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Samsung Elec profit seen bottoming in Q3 ahead of slow recovery

[SEOUL] Samsung Electronics Co Ltd's profit is seen weakening further in the third-quarter, underscoring the downturn in its market-leading smartphone business and piling pressure on the firm to deliver a revamped product lineup.

Analysts forecast the world's largest smartphone maker, which is due to give its July-September earnings guidance on or around Oct 7, to show its worst operating profit in nearly three years, with a slow recovery seen starting in the fourth quarter.

And for the first time in more than three years, Samsung's semiconductor business could bring in more profits in the quarter than its erstwhile cash-cow handset business, some analysts say. "What's expected now is for the company to hit bottom and gradually recover, but we have now seen smartphone-related earnings peak," Korea Investment Trust Management fund manager Baik Jae-yer said.

Analysts and investors say Samsung's days of massive smartphone-driven earnings are over, as Apple Inc grabs the lion's share of profits at the high end of the market and Chinese makers of cheap and feature-rich smartphones, like Lenovo Group Ltd and Xiaomi Inc, erode margins at the low end.

Samsung, however, is not on the same slide to irrelevance as Nokia Oyj, the Finnish company that sold its once-dominant phone business to Microsoft in April, the analysts said, as it has a track record for quickly correcting its mistakes. "We used to look at the smartphone market from an Apple vs. Samsung framework, but it turns out that it was really Apple vs. Android," IBK Securities analyst Lee Seung-woo said, referring to Google Inc's mobile operating system which powers most smartphones including Samsung's. "Samsung used to take all the profits from Android because its rivals were doing such a poor job. Now there's very little difference between Samsung and its Android rivals," Lee said.

Samsung President D.J. Lee last week forecast a quick recovery for the mobile division, calling recent smartphone woes "temporary".

The new Galaxy Note 4 flagship smartphone has been well-received by critics, and Lee said pre-orders were stronger than for its predecessor.

Even so, Samsung shares touched a low of 1.141 million won last week, their worst since July 25, 2012. About half of 42 analysts surveyed by Thomson Reuters I/B/E/S have cut their third-quarter earnings forecasts since Sept 16, by an average of 28 per cent.

The mean forecast of 42 analysts tips Samsung's third-quarter operating profit to slip 45 per cent to 5.6 trillion won (US$5.28 billion) from a record 10.2 trillion won a year earlier, which would be the weakest since the fourth quarter of 2011.

Analysts said a lack of major smartphone product launches and higher marketing costs for clearing unsold inventory are likely hurt the bottom line. A company spokeswoman declined to comment on inventory issues.

At the same time, Apple's new, out-sized iPhone 6 Plus is expected to cut into Samsung's phablet turf, potentially hurting Galaxy Note 4 sales.

In the mid-to-low tier markets, any market share gains for Samsung will come at the expense of margins, Nomura said in a client note last week. "We expect this to be the beginning of a game of chicken in some respects against Chinese players and other competitors," it said.

Samsung's chip business is soothing some of its pain - ironically due in part to demand from Apple's latest iPhone launch.

Research firm DRAMeXchange expects Apple's consumption of mobile DRAM chips to grow to 25 per cent of global supply next year from 16.5 per cent currently, supporting prices for chipmakers. - Reuters