Samsung shares slide as trade tensions jeopardise profit

Seoul

SAMSUNG Electronics Co shares slid after South Korea's most important company reported sharply lower profit amid global trade tensions and a wireless industry slump.

Net income fell 54 per cent from a year earlier to 5.06 trillion won (S$5.9 billion) for the three months ended June, the Suwon, South Korea-based company said in a statement, while revenue dropped 4 per cent to 56.1 trillion won. Shares slid as much as 3.3 per cent .

The world's largest maker of memory chips and smartphones has been hammered by geopolitical tensions and a wireless slump. The US-China trade war has rattled the global tech-supply chain and weighed down the price of memory chips used in phones and data centers. In addition, Japan restricted the export of materials used in chips and displays to Korea, raising concern over potential disruptions at Samsung and SK Hynix Inc.

"Shares are falling as Samsung delays shareholder return plans because of growing external uncertainties," Greg Roh, senior vice president at Hyundai Motor Securities, said by phone. "As for now, the extent of global cloud customers' investments and Japan's export restrictions are important factors for Samsung's outlook." Its stock originally traded higher and then dropped lower during an investor call as Samsung said it's facing uncertainty due to growing macroeconomic issues. Beyond the US-China dispute, Japan may announce further export curbs against South Korea this week.

"Even though Japan's measures do not ban the export of the materials, we are facing difficulties due to the burden of new export approval process and uncertainties that this new process will bring," Robert Yi, an investor relations executive, said on an earnings call. "We are dedicated to minimising any negative impact on our manufacturing process." Samsung did signal optimism about improvements for the memory business - its most profitable - for the rest of the year.

"In the second half, demand is expected to grow although the company sees volatility in the overall industry due to increased external uncertainties," Samsung said in a statement on Wednesday. The company said memory demand increased in the second quarter as data-centre customers resumed purchasing and mobile applications adopted higher-capacity products. The company didn't commit to cutting capacity saying that expenditure plans for 2020 haven't been finalised.

Samsung had reported preliminary numbers this month that showed operating profit fell more than 50 per cent and its net income did exceed the 4.88 trillion won average of estimates compiled by Bloomberg.

Shares have been little changed over the past year, though they've gained in recent weeks with hope of a recovery in chip prices and of progress in the US-China trade dispute.

Memory chips have been challenging this year. Contract prices for 32-gigabyte DRAM server modules, used to store data on PCs and servers, dropped by 25.1 per cent in the June quarter, according to InSpectrum Tech Inc. Prices for TLC 128 NAND flash memory dropped 11.5 per cent .

Demand for DRAM is expected to rise on seasonal factors while servers will benefit as customers adjust inventory levels and resume purchasing, Samsung said in its statement. The NAND market should stabilise from the third quarter, it said.

"We will continue to manage line operations flexibly depending on demand changes. Currently, we are not considering any artificial decrease of wafer input," Chun SeWon, executive vice president of the company's semiconductor business, said during the earnings call.

Chipmakers have been predicting a recovery in memory demand this year, but that's been delayed amid the trade war and slower expansion of data centres.

The mobile division of the world's largest smartphone maker posted a 42 per cent decline in operating income to 1.56 trillion won. Samsung said its profitability eroded because of intensifying competition in low-to-mid range markets, and vowed to launch successfully the Galaxy Note 10 and Galaxy Fold in the second half of this year.

Samsung's display division, which supplies organic light-emitting-diode screens for Apple's iPhones, posted operating profit of 750 billion won due to a one-time gain and a gradual demand recovery. The consumer electronics unit, which includes TVs and appliances, posted 710 billion won of profit.

"There are many negative factors for Samsung, but its display business is improving," Song Myung-sup, analyst at HI Investment & Securities, said before earnings release. "Samsung might start seeing a windfall from the US ban on Huawei and more display orders from Apple." BLOOMBERG