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LG Beats Profit Forecasts, Growth Seen Slowing

Posted by: Ihlwan Moon on October 21, 2009

South Korea’s LG Electronics continued its stellar performance, reporting a quarterly profit that beats corporate analysts’ forecasts. LG, which is trying to follow the footsteps of its compatriot Samsung Electronics in edging past Japanese electronics giants, said on Oct. 21 its record TV sales helped its operating profit soar 49% year-on-year to $685 million in the three months ended in September.

The profit is 25% smaller than its record earnings in the previous quarter but that’s largely because of a seasonal slowdown in sales of air conditions (LG is the world’s largest maker of home air conditioners). Most analysts had estimated LG’s third quarter profit at below $620 million.

Yet LG expects weaker results ahead. LG executives, citing increased marketing spending and fierce price competition, say a profit fall is likely in the current quarter although revenues could rise slightly from $11.2 billion in three months to September, up 16% from a year earlier. LG pledges an aggressive marketing campaign to win a battle with Sony for the world No.2 position in the LCD TV industry after Samsung.

Few doubts LG will boost its TV sales. The company sold a record 4.01 million LCD TVs in the third quarter, up 60% from a year earlier and aims to boost annual sales to 25 million sets in 2010 from a targeted 17 million this year. The company will focus on a newly designed model, called Borderless LCD TV, which removed bezel to make the front of the set look cleaner and more elegant. It will also roll out models using LEDs (light-emitting diodes), instead of traditional fluorescent lamps, as a light source. “In view of its new lineup and improving brand image, LG appears poised to improve its presence in TV,” says Han Eun Mee, electronic analyst at brokerage HI Investment & Securities.

LG faces tougher challenges in its mobile phone business. Ranked No.3 after Nokia and Samsung, LG sold 31.6 million handsets in the third quarter, its quarterly record and up 37% from a year earlier. But while its TV profit margin stayed steady at around 5%, handset margin fell to 8.8% in the latest quarter from 11% three months ago and 11.5% a year earlier.

That’s because LG is nowhere in the most profitable handset segment: smartphones. It is gaining presence for its mobile phones in Europe and Latin America but LG execs concede that they failed to come up with any eye-turning smartphone after trying to move into the segment for two years. LG officials say they will roll out a number of smartphones in coming months, including one running on Google-backed Android operating system. The problem, however, is that LG has yet to introduce a credible app store and software that could wow consumers.

LG could also lose some of its advantage it has enjoyed from the weakness of the Korean currency. The weak won, which helped all Korean exporters navigate through the global crisis, has gained a third of its value against the dollar since its low in March although it still remains about 20% below its level at the end of 2007. Few economists expect the won to regain its value to what it was in 2007 but, with Korea posting a trade surplus worth billions of dollars every quarter, it has room to strengthen.

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