Samsung Electronics says Q4 profits take a drubbing on weak chip demand

Seoul

SAMSUNG ELECTRONICS surprised the market on Tuesday with an estimated 29 per cent drop in quarterly profit, blaming weak chip demand in a rare commentary issued to "ease confusion" among investors already fretting about a global tech slowdown.

The South Korean firm also said profit would remain subdued in the first quarter due to difficult conditions in memory chips, but that the market is likely to improve in the second half of the year as customers release new smartphones.

Weaker earnings at the world's biggest maker of smartphones and semiconductors adds to worries for investors already on edge after Apple Inc last week took the rare move of cutting its quarterly sales forecast, citing poor iPhone sales in China.

China boasts the world's biggest smartphone market, but a slowing economy, exacerbated by a trade war with the US, has seen demand for gadgets drop across the tech sector.

Growing support for domestic champions has also impacted foreign brands, with Samsung's market share falling to 0.9 per cent from a high of 18.2 per cent in 2013.

Still, the South Korean firm's chips power the handsets of most major makers, including Apple and China's market leader Huawei Technologies Co Ltd. Its memory and processor chips account for over three-quarters of overall profit and about 38 per cent of sales.

For October-December, Samsung estimated operating profit of 10.8 trillion won (S$13 billion), missing the 13.2 trillion won average of 26 analyst estimates in a poll. It also estimated an 11 per cent fall in revenue at 59 trillion won.

Samsung routinely releases estimated earnings figures before posting detailed results and elaboration towards the end of the month. For the just-ended quarter, however, it issued its first commentary since late 2014, when mobile phone profits dropped.

It said weaker-than-expected demand from data centre customers adjusting inventories drove down chip prices and hurt earnings in the face of rising macro uncertainty. It did not disclose the customers or elaborate on the macro uncertainty. Data centre demand - mostly from the US - currently accounts for as much as nearly 30 per cent of demand for Samsung's DRAM chips compared with 5 per cent five years ago, said analyst Kim Yang-jae at KTB Investment & Securities.

"Smaller investments from data centres, a really bad smartphone market in China, and impact from the US-China trade war have all hit Samsung's chip business," Mr Kim said.

On the whole, analysts expect Samsung's profit to decline through 2019, with a slowing Chinese economy eroding demand. "Second- and third-tier Chinese smartphone makers saw drastic drops in their sales, which also took a toll on chip demand," said analyst Kim Young-woo at SK Securities.

Prices for DRAM chips, which provide devices with temporary workspaces and allow them to multi-task, fell 10 per cent in the fourth quarter, showed data from industry tracker DRAMeXchange. Prices of NAND flash memory chips, which hold data permanently, slipped 15 per cent.

Shares in Samsung opened 1.9 per cent lower on Tuesday and were down 0.4 per cent around midday versus a 0.2 per cent fall in the benchmark Kospi index. REUTERS