Samsung Electronics Braces for Profit Drop as China Slowdown Chips Away at Demand

Samsung Electronics Co is set to post its first drop in quarterly operating profit in two years as slowing economic growth in China, a key market for the South Korean tech giant, erodes demand for its products.

Bleak results from the world's top maker of semiconductors and smartphones would add to worries for investors, already on edge after Samsung's biggest rival Apple this week took the rare step of cutting its sales forecast on slowing iPhone demand in China.

Samsung, due to publish preliminary fourth-quarter results on January 8, is expected to see a 12 percent year-on-year drop in operating profit to KRW 13.3 trillion ($11.85 billion) for the period, I/B/E/S data from Refinitiv shows.

"Depressed demand in China will further drive down Samsung's chip sales there. And China's overall smartphone market is stalled and declining, which will affect not only Apple but Samsung," Song Myung-sup, a senior analyst at HI Investment & Securities, told Reuters.

Revenue is expected to have slipped 5 percent, hurt by lower memory-chip shipments. Samsung had in October slashed its 2018 capex, calling an end to a two-year bonanza for memory chips as the global smartphone market slowed.

This headwind continued to buffet the industry in the fourth quarter, with overall sales in the world's top smartphone market China falling 8 percent in the preceding three months, according to Counterpoint Research.

China is key
Samsung's worldwide smartphone business has not been spared, with profit at the unit expected to have slumped by a fifth in the fourth quarter, Refinitiv data shows.

"You see, Apple's iPhones are already losing sales in China. For Samsung too, how long this weak demand from China's mobile phone market will continue is key," said Park Jung-hoon, a fund manager at HDC Asset Management, which owns Samsung shares.

Samsung has a less than 1 percent share of China's smartphone market, versus 9 percent for Apple. But its memory and processor chips, which account for over three-quarters of its earnings and about 38 percent of sales, power smartphones including those from China's top player Huawei.

Amid the smartphone woes, overall operating profit at Samsung's chip business is expected to have slipped 3.7 percent from a year ago to 10.5 trillion won.

Its memory-chip shipments fell 10 percent on an average in the fourth quarter, according to brokerage Eugene Investment & Securities.

More pain ahead
Analysts say that Apple's woes and Samsung's are indicative of tougher times ahead for global businesses, as dismal growth in the world's second-largest economy, exacerbated by a long China-US trade war, takes a toll.

China's factory activity contracted for the first time in over two years in December. The World Bank has estimated the weakest GDP expansion for the country in nearly three decades this year.

South Korea's semiconductor exports to China dropped for the first time in more than two years in December.

China is a major market for South Korean chipmakers that, led by Samsung and smaller rival SK Hynix, exported roughly 41 percent of their products to the mainland between January and November 2018.

Samsung's profit is expected to decline through 2019 as the weakness persists, Refinitiv data showed.

Prices for DRAM chips, which provide devices with temporary workspaces and allow them to multitask, declined 10 percent in the fourth quarter, according to industry tracker DRAMeXchange.

Prices of NAND flash memory chips, which hold data permanently, slipped 15 percent.

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

© Thomson Reuters 2019