Samsung's Q3 Earnings May Herald Rosy Days Ahead

TVs and mobile phones helped Samsung Electronics' earnings soar earlier this year. Now, South Korea's electronics giant is riding high as prices of memory chips and liquid-crystal display (LCD) panels gain in early signs of recovery in the information technology sector. Samsung, the world's largest maker of memory chips and LCD panels, said on Oct. 6 that its operating profit almost tripled in the three months through September from a year earlier.

In earnings guidance for the third quarter, Samsung said its operating profit would be between $3.3 billion and $3.7 billion. That's up sharply from a profit of $2.2 billion from the previous quarter and $1.3 billion a year earlier. "It is likely to be the record quarterly profit," says Michael Min, technology sector specialist at fund manager Tempis Capital Management. The previous high was set in the first quarter of 2004, when its profit was $3.4 billion, excluding financial results of its subsidiaries whose earnings contributions were negligible. (Samsung has since amended its accounting method, and the latest results reflect performances of subsidiaries.)

The better-than-expected profit guidance indicates the Korean electronics company's strategy of pulling away from rivals during an industry slump is beginning to pay off. Industry watchers reckoned Samsung would be the first beneficiary of a recovery, as it had kept investing in the latest production technologies and equipment while others cut back in spending. "Payoffs will continue in coming quarters," says Min. Samsung's share price closed slightly lower, in line with a 0.5% fall of the benchmark Kospi index on the Korea Exchange. The company's stock has jumped 67% so far this year, against a 42% Kospi gain.

Samsung, which is also the largest TV maker and the No. 2 mobile-phone maker, said its third-quarter sales rose about 11%, to $31 billion, from the previous three months but gave no other details. (Samsung plans to release full details around Oct. 23.)

A Leader in Memory Chips, LCD Panels Corporate analysts believe one major improvement came in Samsung's chip business, which is expected to report a profit of between $750 million and $850 million in the third quarter, against a profit of $205 million in the second quarter and a loss of $572 million in the first quarter. "The recovery in the demand of memory chips is not very strong yet," says Kim Soo Kyoum, semiconductor program director at researcher IDC. "But the supply side is limited, and no one can match the strength of Samsung until at least mid-next year, as the Koreans clearly outgunned their Taiwanese, Japanese, and American rivals during an industry down cycle." Kim figures Samsung is one generation ahead of the likes of Micron (MU) of the U.S., Elpida Memory (ELPDF) of Japan, and Taiwan's Nanya Technology and ProMos Technologies in the technology of printing thinner circuit lines on wafer disks.

Prices of computer memory chips have rebounded recently after a free fall in 2007 and 2008. Prices of the benchmark DRAM chip, which temporarily holds data while computer processors run programs, have more than doubled, to $1.70 from $0.83 in January, says chip analyst Song Myung Sup at brokerage HI Investment & Securities. Samsung, meanwhile, has increased its market share by about four percentage points in the past year to control more than a quarter of the global DRAM market now, according to Song.

Another big turnaround came in the LCD unit. Helped by strong LCD-TV demands in China and North America and double-digit price gains in LCD panels for monitors and notebooks in the third quarter, Samsung is expected to increase profits in its LCD panel businesses to around $850 million in the three months to Sept. 30 from $128 million in the previous quarter, says Jay Kim of brokerage Hyundai Securities.

LED-TV Bet Pays Off The significant profit gains in the LCD and chip businesses follow the Korean company's marketing success in TVs, particularly for sets using LEDs (light-emitting diodes) as a light source. Its high-risk bet on high-end LED-TVs helped Samsung rake in profits in the second quarter, when it boasted a double-digit profit margin from the traditionally thin-margin TV business. Hyundai Securities expects Samsung to earn roughly equally from its four main businesses of memory chips, LCD panels, TVs, and handsets in the third quarter, while it relied heavily on TVs and mobile phones for profits three months earlier.

One big question is if Samsung can continue its winning streak even as the Korean currency begins to strengthen. The Koreans have enjoyed a price and profit advantage against their Japanese, European, and U.S. rivals as the won stayed weak since the 2008 global financial crisis. Yet after the won lost its value against the dollar by 25.7% in 2008, it has strengthened against the greenback by 7.5% so far this year.

However, analysts point out that the won has dropped by about 13% against the yen, which has been gaining value against the dollar at a much faster pace than the won. "Even if the won strengthens somewhat, benefits from an economic recovery will more than balance out the negative implications in its earnings prospects," says Min at fund manager Tempis Capital.

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