Samsung H2 growth to slow, European market weakens

Samsung Electronics, will struggle to replicate its record quarterly profits in the second half of the year as a fragile European economy cuts into demand for flat screens, and buoyant chip prices are set to ease.

Samsung, three times bigger than rivals such as Sony Corp and Nokia by market value, is leading its competitors in earnings recovery in a robust consumer electronics market. Its emerging smartphone business is however far lagging behind Apple Inc's smash hit iPhone.

Samsung has already outlined a record 18trn won ($14.7bn) spending plan to turn up the heat against hometown rivals including LG Display and Hynix Semiconductor.

"Profits will peak out in the third quarter and then gradually decrease from the fourth quarter," said Jay Kim, analyst at Mirae Asset Securities.

"There are a few risk factors that could hit earnings, such as a slow recovery in the smartphone business, a potential surge in the won and macroeconomic conditions, but overall the picture is quite positive."

Shares in Samsung, Asia's most valuable technology firm worth $92bn, have fallen 11 per cent over the past three months from a record high of 875,000 won, lagging the local market's 2.4 per cent drop. By 0350 GMT, the stock fell 0.9 per cent in a weak broader market.

Samsung expects record results in the current quarter but analysts estimate profits will fall by 20 per cent in the fourth quarter on rising supply. For 2010, analysts estimate the firm's operating profit to rise 70 per cent on average to a record 18.5trn won.

Sluggish demand from Europe and a nearly 10 percent tumble in the euro will probably lead Samsung to report its mobile phone unit's profit nearly halved in the second quarter from the preceding quarter, analysts said.

Europe is estimated to make up 30-40 per cent of Samsung's TV and handset sales.

"The second half could be a problem and that's because demand in Europe might slow and hurt sales of memory chips and (flat screen) panels," said Michael On, manager director of Beyond Asset Management in Taipei. "Its profits in the second half won't be as good as the first half."

The phone business, one of Samsung's weakest performing units, is also likely to see a slow profit recovery as it ramps up marketing spend to increase its share of the smartphone market after delayed product roll-outs.

Samsung, the world's largest maker of flat screen and TVs and also the No 2 producer of mobile phones, is launching the Galaxy S, its answer to the latest version of iPhone 4, globally with around 100 carriers including the top five US carriers.

The company's spending plan underscores an aggressive push toward new technology by Lee Kun-hee, who returned as Samsung chairman in March and has orchestrated its successful foray into the chip business since the early 1980s.

Lee, 68, has repeatedly warned most businesses and products that represent Samsung today would disappear from the market in 10 years and the company needed to start again.

SK Securities analyst Hwang Yoo-shik said: "European demand for finished goods is decreasing, which could hurt earnings, but it must be kept in mind that more than half of Samsung's profitability comes from component products such as chips, for which demand is still strong."

Sales of liquid crystal display flat screen panels also remain strong thanks to robust demand from TV producers betting on healthy demand growth during this summer's World Cup.

Last week, a senior Samsung official said he expects the firm's flat-screen TV sales target to be around 45-50 million units from the previous 39 million to reflect strong demand for premium products such as 3D TVs and LED-backlit LCD TVs.

Samsung estimated its April-June operating profit at a median 5.0trn won ($4.09bn) in a range of 4.8-5.2trn won, higher than a consensus forecast of 4.8trn won by 22 analysts polled by Thomson Reuters I/B/E/S.

The quarterly profit would beat the previous record of 4.41 trillion won reported in the preceding quarter and almost double from 2.67trn won a year ago.

The South Korean firm, the first major global technology firm to flag second quarter estimates, reports official quarterly results later this month.

Samsung expects sales at the midpoint of a 36trn and 38trn won range, slightly below market expectations of 38 trillion won. It did not provide a detailed guidance breakdown for each division.