Samsung braces for its weakest year of smartphone growth since 2007

Samsung braces for its weakest year of smartphone growth since 2007
Samsung Electronics Co Ltd is bracing for its weakest smartphone profit growth this year since 2007 as arch rival Apple Inc challenges its domination in China's $80 billion market.

Samsung's mobile devices business, which earns two thirds of the company's profit, will come under pressure when Apple makes its phones available from January 17 via China Mobile Ltd, through which Samsung has been selling smartphones for around seven years.

Apple is also widely expected to sell smartphones with larger screens come autumn when it traditionally announces products, neutralising a selling point that Samsung has enjoyed since introducing its Galaxy Note in late 2011.

"Profit decline in mobiles will be inevitable, as the majority of growth will come from cheaper, low-margin phones, while competition at the high end will get only tougher with Apple's iPhone deal in China," said Shinhan Investment analyst Kim Young-chan.

Operating profit at Samsung's mobile devices division is likely to grow by a low single digit or to shrink mildly in 2014, after increasing its size by eight times over the past five years, according to a Thomson Reuters' Starmine SmartEstimate of 23 analysts, which gives greater weighting to the more accurate analysts.

"Its business was already hit in the fourth quarter by Apple's strong iPhone sales, and the impact will continue at least until the end of the first quarter," said Kim.

Samsung, the world's biggest smartphone maker with a third of the market, will release October-December earnings guidance on Tuesday which will likely show operating profit growth of 10 percent at 9.75 trillion won, according to Starmine.

(Also see: Samsung quarterly smartphone shipments top 88 million: Research)

That would be 4 percent less than the record 10.2 trillion won of July-September as Apple enjoyed buoyant sales in the United States and Japan during the year-end holiday season.

Fourth-quarter earnings were also likely pulled down by a special bonus related to the 20th anniversary of the "New Management" strategy of Chairman Lee Kun-hee, which analyst estimates put at 300 billion to 700 billion won.

Apple competition
Samsung is the biggest smartphone vendor in China with sales reaching around 70 million units last year, or 20 percent of its total shipments, analysts estimate.

But Apple's China Mobile incursion and possible larger screen offerings could cut sales of Samsung's latest Galaxy S and Note series by 3 percent this year, BNP Paribas estimates. The iPhone is widely perceived in China as a gold standard for high-end products, analysts say.

(Also see: Apple inks China Mobile deal, gets 760 million new potential iPhone customers)

"We think one of the key reasons Samsung has managed to take market share from Apple so far is its large-sized screen offerings," BNP analyst Peter Yu said in a note.

"However, this gap is likely to narrow if Apple launches large-screen phones in 2014. Unless Samsung further differentiates itself with flexible OLED (organic light-emitting diode) screens, it may lose some of these high-end customers."

Shares tumble, Won soars
Samsung shares have been pummelled in recent weeks by 22 analysts downgrading fourth-quarter earnings estimates over the past 30 days.

The shares, worth $190 billion, fell 10 percent over the past fortnight to a 4-month low last week, wiping off market value to the tune of $19 billion - equal to the total value of shares of Sony Corp.

The won's rise to a five-year high against the U.S. dollar has also been prompting investors to sell, as a strong won reduces the value of Samsung's repatriated earnings.

A strong won is particularly troublesome for Samsung's components business, which generates around 30 percent of overall operating profit, because it primarily settles accounts in dollars, analysts said.

Samsung's brightest spot is its semiconductor unit, which brings in 20 percent of operating profit, and which enjoys growth estimates of around 42 percent this year.

Overall operating profit growth for 2014 is likely to be 6.2 percent, the slowest pace in three years, according to Starmine.

© Thomson Reuters 2014


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Further reading: Samsiung mobiles, Samsung, smartphones
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