Samsung Electronics on course for record profit as memory chips rebound

Reuters

* Q3 operating profit seen up 24 pct to $9.3 bln

* Mobile business profit seen stagnating on drop in S4 sales

* Chip profits may have more than doubled to 2.4 trln won

By Miyoung Kim

SEOUL, Oct 4 (Reuters) - Samsung Electronics Co Ltd is on track to post a record $9.3 billion quarterlyprofit as a rebound in its semiconductor business shields theSouth Korean tech giant from a slower smartphone market.

The world's biggest memory chipmaker is likely to see itssemiconductor earnings charge to a three-year high - amuch-needed shot in the arm - just as sales of its flagshipGalaxy S4 smartphone begin to flag, analysts say.

The global chip market has rallied since late 2012 due to asupply crunch caused by years of cautious investment to supportprices, and conversion of factory capacity to produce moreprofitable chips used in smartphones and tablets.

The semiconductor market further tightened following a firein early September at a China plant owned by the world's No.2memory chipmaker SK Hynix.

"Stronger memory prices, made even better with the Wuxi DRAM(dynamic random access memory) fab fire, are driving Samsung'snext leg of profit growth," Bernstein analyst Mark Newman said.

Samsung, due to release its earnings guidance forJuly-September on Friday, likely increased its quarterlyoperating profit to 9.96 trillion won ($9.3 billion), accordingto a survey of 34 analysts by Thomson Reuters I/B/E/S.

The company's chip business will likely post a profit ofaround 2.4 trillion won in the three months ended September, thehighest since the third quarter of 2010, and accounting foraround one quarter of overall earnings.

Contract DRAM chip prices jumped 9 percent in the secondhalf of September from the first half of that month while spotprices soared 37 percent.

UBS estimates supply of DRAM chips by SK Hynix would shrinkby 14 percent in the fourth quarter, plunging the overall DRAMmarket into a supply deficit of some 7 percent. The South Koreanfirm aims to fully restore operations in November.

"It has become more of a seller's market as there are nowonly just a couple of major memory chip makers left," said ByunHan-joon, an analyst at KB Investment & Securities. "The upcyclecould last longer than many had initially thought."

Shares in Samsung advanced as much as 3.1 percent onWednesday. Financial markets in South Korea were closed onThursday due to a public holiday.

SLOWING GROWTH

Samsung's operating profit likely rose 5 percent from theprevious quarter and 24 percent from a year earlier, its slowestyear-on-year growth since the third quarter of 2011 when profitshrank 11 percent.

"Earnings at its handset business have peaked ... andSamsung will be pressed to discuss how it can stop profitsfalling sharply from here," said Byun at KB.

Samsung's mobile devices business has helped the companyreport a record profit every quarter since last year, except thefirst three months of 2013.

The division, which generates two-thirds of the company'stotal earnings, is stalling as sales of the Galaxy S4 slows andthe high-end market rapidly saturates, analysts say.

Barclays estimates S4 smartphone sales will have dropped to16 million sets in July-September from around 20 million in thetwo months following its late April debut. Sales may slipfurther to 13 million sets in the fourth quarter, according toBarclays.

Samsung is widely expected to have sold 86-88 millionsmartphones in the third quarter, up from 76 million in thesecond quarter, as the company increased shipments of cheapermodels to emerging markets.

Profits at its mobile division are seen at 6.4 trillion won,better than the second quarter's 6.3 trillion won but down froma record 6.5 trillion won in the first three months.

Further capping Samsung's earnings upside, televisions, homeappliances and TV screen displays are struggling with weaksales, as plunging emerging market currencies increase the costof raw materials, which are based in the U.S. dollar.

Intense price competition in TVs has also put its marginsunder pressure.

Samsung's smaller rivals are also reeling.

Japan's Toshiba Corp said this week it would slash50 percent of staff in its loss-making TV unit and ceaseproduction at two of its three overseas factories before the endof this fiscal year, while German high-end TV maker Loewe AG filed for insolvency on Tuesday.

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