Handsets rings in profits for LG Elec

Jean Yoon and Kim Miyoung

SEOUL: South Korea's LG Electronics Inc. reported it swung to a quarterly profit from a year-ago loss on record sales of mobile phones, but earnings momentum slowed because of crumbling flat screen prices.

The world's fifth-largest cellphone maker, enjoying healthy demand for its pricey third generation (3G) handsets, forecast its phone sales will rise as much as 40 percent in 2005.

The earnings topped analysts' forecasts and the company raised its dividend by 20 percent to 1,500 won a share, but LG shares fell 2.6 percent to 71,300 won as investors focused on the global glut of flat screens.

"Handset sales are the driver of earnings, and I expect sales to continue to be strong, although it will be hard for LG Electronics to improve significantly from the fourth-quarter numbers," said Yoo Ji-yong, a fund manager at CJ Investment Trust Management.

"My main concern about LG is in flat screen prices, and we are going to have to closely monitor these. Market expectations are for prices to bottom by the second quarter, but there is nothing certain about this."

LG, which competes with Samsung Electronics Co. Ltd. in phones, televisions and refrigerators, earned a net profit of 143.6 billion won ($138.3 million) for the fourth quarter, beating analysts' consensus forecast of 126 billion.

This compared with a loss of 17 billion won a year ago on hefty restructuring charges at its TV tubes unit, and a profit of 304 billion won in the third quarter.

Sales rose by a fifth to 6.5 trillion won in the quarter. The company said it was targeting 2005 sales of 28-30 trillion won, up from 24.7 trillion in 2004.

LG more than doubled its 2004 profit to 1.53 trillion won but earnings are expected to fall 12 percent to 1.35 trillion won in 2005, Reuters Estimates showed.

"We remain skeptical about the outlook as the mobile phone operation is the only division with a solid profit margin, while LG needs to address the impact of a stronger won on its bottomline," said Kim Hee-yeon, an analyst at Hyundai Securities.

Currency factors hurt LG after the won gained 11 percent against the dollar over the quarter.

"One of the biggest risk factors for LG is a stronger won as it sells nearly three quarters of its products overseas and price competitiveness still needs more improvement, although mobile phone operations are doing well" said Choi Bo-sung, an analyst at Daewoo Securities.

MOBILE PHONES LEAD

LG, a latecomer to the overcrowded global mobile phone market, is winning multi-million-dollar deals to deliver 3G handsets to telecom giants such as Hutchison Whampoa and France Telecom's Orange.

"In 2005, overall handset sales are expected to grow 40 percent year-on-year to 62 million units, versus last year's 44 million units, by fortifying market leadership in the GSM and W-CDMA market," LG said in a statement.

LG shipped about 13.5 million handsets in the fourth quarter, up from 11.8 million in the third quarter, according to Reuters calculations.

But its operating profit margin for mobiles, excluding one-offs, fell to an estimated five percent from around seven percent on the firmer won and higher marketing expenses, analysts said.

Its telecoms business accounted for 44 percent of LG's overall sales in the fourth quarter, display and media account for 36 percent and appliances for 20 percent.

After four years of growing pains that led to delays in new phones, LG got a breakthrough last year with an order for three million videophones from Hutchison.

Then followed a deal with Orange, which picked LG along with Sony Ericsson to supply its first order of phones for 3G networks providing multimedia Internet-style services to mobile devices.

LG overtook Japanese-Swedish joint venture Sony Ericsson in the third quarter with a 7 percent market share, according to research firm Strategy Analytics. It ranks behind Nokia Oyj, Motorola Inc., Samsung and Siemens AG.

LG announced on Monday a deal with Nortel Networks Corp. to set up a telecom equipment joint venture.

But LG's 45-percent owned liquid crystal display (LCD) business, LG.Philips LCD Co. Ltd., is suffering from sliding prices and posted a 94 percent fall in profit in the fourth quarter.

(Additional reporting by Rafael Nam)