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Samsung’s bad news intensifies US$70b cash bind

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Samsung Electronics' bad news intensifies its US$70 billion bind. The South Korean giant says its fourth-quarter operating profit will tumble 29 per cent compared to a year earlier, to a worse-than-expected 10.8 trillion won (S$13 billion).

[HONG KONG] Samsung Electronics' bad news intensifies its US$70 billion bind. The South Korean giant says its fourth-quarter operating profit will tumble 29 per cent compared to a year earlier, to a worse-than-expected 10.8 trillion won (S$13 billion).

With chip prices set to fall further, there is comfort to be found in the group's ballooning cash pile. Scion and de facto boss Jay Y Lee can boost investor returns and invest more energetically in new tech, from 5G to autonomous driving.

Tuesday's bleak guidance from the world's top handset and chip maker confirms fears of a quicker-than-expected downturn in smartphones and semiconductors. Just last week, Apple boss Tim Cook rattled markets by lowering the iPhone-maker's quarterly sales forecast, blaming cooler Chinese demand.

Meanwhile, a supply glut is squeezing prices for memory chips, Samsung's key profit driver. Analysts at Nomura reckon annual sales globally will contract by a fifth to US$122 billion in 2019.

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Samsung will disclose detailed earnings later this month, but its rare early warning is clear: "difficult conditions" in the memory chip market will continue in the first three months of this year. Its shares have already slumped by a quarter over the past 12 months, and trade at just six times forward earnings; Apple and rival chipmaker Intel fetch nearly twice that.

The 50-year-old Lee, who is appealing a suspended sentence for bribery and other charges, can nevertheless appease investors. To date, corporate governance and shareholder returns have been poor at the family-run conglomerate. Egged on by US activist investor Elliott, Lee has taken small steps. In 2017, the company committed to pay out at least half of free cash flow back to shareholders. He has also turned to new areas of growth, like biotechnology and connected cars.

But much more can be done, not least thanks to a US$68 billion net cash pile that will top US$100 billion by the end of 2019, according to some analysts. Thanks to spending cuts, Nomura estimates free cash flow will increase by 13 per cent to nearly US$35 billion this year, even if operating profit weakens. Handing more back to shareholders - through dividends or buybacks - is one option. Spending to catch up with global peers in next-generation wireless technology and artificial intelligence is another.

CONTEXT NEWS

South Korea's Samsung Electronics on Jan 8 said it expects 59 trillion won of revenue in the three months to December, a decrease of 11 per cent from the same period last year.

Operating profit is forecast to fall 29 per cent year-on-year to 10.8 trillion won, the first such decline in two years. That compares to a mean analysts' forecast of 13.9 trillion won, according to I/B/E/S data from Refinitiv.

Samsung said it expected earnings "to remain subdued in the first quarter of 2019 due to difficult conditions for the memory business". The group will publish detailed earnings in late January.

Shares of Samsung fell in early trade in Seoul on Jan 8, but turned positive to trade up 0.5 per cent at around 0100 GMT, changing hands at 39,000 won.

REUTERS