Samsung sees tough chip

SEOUL, SOUTH KOREA: Samsung Electronics Co, the world's top maker of memory chips, faces stiff headwinds from plunging prices for chips and flat screens and a stronger won, after posting its second-best profit in the third quarter.

After beating estimates with two consecutive quarters of record profits in the first half, the world's top producer of TVs and flat screens and the No.2 maker of mobile phones is now bracing for a challenging outlook on all fronts, with earnings forecast to fall in the months ahead.

Growing price competition in TVs will hit margins in the run-up to Christmas as LCD flat screens are oversupplied and the division may report losses due to faltering demand from TVs.

Prices of Samsung's bread-and-butter memory chips are also falling rapidly on weak consumer demand for computers.

"The slowdown in the memory chip sector is ahead as DRAM prices are set to fall, probably through first quarter of next year," said Hwang Yoo-shik, an analyst at SK Securities.

"But new devices such as the tablet PC are could be Samsung's next big thing, and may help offset slowdown in other businessnes... I expect Samsung's earnings to pick up from first quarter of next year."

Samsung trails Nokia in mobile phones and competes with Sony Corp and LG Electronics in TVs and Toshiba and Hynix in semiconductors.

Pricing Pressure

"Samsung expects oversupply in the memory semiconductor market will lead to reduced pricing, while prices for LCD panel will continue to decline," the firm said in its earnings statement.

"The recent appreciation of the Korean won is also expected to put downward pressure on fourth quarter earnings," it said.

Samsung reported on Friday a 4.9 trillion won ($4.36 billion) operating profit for the July-September quarter, matching the consensus forecast by 12 analysts polled by Reuters.

Earlier this month, Samsung said it would post an operating profit between 4.6 trillion and 5.0 trillion won.

The results were a improvement from a 4.2 trillion won profit a year earlier thanks to strong sales of smartphones and chips, but were down 3 percent from a record 5.0 trillion won reported in the second quarter as the company was hit by plunging prices of flat panels.

Sales rose 12 percent to 40.2 trillion won, spurred by higher revenues from chips, which generated a record 3.4 trillion won profit to account for 70 percent of Samsung's total profit

Its TV division swung to a 230 billion won loss, hit by price competition, as producers grappled with growing stockpiles on weaker-than-expected demand in the U.S. and European market.

"Samsung's TV unit is likely to remain in the red in the fourth quarter, because of competition and price drops," said Greg Noh, an analyst at HMC Investment Securities.

BETTING ON MOBILE AS LCD, CHIPS DOWN

Its smartphone business, which was a major drag in the first half of the year, is recovering fast to challenge heavyweights such as Apple and Research In Motion with its Galaxy S phone, powered by Google's Android operating system.

But supplies of components such as advanced displays are failing to keep up with explosive growth of smartphones and may put pressure on Samsung's volume increase.

In chip business, growing supply and stalled demand growth have brought a quick end to the sector's one-year boom and will push the industry back into an oversupply cycle at least until the first half of next year, analysts warn.

Ahead of the quarterly results, Samsung was forecast to report a 25 percent drop in the fourth quarter operating profit from the preceding quarter, according to a survey of 12 analysts.

Shares in Samsung, Asia's most valuable technology firm with a market value of $112 billion, fell 1.6 percent by 0200 GMT.

The stock has dropped 5 percent so far this year, lagging a 14 percent gain in the wider market.