Is Samsung's profit drop a blip or the end to stellar run?
Samsung Electronics’ first profit decline in seven quarters has left investors wondering if its underperformance is a blip or the start of a more meaningful reversal.
The company posted net profit of Won11.04tn ($9.9bn) in the second quarter, a dip from the Won11.05tn reported a year earlier and down 5.5 per cent from the previous quarter. Sales fell 4 per cent year-on-year to Won58.5tn.
The fall suggested to some that a stellar run of record profits for corporate Korea’s crown jewel was coming to an end, with clear implications for investors.
The company single-handedly comprises 19 per cent of the value of the country’s Kospi index, and in 2017 briefly eclipsed Apple as the world’s most profitable tech group. It also last year overtook Intel as the world’s biggest semiconductor company by sales.
At issue for Samsung is whether the group’s semiconductor division can continue to propel it to record profits, countering sliding income at its smartphone unit.
“Demand for memory chips next year will not likely be as strong as this year,” said Kim Young-woo at SK Securities. “There are concerns that Samsung’s earnings growth could be stalled in the coming years.”
The technology company struck an upbeat outlook for the months ahead, citing strength in its chip business even as its mobile division reported a 34 per cent drop in second-quarter operating profit.
The semiconductor business remained the bright spot: memory chips generated almost 80 per cent of Samsung’s operating profit on strong server demand. Operating profit at Samsung’s semiconductor division jumped 45 per cent to a record Won11.6tn in the second quarter from a year earlier.
However, although Samsung said the semiconductor outlook remained strong, there were signs that the two-year memory boom might be nearing an end.
Average prices of Nand flash memory chips, used for longer-term data storage, have almost halved from a peak in 2017 amid increased output, although prices of D-Ram chips, used for processing huge streams of data for computer servers, gaming PCs and cryptocurrency mining devices, have risen almost 20 per cent this year.
In addition to concern that the semiconductor industry is peaking, slowing smartphone sales also weigh on Samsung’s outlook. The world’s largest smartphone maker— it controls more than a fifth of the global market — predicts a “challenging” mobile market in the second half of the year as Chinese rivals such as Xiaomi and Huawei crank out cheap smartphones at ever higher standards of quality.
Samsung said it would rejuvenate smartphone sales with the launch of its latest flagship Galaxy Note 9 phone next week and by possibly launching a phone with a foldable screen next year.
However, analysts said the company would struggle to revive sales as the industry’s replacement cycle gets longer in a saturated market and as new features become less compelling to consumers.
The slowing smartphone market is also weighing on demand for core Samsung offerings such as the Nand chips and display panels.
The company forecast bigger earnings in the second half, citing continued strength in the memory market and growing demand for organic light-emitting diode panels, propelled in part by Apple’s expected new iPhone launch later this year.
“I think the profit decline was just temporary and the company will post record earnings again in the third quarter,” said Daniel Kim at Macquarie. “Although there is some controversy over the semiconductor cycle, I think the memory boom will continue next year thanks to strong demand from data centres.”
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But other analysts said it would be difficult for Samsung to sustain its earnings momentum in coming years, citing the trend for the semiconductor industry cycle to turn downward on excess capacity.
Samsung contends with specific pressures from the South Korean government to increase investment and create jobs at home, with its billionaire heir Lee Jae-yong awaiting a supreme court ruling on bribery charges.
“Samsung is at a critical point for its earnings,” said Mr Kim at SK Securities. “If Samsung, under government pressure, actually decides to build up more wafer capacity, this will inevitably lead to oversupply, damaging its cash cow: D-Ram chips.”
So far, Samsung has been reluctant to rapidly increase capacity to protect chip margins but Mr Lee is expected to meet Seoul’s finance minister early next week when he is likely to announce massive investment to meet government expectations.
The murky outlook has pushed Samsung shares about 10 per cent lower so far this year, making them one of the worst performers this year among global technology shares.
Analysts said Samsung needs new growth drivers to stay ahead as China invests heavily in the semiconductor industry to develop homegrown chip champions.
“Although Samsung and entrenched memory makers would eventually prevail, new Chinese entrants can potentially wreak havoc on memory industry’s profitability,” said Peter Yu at BNP Paribas in a recent report. “[This] has been one of the key long-term risk factors for memory makers.”
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