Samsung's profit falls short on weak phone demand

Seoul

EVEN as most global smartphone makers felt the impact of slowing smartphone sales months ago, Samsung Electronics Co managed to weather the downturn. Not anymore.

The maker of Galaxy phones reported that operating income rose to 14.8 trillion won (S$18 billion) in the three months ended June, short of the 15.3 trillion won average of analysts' estimates, according to preliminary results released on Friday.

Smartphone shipments started to cool last year after a decade of robust growth, but Samsung had managed to deliver results exceeding projections, thanks to demand for memory. Now, weaker sales of its Galaxy S9 devices unveiled in the first three months of the year are starting to have an impact on the Suwon, South Korea-based company, even as it dominates in both DRAM and NAND markets. Sales of organic light-emitting diode screens to Apple Inc have also not lived up to expectations, while the growth of semiconductor prices has been slowing.

"While chip sales keep rising, smartphones aren't looking good," said Jung Sang Jin, a fund manager at Korea Investment Management. "While chips and phones cancel each other out in profit, the weakening won may work in Samsung's favour in the second half."

Sales for the second quarter fell to 58 trillion won, compared with the 60.8 trillion won average projection compiled by Bloomberg. Samsung won't provide net income or break down divisional performance until it releases final results later this month.

Shares fell as much as 2.3 per cent in Seoul to their lowest in five months. The stock is down 12 per cent this year after trading near record highs in 2017.

Samsung warned in April that its mobile business would see "stagnant sales of flagship models amid weak demand and an increase in marketing expenses" in the second quarter.

Samsung's market share is forecast to fall to 20.4 per cent in the second quarter from 21.4 per cent in the previous quarter, while Huawei Technologies Co, Oppo and Xiaomi Corp would all raise theirs, according to TrendForce.

Chinese companies have also been challenging Samsung in the LCD television market where the South Korean manufacturer leads.

Samsung is also being investigated in China over allegations of collusion in chip sales with Micron Technology Inc and SK Hynix Inc while facing regulatory pressure at home over corporate governance.

The semiconductor business forms the largest portion of Samsung's profit. Contract prices for 32-gigabyte DRAM server modules climbed 2.8 per cent in the June quarter from the March period, which saw them rise 5.6 per cent. Prices for 128 gigabit MLC NAND flash memory chips fell about 9 per cent, according to inSpectrum Tech Inc.

Protectionism may end up benefiting the South Korean chipmaker if the US puts tariffs on Chinese imports and China retaliates, Mr Jung at Korea Investment Management said. Samsung offers China an alternative to Micron in chips and US companies may look to Samsung for displays if Chinese firms like BOE Technology Group Co are hit, he said.

The won may also help Samsung to bounce back in the second half. The Korean currency has weakened sharply since early June after fears of a trade war reignited.

"The won depreciation is working in Samsung's favour," said Claire Kim, an analyst at Daishin Securities Co. "Samsung's semiconductors sales are still beating expectations and chips are making more money than smartphones are losing." BLOOMBERG