costs of $270 mn. Reduced debt by 11 trillion Won

Reforms with Samsung u Just-In-Time Inventory System u Saved overhead costs of $270 mn. u Reduced debt by 11 trillion Won

Strategic Expansion Plan Thailand: u Increase mobile phone market share from 12% to 15% u Invest: 500 million Bhat--Marketing u Invest: 1 billion Bhat—Manufacturing Southeast Asia u Simultaneous market expansions

Thailand overview MYANMAR China South Korea Japan Taiwan Hong Kong Thailand Vietnam Maldives MALAYSIA Sri Lanka Philippines Brunei Malaysia Singapore Indonesia East Timor

Thailand’s history u Founded u Unified in 1238 in 1350 – Only SE Asian country not colonized u Official religion is Buddhism (95%) u Absolute Monarchy until 1932

Thailand currently u Constitutional Monarchy (1932 -) – King Phumiphon in power since 1946 – Prime Minister Thaksin since 2001

Thailand more recently 62 million people u 13% below poverty line u Agricultural until 1980 s u Industry in 1980 s included tourism, textiles, clothes, and steel u Manufacturing now accounts for 80% of GDP, and includes electronics, electronics components, and automobiles u

Economic Development u Late 1950 s (Import Substitution) u Late 1960 s (Export Promotion) – Devaluations of 1981 and 1984 u 1985 -1995; 9% average annual growth u 1996; growth slowed with more cheap labor u 1997; (July) Fixed rate abandoned; Thailand enters recession u 1999 -2000; recovery due to strong exports

Exchange Rate Baht per $ Short-term interest - 1996 1997 1998 1999 2000

Foreign Direct Investment Millions of USD

Real GDP Growth 96 97 98 99 00 01 02

Consumer Price Index (Inflation) 98 99 00 01 02 03

Thailand’s Mobile Phone Market Industry Overview 28% Penetration Rate u

Thailand’s Mobile Phone Market Industry Overview-Service: u 28% Penetration Rate u Total user base: 15 million u Highly regulated-TOT and CAT u Dominated by local service providers (AIS, DTAC)

Thailand’s Mobile Phone Market Mobile Phone Makers: u Dominated by foreign companies u Top three firms(Nokia, Motorola, Samsung) make up 59% u Other smaller foreign firms make up 36%

Competition u Main competitors: Nokia, Motorola u Others: Sony-Ericsson, Sendo, TCL, Maxon, etc u Samsung: Technology leader

Relative Market Share Aggregate Market Share Comparative Market Share Among Main Competitors

Industry Trend u Recent slowdown in user-base growth.

Industry Trend Continued Shift in Consumer Demand u More focus on product features u Decreased price sensitivity u Expected growth of 7 million unit u Opportunities for product differentiation

Valuation of Samsung Electronics Co. Ltd. u WACC=35*. 056*(1 -. 1209)+. 65*. 2151=. 157 u Modigliani and Miller Propositions V = (((1 -b)(EBIT) * (1 -Taxes))/(WACC-g)) u – 10 year EBIT Growth Rate = 33. 2%>15. 7% u. SK real GDP growth =3. 26% u. Payout ratio = 11% u V = (((1 -. 11)(3, 487, 911) * (1 -. 1209))/(. 157. 0326))~ 22 Trillion Korean Won

Valuation of the Thailand Mobile Phone Project The Goldman Integrated Model u R = Rf + SYS + B(Risk premium) u Thailand’s beta =. 89 u U. S. historical risk premium = 7% u Sovereign yield spread =. 53% – U. S 10 -year Treasury note = 3. 93% – Thailand 10 - year bond = 3. 4% u SYS seems much too narrow – Increased usage of default swaps – Analysts commonly name Thailand as the country whose yield is way out of place

The Discount Rate u R=. 0393+(. 0393–. 034)+. 89(. 7) = 10. 7% u Reasons why outcome so low – The reflections through the bond spread – Default swaps manipulated the true bond yield u Very hard to quantify any adjustments u Based on our own assumptions, we doubled the discount rate to 21. 4%

NPV Valuation u u u Cashflow Growth Rate = 39% Expected year-end 2003 = Bt 5. 4 billion. We grew for the next 5 years Total Initial Investment ~ Bt 1. 62 billion Using 10. 7% – NPV ~ Bt 55 billion Using 21. 4 % – NPV ~ Bt 40 billion

Summary of Major Points u Only 28% penetration and Samsung has a favorable marketing position u Despite high discount rate, ROI given potential growth is extremely favorable u Projected NPV of 39 -54 billion baht

Conclusions u u u The Thai market poses a great investment opportunity for Samsung is in a great position for growth to capitalize on its current market share and both steal market share from other major players Nokia and Motorola as well as retain market share from other smaller firms looking to expand (Sony -Ericsson, TCL, etc… Samsung has more than enough financial flexibility at the moment to continue its vigorous investment plans and potentially even invest more in marketing or R&D without fear of too much added risk