Korean giants LG and Samsung report significant drop in profits

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SEOUL (Reuters) – South Korea’s LG Electronics Inc said on Tuesday its fourth-quarter operating profit likely plummeted 80 percent from the same period a year earlier, falling well below analyst expectations.

The world’s second-biggest television set maker behind compatriot Samsung Electronics Co Ltd estimated profit of 75.3 billion won ($67.03 million) for October-December last year. That would compare with the 387 billion won average of 11 analyst estimates in an I/B/E/S Refinitiv poll.

Revenue likely fell 7 percent to 15.8 trillion won, LG said in a regulatory filing, versus analysts’ 16.3 trillion won estimate.

LG did not disclose further details of fourth-quarter operations and will announce full results at the end of January.

Analysts said likely causes included profit margins for its high-end TVs being thinned by increasing competition, while the firm’s smartphone business continues to lose money.

“It’s a surprise,” said analyst Lee Jae-yun at Yuanta Securities. “Home appliance sales were worse in emerging markets and China, while its high-end TV business isn’t making profit as much as before.”

Analysts also said earnings were likely squeezed by higher year-end bonuses and marketing expenses for new handsets.

LG held a 3 percent share of the global smartphone market in the second quarter of last year, showed latest data from market tracker Counterpoint Research.

Earlier in the day, Samsung estimated a 29 percent drop in quarterly profit, its first decline in two years, as it flagged tough memory chip and mobile phone markets.

Samsung blamed 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 United States, 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 percent from a high of 18.2 percent 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 percent of sales.

For October-December, Samsung estimated operating profit of 10.8 trillion won ($9.67 billion), missing the 13.2 trillion won average of 26 analyst estimates in an I/B/E/S Refinitiv poll. It also estimated an 11 percent fall in revenue at 59 trillion won.

Samsung routinely releases estimated earnings figures before posting detailed results and elaboration toward the end of the month. For the just-ended quarter, however, it issued its first commentary since late 2014, when mobile phone profit 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 United States – currently accounts for as much as nearly 30 percent of demand for Samsung’s DRAM chips compared with 5 percent five years ago, said analyst Kim Yang-jae at KTB Investment & Securities.

“Smaller investment from data centres, a really bad smartphone market in China, and impact from the U.S.-China trade war have all hit Samsung’s chip business,” 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 analyst at SK Securities.

CHIP PRICES

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

DRAMeXchange expects memory chip prices to fall 10 percent on an average in the first quarter of 2019.

Samsung also said a “stagnant and fiercely competitive smartphone market” pressured income and that the firm would continue to innovate its product line such as with foldable handsets and models capable of fifth-generation (5G) networking.

“If Apple’s not selling, then is it Samsung that’s selling well? It is not. The smartphone market is already saturated,” said senior analyst Greg Roh at Hyundai Motor Securities.

“Apple’s iPhones have not been selling well in China… That’s even worse for Samsung because that would drag its chip prices down,” Roh said, referring to Apple as a Samsung chip client.

Later on Tuesday, domestic peer LG Electronics Inc also flagged a drop in quarterly profit, with analysts pointing to increased marketing spending on smartphones as well as worse-than-expected sales of home appliances such as refrigerators in regions including China.

Shares of LG closed down 3.6 percent whereas those of Samsung closed down 1.7 percent. The benchmark Kospi index ended down 0.6 percent.

Last year, Samsung shares lost 24 percent and LG fell 41 percent amid a global tech selloff prompted by investor fears over the impact on supply chains of the Sino-U.S. trade war. The tech-heavy Nasdaq Composite index has fallen 16 percent since setting a record high on Aug. 30.

(For an interactive graphic on memory chip prices, click here.)

($1 = 1,116.4000 won)

(Reporting by Heekyong Yang and Ju-min Park; Additional reporting by Sayantani Ghosh in SINGAPORE; Editing by Christopher Cushing)

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